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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM: TO
COMMISSION FILE NUMBER: 1-13754
ALLMERICA FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3263626
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
440 LINCOLN STREET, WORCESTER, 01653
MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
Registrant's telephone number, including area code: (508) 855-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class of securities Name of Exchange on which Registered
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
7 5/8% SENIOR DEBENTURES DUE 2025 NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on the closing sales price of February 28, 1997 the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$1,873,782,581.
The number of shares outstanding of the registrant's common stock, $.01 par
value, was 50,134,651 shares outstanding as of February 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Allmerica Financial Corporation's Annual Report to Shareholders
for 1996 are incorporated by reference in Parts I, II, and IV.
Total number of pages, including cover page: 170
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PART I
ITEM I
BUSINESS
ORGANIZATION
Allmerica Financial Corporation ("AFC" or the "Company") is a non-insurance
holding company organized as a Delaware corporation in 1995 to hold all of the
outstanding shares of First Allmerica Financial Life Insurance Company
("FAFLIC").
The consolidated financial statements of AFC include the accounts of FAFLIC,
its wholly owned life insurance subsidiary, Allmerica Financial Life Insurance
and Annuity Company ("AFLIAC"), non-insurance subsidiaries (principally
brokerage and investment advisory subsidiaries), and Allmerica Property &
Casualty Companies, Inc. ("Allmerica P&C", a 59.5%-owned non-insurance holding
company).
On February 19, 1997, AFC and Allmerica P&C entered into an Agreement and
Plan of Merger (the "Merger Agreement") pursuant to which AFC will acquire all
of the outstanding Common Stock, $1.00 par value per share, of Allmerica P&C
that it does not already own for consideration consisting of $33.00 per share
of Common Stock, subject to adjustment, payable in cash and shares of common
stock, par value $0.01 per share, of AFC (the "AFC Common Stock"). In
addition, a shareholder of Allmerica P&C may elect to receive the
consideration in cash, without interest, or in shares of AFC Common Stock,
subject to proration as set forth in the Merger Agreement. The maximum number
of shares of AFC Common Stock to be issued in the Merger is approximately 9.67
million shares. The acquisition will be accomplished by merging a newly
created, wholly-owned subsidiary of AFC with and into Allmerica P&C (the
"Merger") resulting in Allmerica P&C becoming a wholly-owned subsidiary of
AFC. Also, immediately prior to the Merger, Allmerica P&C's Certificate of
Incorporation will be amended to authorize a new class of Common Stock, one
share of which will be exchanged for each share of Common Stock currently held
by SMA Financial Corp., a wholly-owned subsidiary of AFC. The consummation of
the Merger is subject to the satisfaction of various conditions, including the
approval of regulatory authorities.
On February 3, 1997, AFC Capital Trust (the "Trust"), a subsidiary business
trust of AFC, issued $300.0 million Series A Capital Securities, which pay
cumulative dividends at a rate of 8.207% semiannually commencing August 15,
1997. The Trust exists for the sole purpose of issuing the Capital Securities
and investing the proceeds thereof in an equivalent amount of 8.207% Junior
Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated
Debentures"). Through certain guarantees, the Subordinated Debentures and the
terms of related agreements, AFC has irrevocably and unconditionally
guaranteed the obligations of the Trust under the Capital Securities. Net
proceeds from the offering of approximately $296.3 million are intended to
fund a portion of the acquisition of the 24.2 million publicly held shares of
Allmerica P&C pursuant to the Merger Agreement.
FAFLIC was organized as a mutual life insurance company until October 16,
1995. FAFLIC converted to a stock life insurance company pursuant to a plan of
reorganization ("the Plan") effective October 16, 1995 and became a wholly
owned subsidiary of AFC. Pursuant to the plan of reorganization, the Company
issued 37.5 million shares of its common stock to eligible policyholders. The
Company also issued 12.6 million shares of its common stock at a price of
$21.00 per share in a public offering, resulting in net proceeds of $248.0
million, and issued Senior Debentures in the principal amount of $200.0
million which resulted in net proceeds of $197.2 million.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Management. Within these broad areas, the
Company operates principally in five operating segments. These segments are
Regional Property and Casualty; Corporate Risk Management Services ("CRMS");
Retail
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Financial Services ("RFS"); Institutional Services; and Allmerica Asset
Management ("AAM"). The Regional Property and Casualty segment consists of the
Company's 59.5% ownership of Allmerica P&C; however, all property and casualty
results presented include 100% of Allmerica P&C's pre-tax results of
operations, consistent with the presentation in the Company's consolidated
financial statements. The other segments are all owned and operated by FAFLIC
and its wholly owned subsidiaries. In addition to the five operating segments,
the Company also has a Corporate segment, which consists primarily of Senior
Debentures and a portion of the net proceeds from the Company's initial public
offering. These proceeds are invested primarily in fixed maturities at
December 31, 1996.
Information with respect to each of the Company's segments is included in
"Segment Results" on pages 35-45 in Management's Discussion and Analysis of
Financial Condition and Results of Operations and in Note 14 on page 71 of the
Notes to the Consolidated Financial Statements included in the 1996 Annual
Report to Shareholders, the applicable portions of which are incorporated
herein by reference.
DESCRIPTION OF BUSINESS BY SEGMENT
The Company offers financial products and services in two major areas,
operating principally in five segments as described above. Following is a
discussion of each segment.
RISK MANAGEMENT
REGIONAL PROPERTY AND CASUALTY
General
The Company's Regional Property and Casualty segment is composed of FAFLIC's
59.5% ownership of Allmerica P&C. The Company's interest in Allmerica P&C is
composed of Hanover and Hanover's 82.5%-owned subsidiary, Citizens. For the
year ended December 31, 1996, the Regional Property and Casualty segment
accounted for approximately $2,193.7 million, or 67.0%, of consolidated
revenues and approximately $197.7 million, or 59.6%, of consolidated income
before taxes. The Company primarily underwrites personal and commercial
property and casualty insurance through this segment, with Hanover's principal
operations located in the Northeast and Citizens' in Michigan. Both Hanover
and Citizens Insurance have an historically strong regional focus and both
place heavy emphasis on underwriting profitability and loss reserve adequacy.
As of December 31, 1995, according to A.M. Best, the Regional Property and
Casualty segment ranks as one of the 30 largest property and casualty
insurance groups in the United States based on net premiums written.
The Company strives to maintain a clear focus on the core disciplines of
underwriting, pricing, claims adjusting, marketing and sales. In particular,
the Regional Property and Casualty segment seeks to achieve and maintain
underwriting profitability in each of its five major product lines. The
Company's overall strategy is to improve profitability through operating
efficiencies and to pursue measured growth in profitable markets.
Hanover's average premium growth rate for the ten-year period ended December
31, 1996 was 3.2% compared to an industry average of 6.2% for the same period.
Hanover's average statutory combined ratio for the same ten-year period was
107.1, compared to an industry average of 108.2. Over the last ten years,
Citizens has consistently reported stronger growth in statutory net premiums
written than the property and casualty industry as a whole. Citizens' average
premium growth rate was 8.9% for the ten-year period ended December 31, 1996
and its average statutory combined ratio for the same period was 100.1.
(Industry estimates are based on data published by A.M. Best.)
The industry's profitability can be affected significantly by price
competition, volatile and unpredictable developments such as extreme weather
conditions and natural disasters, legal developments affecting insurer
liability and the size of jury awards, fluctuations in interest rates and
other factors that may affect investment returns and other general economic
conditions and trends, such as inflationary pressures that may affect the
adequacy of reserves.
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Lines of Business
Hanover and Citizens both underwrite personal and commercial property and
casualty insurance coverage. The personal segment principally includes
personal automobile and homeowners' coverage. The commercial segment
principally includes workers' compensation, commercial automobile and
commercial multiple peril coverage.
Personal automobile coverage insures individuals against losses incurred
from personal bodily injury, bodily injury to third parties, property damage
to an insured's vehicle, and property damage to other vehicles and other
property.
Homeowners coverage insures individuals for losses to their residences and
personal property, such as those caused by fire, wind, hail, water damage
(except for flooding), theft and vandalism, and against third party liability
claims.
Commercial automobile coverage insures businesses against losses incurred
from personal bodily injury, bodily injury to third parties, property damage
to an insured's vehicle, and property damage to other vehicles and other
property.
Workers' compensation coverage insures employers against employee medical
and indemnity claims resulting from injuries related to work. Workers'
compensation policies are often written in conjunction with other commercial
policies.
Commercial multiple peril coverage insures businesses against third party
liability from accidents occurring on their premises or arising out of their
operations, such as injuries sustained from products sold. It also insures
business property for damage, such as that caused by fire, wind, hail, water
damage (except for flooding), theft and vandalism.
Both Hanover and Citizens Insurance also offer a variety of other products,
such as inland marine, fire, and fidelity and surety insurance. The Company,
through the Regional Property and Casualty segment, provides self-insurance
administration services for individual and group risks and writes excess
reinsurance coverage for the self-insurance programs it administers through
its wholly-owned subsidiary, Citizens Management, Inc.
Hanover's Amgro, Inc. ("Amgro"), is an insurance premium finance company
which provides short-term installment loans to small and medium-sized
businesses that do not wish to prepay property and casualty insurance
premiums. In exchange for advancing full policy premiums to the insurance
carrier or its agent, the insured executes a promissory note with Amgro which
enables Amgro to cancel the insurance and receive the unearned premium in the
event of default in payment by the insured.
Customers, Marketing and Distribution
Through its property and casualty insurance subsidiaries, the Company is
licensed to sell property and casualty insurance in all fifty states in the
United States, as well as the District of Columbia and all provinces of Canada
except Prince Edward Island. Hanover's business is concentrated in the
Northeast, primarily Massachusetts, New York, New Jersey and Maine. Citizens'
business is predominantly in Michigan and has recently expanded into Indiana
and Ohio.
The Company markets property and casualty insurance products through
approximately 2,600 independent insurance agencies and seeks to establish
long-term relationships with larger, well-established agencies. In selecting
agencies for new appointments, the Company considers the following criteria: a
record of profitability and financial stability, an experienced and
professional staff, a marketing plan for future growth and a succession plan
for management. Once appointed, each agency's performance is carefully
monitored.
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Since the Company offers property and casualty insurance products
predominately through independent agents, fostering a close, supportive
relationship with each agency is critical to the continued growth of the
business. The Company, in the Regional Property and Casualty segment,
compensates agents based on profitability, in addition to regular commission.
This practice motivates its agents to write policies for customers with above-
average profit characteristics. By offering its independent agents a
consistent source of products demanded by the agents' customers, the Company
believes that an increasing number of its agents will rely on it as their
principal supplier of insurance products. Hanover has implemented a number of
programs designed to strengthen its relationship with its agencies. These
initiatives include the formation of a National Agency Advisory Council, which
is intended to provide agents a role in coordinating marketing efforts and
implementing Hanover strategies, as well as remaining committed to maintaining
the local market presence which provides agents access to experienced Company
personnel with expertise in the local markets. Citizens' position as a
preferred provider with many of its agencies is evidenced by its high average
premiums written per agency of over $1.2 million in 1996.
In 1995, Hanover began to exploit the benefits of worksite marketing as a
distribution channel for personal property and casualty lines. This worksite
distribution channel offers discounted insurance products that are
individually written to employees and members of organizations which have
established a marketing agreement with the Company. Management believes that
advantages of competitive pricing, effective consumer awareness campaigns at
sponsoring organizations, the convenience of payroll deducted premiums and
word of mouth advertising will contribute to the effectiveness of the worksite
distribution channel. Additionally, the Company expects to be well positioned
to integrate other insurance products offered by other subsidiaries of AFC in
order to maximize corporate worksite marketing relationships.
Citizens also develops and markets franchise programs that are tailored for
members of associations and organizations, including its Citizens Best program
for senior citizens.
The Company, in the Regional Property and Casualty segment, is not dependent
upon a single customer or a few customers, for which the loss of any one or
more would have an adverse effect upon the segment's insurance operations.
Hanover
Hanover accounted for approximately $1,062.8 million, or 56.0%, of the
Regional Property and Casualty segment's consolidated net premium earned in
1996. Hanover's products are marketed through independent agencies which
provide specialized knowledge of property and casualty products, local market
conditions and targeted customer characteristics.
Hanover seeks to pursue measured growth in existing markets through local
management operations that apply extensive knowledge of markets to offer
competitive products and services. Hanover also seeks to increase operating
efficiencies through centralized strategic planning, marketing and
administrative support functions and increased use of sophisticated risk
selection and operational technologies. During 1996, the Company began the
process of consolidating certain operations of Hanover and Citizens which is
intended to achieve process improvements and efficiencies in operations. These
operations include claims, finance, policy processing and administration
functions.
Hanover has substantially enhanced the level of automation of functions such
as risk selection, policy processing, customer service and claims settlement.
Over the past few years, Hanover introduced an automated risk selection
program for the private passenger automobile business which rates the
probability of future claims potential and increases the efficiency of the
underwriting process. Hanover also introduced a similar program for its
homeowners' business. Hanover is also expanding its use of agency-company
interface ("ACI") technology, which enables agents to electronically submit
personal lines policies for review and rating. In addition, Hanover has
established automated client centers for centralizing the back office
processing functions of most of its branches. The Company believes that these
investments in technology will, over time, create technological efficiencies
and provide capacity for enhanced service to customers.
5
Although Hanover's strategic planning and certain of its administrative
functions are centralized in the home office, the Company is committed to
maintaining the local market presence afforded by Hanover's twelve branch
offices. These branches provide knowledge of local regulatory and competitive
conditions, and have developed close relationships with Hanover's independent
agents, who provide specialized knowledge of property and casualty products,
local market conditions and target market characteristics. Hanover believes
that the selection of attractive markets in which to pursue profitable growth
depends upon maintaining its local market presence to enhance underwriting
results and identify favorable markets.
Citizens
Citizens' insurance products are marketed in Michigan through approximately
3,800 licensed independent insurance agents, who are paid on a commission
basis, associated with approximately 525 insurance agencies. Citizens also
markets its products in Indiana and Ohio through approximately 1,700 licensed
independent insurance agents associated with approximately 200 insurance
agencies. In 1996, each agency representing Citizens wrote an average of
approximately $1.2 million of Company premiums. The three largest agencies
wrote approximately $19.3 million, $12.9 million, and $10.7 million of Company
premiums, respectively.
Citizens seeks to establish long-term relationships with larger, well-
established agencies. In selecting agencies for new appointments, Citizens
considers the following criteria: a record of profitability and financial
stability; an experienced and professional staff; a marketing plan for future
growth; and a perpetuation plan for successor management. Citizens believes
that by improving its relationship and stature with its most productive
agents, it will receive a greater share of its agent's higher quality
writings. To solidify its relationships with higher quality agencies and take
advantage of local knowledge of operating territories, Citizens maintains four
branch offices and twenty five claims offices located throughout Michigan, one
branch office and three claims offices in Indiana and one branch office in
Ohio.
Since Citizens offers its products only through independent insurance
agencies, its relationships with those agencies is critical to the continued
growth of its business. Accordingly, Citizens establishes strong relationships
with quality agencies by offering enhanced profit sharing arrangements,
recognition awards and internal support for agency operations. Citizens seeks
to become the preferred provider for quality insurance agents who Citizens
believes will provide it with customers with average or above-average profit
characteristics. Citizens has a comprehensive program to recognize and honor
those agents who excel, as measured by profitability and premium volume. By
offering its independent agents a consistent source of personal and commercial
property and casualty insurance products, Citizens believes that an increasing
number of its agents will rely on Citizens as their principal supplier of
insurance products.
Citizens has been successful in developing and marketing affinity franchise
programs in both the personal and commercial segments that are tailored for
members of associations and organizations in Indiana and Michigan. The
associations may choose to make Citizens' programs available to their members
based on an evaluation of Citizens' rates, service and regulation, but each
risk is individually underwritten and each customer is issued a separate
policy. Associations and organizations receive no payment for making Citizens'
franchise programs available to their members. As of December 31, 1996,
Citizens had approximately 110 affinity franchise programs in-force, 82 of
which were in personal lines and 28 of which were in commercial lines.
Agents are authorized to bind Citizens on risks. The agents are guided by
Citizens' written underwriting rules and practices. These rules and practices
set forth eligibility rules for various policies and coverages, unacceptable
risks, and maximum and minimum limits of liability. Violation of these rules
and practices is grounds for termination of the agency's contract to represent
Citizens.
Residual Markets and Pooling Arrangements
As a condition of its license to do business in various states, the Company
is required to participate in mandatory property and casualty shared market
mechanisms or pooling arrangements which provide various
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insurance coverages to individuals or other entities that otherwise are unable
to purchase such coverage voluntarily provided by private insurers. For
example, since most states compel the purchase of a minimal level of
automobile liability insurance, states have developed shared market mechanisms
to provide the required coverages and in many cases, optional coverages, to
those drivers who, because of their driving records or other factors, cannot
find insurers who will write them voluntarily. The Company's participation in
such shared markets or pooling mechanisms is generally in amounts related to
the amount of the Regional Property and Casualty segment's direct writings for
the type of coverage written by the specific pooling mechanism in the
applicable state. The Company, in the Regional Property and Casualty segment,
incurred an underwriting loss from participation in such mechanisms, mandatory
pools and underwriting associations of $0.2 million and $0.7 million in 1996
and 1995, and underwriting profit of $1.3 million in 1994 relating primarily
to coverages for personal and commercial automobile, personal and commercial
property, and workers' compensation.
Assigned Risk Plans
Assigned risk plans are the most common type of shared market mechanism.
Many states, including California, Illinois, New Jersey, New York, and Texas
operate assigned risk plans. The plan assigns applications from drivers who
are unable to obtain insurance in the voluntary market to insurers licensed in
the applicant's state. Each insurer is required to accept a specific
percentage of applications based on its market share of voluntary business in
the state. Once an application has been assigned to an insurer, the insurer
issues a policy under its own name and retains premiums and pays losses as if
the policy were voluntarily written.
Reinsurance Facilities and Pools
Reinsurance facilities are currently in operation in various states and
require an insurer to write all applications submitted by an agent. As a
result, an insurer could be writing policies for applicants with a higher risk
of loss than it would normally accept. The reinsurance facility allows the
insurer to cede this high risk business to the reinsurance facility, thus
sharing the underwriting experience with all other insurers in the state. If a
claim is paid on a policy issued in this market, the facility will reimburse
the insurer. Typically, reinsurance facilities operate at a deficit, which is
then recouped by levying assessments against the same insurers.
A type of reinsurance mechanism that exists in New Jersey, The New Jersey
Unsatisfied Claim and Judgment Fund ("NJUCJF"), covers no-fault first party
losses in excess of $0.3 million. All no-fault insurers in this state are
required to participate in the reinsurance mechanism. Insurers are reimbursed
for their covered losses in excess of the threshold. Funding for such
facilities comes from assessments against automobile insurers based upon their
proportionate market share of the state's no-fault insurance market. The
NJUCJF currently has an unfunded liability for future payment years. It
calculates assessments against insurers on the basis of a two-year cash flow
analysis.
Michigan's no-fault law requires insurers to provide unlimited medical
coverage to automobile accident victims. In response, the Michigan
Catastrophic Claims Association (MCCA) was established to spread the costs of
medical coverage to all insureds. The MCCA acts as a reinsurer for all
Michigan automobile insurers, reimbursing for amounts paid on personal
protection insurance losses in excess of $0.25 million. Participation is
required for all Michigan-licensed automobile and motorcycle insurers. The
MCCA assesses its member companies an annual premium on each of such member
company's policies covering automobile and motorcycles written in Michigan.
The assessment is passed on directly to policyholders. The Company, in the
Regional Property and Casualty segment, cedes a significant portion of its
private passenger automobile premiums to the MCCA. Ceded premiums earned to
MCCA in 1996, 1995, and 1994 were $50.5 million, $66.8 million and $80.0
million, respectively. Losses and LAE ceded to MCCA in 1996, 1995, and 1994
were ($52.9) million, $62.9 million and $24.2 million, respectively. In 1996,
the MCCA's favorable development on prior year reserves exceeded the losses
and LAE incurred during the year. The aggregate losses and LAE ceded to the
MCCA have no impact on the Regional Property and Casualty segment's statements
of income.
7
At December 31, 1996 and 1995, the Company, in the Regional Property and
Casualty segment, had reinsurance recoverable on paid and unpaid losses of
$292.0 million and $355.0 million, respectively, from the MCCA. The amount
recoverable from the MCCA is a current estimate of future payments to be made
to the Company, in the Regional Property and Casualty segment, by the MCCA for
reimbursements of amounts for currently pending personal protection insurance
(PIP) claims and PIP claims incurred but not yet reported. The Regional
Property and Casualty segment bills the MCCA on a quarterly basis and all
amounts have been paid when due. Because PIP claims, whose payments will be
reimbursed by the MCCA, involve amounts to be paid over many years, actual
amounts to be owed to the Company, in the Regional Property and Casualty
segment, by the MCCA in the future are subject to change based on claims paid.
The Regional Property and Casualty segment bills the MCCA based upon amounts
actually paid by the Regional Property and Casualty segment to policyholders,
however, there can be no assurance that the Company will recover the full
amount of reinsurance payments owed to it by the MCCA. As of June 30, 1996 and
1995, the MCCA estimated surplus of $1.7 billion and $666.2 million,
respectively, compared to an estimated deficit of $22.0 million, as of
December 31, 1994. Management believes that in the current regulatory climate,
the Company, in the Regional Property and Casualty segment, is unlikely to
incur any material loss or become unable to pay claims as a result of
nonpayment of amounts owed to it by the MCCA because (i) the MCCA is currently
in a surplus position, (ii) the payment obligations of the MCCA are extended
over many years, resulting in relatively small current payment obligations in
terms of MCCA total assets, (iii) all amounts owed to the Company by the MCCA
have been paid when due, and (iv) the MCCA is supported by assessments
permitted by statute.
From 1988 through 1992, the Company was a servicing carrier in Maine, and
ceded a significant portion of its workers' compensation premiums to the Maine
Workers' Compensation Residual Market Pool ("MWCRP"), which is administered by
The National Council on Compensation Insurance ("NCCI"). The Company was
involved in legal proceedings regarding the MWCRP's deficit which through a
legislative settlement issued on June 23, 1995, provided for an initial
funding of $220.0 million of which the insurance carriers were responsible for
$65.0 million. Hanover paid its allocation of $4.2 million in December 1995.
Some of the smaller carriers appealed this decision. See "Legal Proceedings"
on page 28 of this Form 10-K which is incorporated herein by reference.
As a servicing carrier in Massachusetts, the Company cedes a significant
portion of its private passenger and commercial automobile premiums to the
Massachusetts Commonwealth Automobile Reinsurers ("CAR"). Net premiums earned
and losses and loss adjustment expenses ceded to CAR in 1996, 1995 and 1994
were $38.0 million and $21.8 million, $49.1 million and $33.7 million, and
$50.0 million and $29.8 million, respectively. At December 31, 1996, CAR and
the MCCA were the only two reinsurers which represented 10% or more of the
Regional Property and Casualty segment's reinsurance business.
Reference is made to Note 16 on pages 72 and 73 and Note 20 on page 75 of
the Notes to Consolidated Financial Statements of the 1996 Annual Report to
Shareholders, the applicable portions of which are incorporated herein by
reference.
Joint Underwriting Associations
A joint underwriting association ("JUA") is similar to a reinsurance pool.
Generally, a JUA allows an insurer to share with other insurers the
underwriting experience of drivers that reflect a higher risk of loss than the
insurer would normally accept. Under a JUA, a limited number of insurers are
designated as "servicing carriers." The servicing carrier is responsible for
collecting premiums and paying claims for the policies issued in the JUA, and
such insurers receive a fee for these administrative services. The
underwriting results of the servicing carrier are then shared with all
insurers in the state. Like reinsurance facilities, JUA's typically operate at
a deficit, and fund that deficit by levying assessments on insurers.
The New Jersey legislature passed automobile insurance reform legislation
that eliminated the New Jersey JUA ("NJJUA") and imposed taxes and assessments
on the insurance industry to fund a portion of the NJJUA deficit. The deficit
resulted primarily from the inadequate rate level of the NJJUA and the
contraction of the
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voluntary auto market, which increased the number of risks requiring insurance
through the NJJUA. The reform legislation also established a Market Transition
Facility ("MTF") to manage business from the NJJUA that is not transferred to
the voluntary market. During 1994, the Company, in the Regional Property and
Casualty segment, released a reserve of $7.0 million as a result of the
resolution of the funding of the New Jersey Market Transition Facility
deficit. Legislation passed in New Jersey during the third quarter of 1994
substantially relieved insurers of responsibility for funding the deficit.
Other Mechanisms
The principal shared market mechanisms for property insurance are the Fair
Access to Insurance Requirements Plans ("FAIR Plans"), the formation of which
was required by the federal government as a condition to an insurer's ability
to obtain federal riot reinsurance coverage following the riots and civil
disorder that occurred during the 1960's. These plans, created as mechanisms
similar to automobile assigned risk plans, were designed to increase the
availability of property insurance in urban areas. The federal government
reinsures those insurers participating in FAIR Plans against excess losses
sustained from riots and civil disorders. The individual state FAIR Plans are
created pursuant to statute or regulation. The property shares market
mechanisms provide basic fire insurance and extended coverage protection for
dwellings and certain commercial properties that could not be insured in the
voluntary market. A few states also include a basic homeowners form of
coverage in their shared market mechanism.
With respect to commercial automobile coverage, another pooling mechanism, a
Commercial Auto Insurance Plan ("CAIP"), uses a limited number of servicing
carriers to handle assignments from other insurers. The CAIP servicing carrier
is paid a fee by the insurer who otherwise would be assigned the
responsibility of handling the commercial automobile policy and paying claims.
Approximately 40 states have CAIP mechanisms, including California,
Connecticut, Illinois, New Hampshire, New Jersey, New York and Rhode Island.
Competition
The property and casualty industry is highly competitive among national
agency companies, direct writers, and regional and local insurers on the bases
of both price and service. Many of these companies are larger and have greater
financial and technical resources than Hanover and Citizens. National agency
companies sell insurance through independent agents and usually concentrate on
commercial lines of property and casualty insurance. Direct writers dominate
the personal lines of property and casualty insurance and operate on a
national, regional or single state basis. Regional and local companies sell
through independent agents in one or several states in the same region and
compete in both personal and commercial lines. In addition, because both
companies market through independent agents, Hanover and Citizens compete with
other independent agency companies for business in each of the agencies
representing them.
Hanover faces competition in personal lines primarily from direct writers
and regional and local companies. In its commercial lines, Hanover faces
competition primarily from national agency companies and regional and local
companies. Due to the number of companies in Hanover's principal property and
casualty insurance marketplace, there is no single dominant competitor in any
of Hanover's markets. Management believes that its emphasis on maintaining a
local presence in its markets, coupled with investments in operating and
client technologies, will enable Hanover to compete effectively.
During the past two years, the competitive environment in Massachusetts has
increased substantially. Approximately 39% of Hanover's personal automobile
business is currently written in this state. In 1995 and 1996, Massachusetts
personal automobile rates decreased 4.5% and 6.2%, respectively, as mandated
by the Massachusetts Division of Insurance. In 1995, the Massachusetts
Division of Insurance began to allow sponsoring organizations to receive
discounts on their auto insurance. Today, Hanover currently offers more than
70 group programs throughout the state, including the second largest group
plan in the state with approximately 347,000 eligible members. On February 24,
1997, Hanover submitted its request to the Massachusetts Division of Insurance
to offer a 10% discount on automobile insurance for its safest drivers. If
approved, qualified
9
Hanover policyholders would reduce their insurance premiums by as much as 20%
by combining "safe driver" and "group" discounts. Management has implemented
these discounts in an effort to retain the Regional Property and Casualty
segment's market share in Massachusetts. These discounts, together with
mandated rate decreases, may unfavorably impact premium growth.
In Michigan, Citizens competes in personal segments with a number of direct
writers and regional and local companies, several of which are larger than
Citizens. National agency companies have not been important factors in
Michigan in the personal segments of property and casualty insurance because
of their tendency to emphasize commercial segments and because Michigan's
insurance regulatory environment would require such companies to develop and
implement special incentive programs designed to encourage agents to identify
and sell insurance to individuals with lower risk profiles consistent with the
constraints of Michigan law. However, in February 1996, an amendment to the
Essential Insurance Act became effective in Michigan. This amendment
eliminates personal automobile and homeowners insurance territorial rating
restrictions and limits merit ratings for automobile policies. The Company
cannot predict the effect of this new legislation, but believes this law may
encourage national companies to return or enter into the state in commercial
and personal lines.
Citizens also faces competition from the two largest direct writers in
Michigan, Auto Club Michigan Group and State Farm Group companies, in the
personal automobile line. In the homeowners line, Citizens' principal
competition in Michigan is also from direct writers, including State Farm
Group. Citizens is the second leading writer in Michigan in its three primary
commercial lines combined: commercial automobile, workers' compensation, and
commercial multiple peril. Citizens faces competition principally from
national agency companies, and regional and local companies, many of which
have financial resources substantially greater than those of Citizens.
The industry has been in a downturn over the past several years due
primarily to price competition. Premium rate levels are related to the
availability of insurance coverage, which varies according to the level of
excess capacity in the industry. The current commercial lines market is
extremely competitive due to a continuing soft market in which capacity is
high and prices are low. Because of the commitment at both Hanover and
Citizens to focus on underwriting profitability and a refusal to write
business at inadequate prices, this highly competitive commercial lines market
has impacted the Regional Property and Casualty segment's growth in commercial
lines. In Michigan, Citizens workers' compensation line is the largest
commercial line in terms of premiums written. Over the past few years,
competition has caused Citizens to reduce rates four times; 8.5%, 7.0%, 6.4%
and 8.7% effective May 1, 1995, December 1, 1995, June 1, 1996, and March 1,
1997 respectively. Management believes that competition for premiums in the
Regional Property and Casualty segment's markets may continue to have an
adverse impact on rates and profitability.
Since there is no one dominant competitor in any of the markets in which the
Regional Property and Casualty segment competes, management believes there is
opportunity for future growth.
Underwriting
Pricing
The manner in which the Company prices products takes into consideration the
expected frequency and severity of losses, the costs of providing the
necessary coverage (including the cost of administering policy benefits, sales
and other administrative and overhead costs) and a margin for profit.
The Company, in the Regional Property and Casualty segment, seeks to achieve
an underwriting profit in each of its product lines regardless of market
conditions. This strategy seeks to achieve consistent profitability with
substantial growth in net premiums written during hard markets and more modest
growth during soft markets. The Company concentrates on its established major
product lines, and accordingly, does not typically pursue the development of
products with relatively unpredictable risk profiles. In addition, the Company
utilizes its extensive knowledge of local markets, including knowledge of
regulatory requirements, to achieve superior
10
underwriting results. Hanover and Citizens rely on information provided by
their local agents and Hanover also relies on the knowledge of its staff in
the local branch offices. As a regional company with significant market share,
Citizens can apply its extensive knowledge and experience in making
underwriting and rate setting decisions.
Claims
The Company employs experienced claims adjusters, appraisers, medical
specialists, managers and attorneys in order to manage its claims. The
Company, in the Regional Property and Casualty segment, has field claims
offices strategically located throughout its operating territories. All claims
office staff members work closely with the agents to settle claims rapidly and
cost-effectively.
Claims office adjusting staff are supported by general adjusters on large
property losses, automobile and heavy equipment damage appraisers on
automobile material damage losses and medical specialists whose principal
concentration is in workers' compensation and no-fault automobile injury
cases. In addition, the claims offices are supported by staff attorneys who
specialize in litigation defense and claim settlements. The Regional Property
and Casualty segment also has special units which investigate suspected
insurance fraud and abuse.
Hanover utilizes advanced claims processing technology to allow smaller and
more routine claims to be processed at centralized locations. Hanover expects
that approximately 70% of its personal lines claims will be processed at these
locations in the future, thereby increasing efficiency and reducing operating
costs.
Citizens has instituted a program under which participating agents have
settlement authority for small property loss claims. Based upon program
experience, the Regional Property and Casualty segment believes that this
program contributes to low loss adjustment expense ("LAE") experience and to
its higher customer satisfaction ratings by permitting the early and direct
settlement of such small claims. Approximately 26.6% and 28.1% of the number
of total paid claims reported to Citizens in the years ended December 31, 1996
and 1995, respectively, were settled under this program.
Hanover and Citizens have also begun using the managed care expertise of the
Allmerica Financial's Corporate Risk Management Services ("CRMS") segment in
the analysis of the provision of medical services in the management of
workers' compensation and medical claims on its automobile policies. Hanover
and Citizens believe that their use of this capability reduces costs and
serves their customers more efficiently.
Property and casualty insurers are subject to claims arising out of
catastrophes which may have a significant impact on their results of
operations and financial condition. The Company, in the Regional Property and
Casualty segment, may experience catastrophe losses in the future which could
have a material adverse impact on the Company. Catastrophes can be caused by
various events including hurricanes, earthquakes, tornadoes, wind, hail, fires
and explosions, and the incidence and severity of catastrophes are inherently
unpredictable. Although catastrophes can cause losses in a variety of property
and casualty lines, homeowners and business property insurance have in the
past generated the vast majority of catastrophe-related claims.
Reserve for Unpaid Losses and Loss Adjustment Expenses
Reference is made to "Reserve for Losses and Loss Adjustment Expenses" on
pages 40, 41 and 42 of Management's Discussion and Analysis of Financial
Condition and Results of Operations of the 1996 Annual Report to Shareholders,
which is incorporated herein by reference.
The Company's actuaries, in the Regional Property and Casualty segment,
review the reserves each quarter and certify the reserves annually as required
for statutory filings.
11
The Regional Property and Casualty segment regularly reviews its reserving
techniques, its overall reserving position and its reinsurance. Based on (i)
review of historical data, legislative enactments, judicial decisions, legal
developments in impositions of damages, changes in political attitudes and
trends in general economic conditions, (ii) review of per claim information,
(iii) historical loss experience of the Regional Property and Casualty segment
and the industry, (iv) the relatively short-term nature of most policies and
(v) internal estimates of required reserves, management believes that adequate
provision has been made for loss reserves. However, establishment of
appropriate reserves is an inherently uncertain process and there can be no
certainty that current established reserves will prove adequate in light of
subsequent actual experience. A significant change to the estimated reserves
could have a material impact on the results of operations.
Significant periods of time often elapse between the occurrence of an
insured loss, the reporting of the loss to the Company and the Company's
payment of that loss. To recognize liabilities for unpaid losses, the Company
establishes reserves as balance sheet liabilities representing estimates of
amounts needed to pay reported and unreported losses and LAE.
The Company, in the Regional Property and Casualty segment, does not use
discounting techniques in establishing reserves for losses and LAE, nor has it
participated in any loss portfolio transfers or other similar transactions.
The following table reconciles reserves determined in accordance with
accounting principles and practices prescribed or permitted by insurance
statutory authorities ("Statutory Reserve") to reserves determined in
accordance with generally accepted accounting principles ("GAAP Reserve") at
December 31, as follows:
1996 1995 1994
-------- -------- --------
(IN MILLIONS)
Statutory reserve for losses and LAE............. $2,113.2 $2,123.0 $2,093.6
GAAP adjustments:
Reinsurance recoverable on unpaid losses....... 626.9 763.5 712.4
Other(*)....................................... 4.0 9.5 15.7
======== ======== ========
GAAP reserve for losses and LAE.................. $2,744.1 $2,896.0 $2,821.7
======== ======== ========
- --------
(*) Primarily other statutory liabilities reclassified as loss adjustment
expense reserves for GAAP reporting.
12
Analysis of Losses and Loss Adjustment Expenses Reserve Development
The following table sets forth the development of net reserves for unpaid
losses and LAE from 1986 through 1996 for the Company.
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
(IN MILLIONS) YEAR ENDED DECEMBER 31,
Net reserve for
losses and
LAE(1)......... $2,117.2 $2,132.5 $2,109.3 $2,019.6 $1,936.9 $1,772.4 $1,550.6 $1,326.3 $1,150.9 $1,008.0 $ 793.0
Cumulative
amount paid as
of(2):
One year later.. -- 627.6 614.3 566.9 564.3 569.0 561.5 521.1 465.3 384.3 319.6
Two years
later.......... -- -- 940.7 884.4 862.7 888.0 874.5 820.2 725.3 616.4 509.9
Three years
later.......... -- -- -- 1,078.1 1,068.4 1,077.1 1,074.3 1,009.3 901.5 764.5 643.6
Four years
later.......... -- -- -- -- 1,184.1 1,207.1 1,186.4 1,130.1 1,009.7 862.1 722.3
Five years
later.......... -- -- -- -- -- 1,279.4 1,265.4 1,192.7 1,078.8 926.0 780.8
Six years
later.......... -- -- -- -- -- -- 1,314.2 1,240.9 1,116.2 969.7 817.3
Seven years
later.......... -- -- -- -- -- -- -- 1,271.4 1,147.4 993.5 844.5
Eight years
later.......... -- -- -- -- -- -- -- -- 1,170.4 1,016.5 860.5
Nine years
later.......... -- -- -- -- -- -- -- -- -- 1,034.6 878.1
Ten years
later.......... -- -- -- -- -- -- -- -- -- -- 892.9
Net reserve re-
estimated as
of(3):
End of year..... 2,117.2 2,132.5 2,109.3 2,019.6 1,936.9 1,772.4 1,550.6 1,326.3 1,150.9 1,008.0 793.0
One year later.. -- 1,991.1 1,971.7 1,891.5 1,868.1 1,755.0 1,601.5 1,412.4 1,220.4 1,058.3 865.0
Two years
later.......... -- -- 1,859.4 1,767.4 1,762.8 1,717.7 1,601.9 1,449.0 1,262.0 1,096.4 904.4
Three years
later.......... -- -- -- 1,691.5 1,703.3 1,670.8 1,614.3 1,471.7 1,290.2 1,125.3 937.0
Four years
later.......... -- -- -- -- 1,658.9 1,654.1 1,597.6 1,484.7 1,312.3 1,155.1 963.5
Five years
later.......... -- -- -- -- -- 1,634.6 1,594.3 1,482.3 1,322.1 1,175.2 983.3
Six years
later.......... -- -- -- -- -- -- 1,588.7 1,486.9 1,328.6 1,188.5 999.5
Seven years
later.......... -- -- -- -- -- -- -- 1,488.4 1,340.7 1,201.2 1,009.5
Eight years
later.......... -- -- -- -- -- -- -- -- 1,403.7 1,215.4 1,025.0
Nine years
later.......... -- -- -- -- -- -- -- -- -- 1,226.8 1,039.6
Ten years
later.......... -- -- -- -- -- -- -- -- -- -- 1,056.1
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
(Deficiency)
Redundancy,
net(4,5,6)..... $ -- $ 141.4 $ 249.9 $ 328.1 $ 278.0 $ 137.8 $ (38.1) $ (162.1) $ (252.8) $ (218.8) $(263.1)
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== =======
- --------
(1) Sets forth the estimated net liability for unpaid losses and LAE recorded
at the balance sheet date for each of the indicated years; represents the
estimated amount of net losses and LAE for claims arising in the current
and all prior years that are unpaid at the balance sheet date, including
incurred but not reported ("IBNR") reserves.
(2) Cumulative loss and LAE payments made in succeeding years for losses
incurred prior to the balance sheet date.
(3) Re-estimated amount of the previously recorded liability based on
experience for each succeeding year; increased or decreased as payments
are made and more information becomes known about the severity of
remaining unpaid claims.
(4) In 1987, Hanover adopted a new actuarial-based reserve methodology
designed to result in a more accurate reflection of underwriting trends
and a more appropriate basis for assessing current reserve adequacy. The
new method is based on groupings of claims using the period in which the
accident occurred rather than loss experience in the financial reporting
period. This method tracks the development of claims from a given accident
period and provides management with continuous updates of losses incurred.
Management believes that this change to actuarial reserving methodologies
has resulted in improved reserve adequacy.
(5) Cumulative deficiency or redundancy at December 31, 1996 of the net
reserve amounts shown on the top line of the corresponding column. A
redundancy in reserves means the reserves established in prior years
exceeded actual losses and LAE or were reevaluated at less than the
original reserved amount. A deficiency in reserves means the reserves
established in prior years were less than actual losses and LAE or were
reevaluated at more than the original reserved amount.
(6) The following table sets forth the development of gross reserve for unpaid
losses and LAE from 1992 through 1996 for the Company:
13
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN MILLIONS)
Reserve for losses and LAE:
Gross liability................ $2,744.1 $2,896.0 $2,821.7 $2,717.3 $2,598.9
Reinsurance recoverable........ 626.9 763.5 712.4 697.7 662.0
-------- -------- -------- -------- --------
Net liability................ $2,117.2 $2,132.5 $2,109.3 $2,019.6 $1,936.9
======== ======== ======== ======== ========
One year later:
Gross re-estimated liability... $2,587.8 $2,593.5 $2,500.5 $2,460.5
Re-estimated recoverable....... 596.7 621.8 609.0 592.4
-------- -------- -------- --------
Net re-estimated liability... $1,991.1 $1,971.7 $1,891.5 $1,868.1
======== ======== ======== ========
Two years later:
Gross re-estimated liability... $2,339.2 $2,333.3 $2,341.9
Re-estimated recoverable....... 479.8 565.9 579.1
-------- -------- --------
Net re-estimated liability... $1,859.4 $1,767.4 $1,762.8
======== ======== ========
Three years later:
Gross re-estimated liability... $2,145.5 $2,257.3
Re-estimated recoverable....... 454.0 554.0
-------- --------
Net re-estimated liability... $1,691.5 $1,703.3
======== ========
Four years later:
Gross re-estimated liability... $2,168.2
Re-estimated recoverable....... 509.3
--------
Net re-estimated liability... $1,658.9
========
Reinsurance
The Company, in the Regional Property and Casualty segment, maintains a
reinsurance program designed to protect against large or unusual losses and
LAE activity. This includes both excess of loss reinsurance and catastrophe
reinsurance. Catastrophe reinsurance serves to protect the ceding insurer from
significant aggregate losses arising from a single event such as windstorm,
hail, hurricane, tornado, riot or other extraordinary events. The Company
determines the appropriate amount of reinsurance based on the Company's
evaluation of the risks accepted and analysis prepared by consultants and
reinsurers and on market conditions including the availability and pricing of
reinsurance. The Company, in the Regional Property and Casualty segment, has
reinsurance for casualty business. Under the 1996 casualty program, the
reinsurers are responsible for 100% of the amount of each loss in excess of
$1.0 million per occurrence up to $30.5 million for general liability and
workers' compensation. Additionally, this reinsurance covers workers'
compensation losses in excess of $30.5 million to $60.5 million per
occurrence. Under the Company's 1996 catastrophe reinsurance program, in the
Regional Property and Casualty segment, Hanover and Citizens retain the first
$25.0 million of loss per occurrence, all amounts in excess of $180.0 million
per occurrence and 10% of all aggregate loss amounts in excess of $25.0
million up to $180.0 million. In addition, Citizens retains 5% of losses in
excess of $10.0 million, up to $25.0 million. In 1996, Citizens purchased
aggregate catastrophe coverage which reinsures 90% of $5.0 million for
aggregated catastrophe losses in excess of $5.0 million which individually
exceed $1.0 million. Under this aggregate catastrophe coverage, Citizens is
expected to recover $4.5 million. In the years ended December 31, 1996, 1995
and 1994, the Company, in the Regional Property and Casualty segment, did not
exceed the minimum catastrophe levels, either individually or in the
aggregate, to obtain recovery under its reinsurance agreements, except as
described above.
Effective January 1, 1997, the Company, in the Regional Property and
Casualty segment, modified its reinsurance program. The 1997 modifications
include the purchase of additional casualty reinsurance and higher
14
retention under the Company's catastrophe reinsurance program. Under the 1997
casualty reinsurance program, the Company added a layer which reinsured 100%
of each loss in excess of $.5 million up to $1.0 million per occurrence. Under
the 1997 catastrophe reinsurance program, Hanover and Citizens retain the
first $25.0 million of loss per occurrence and all amounts in excess of $180.0
million per occurrence, 55% of all aggregate loss amounts in excess of $25.0
million up to $45.0 million, and 10% of all aggregate loss amounts in excess
of $45.0 million up to $180.0 million. In addition, Citizens retains 5% of
losses in excess of $10.0 million, up to $25.0 million.
The Company, in the Regional Property and Casualty segment, cedes to
reinsurers a portion of its risk and pays a fee based upon premiums received
on all policies subject to such reinsurance. Reinsurance contracts do not
relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company.
The Company determines the appropriate amount of reinsurance based on
evaluation of the risks accepted and analyses prepared by consultants and
reinsurers and on market conditions (including the availability and pricing of
reinsurance). The Company also believes that the terms of its reinsurance
contracts are consistent with industry practice in that they contain standard
terms with respect to lines of business covered, limit and retention,
arbitration and occurrence. Based on its review of its reinsurers' financial
statements and reputations in the reinsurance marketplace, the Company
believes that its reinsurers are financially sound.
The Company, in the Regional Property and Casualty segment, is subject to
concentration of risk with respect to reinsurance ceded to various residual
market mechanisms. As a condition to the ability to conduct certain business
in various states, the Company is required to participate in various residual
market mechanisms and pooling arrangements which provide various insurance
coverages to individuals or other entities that are otherwise unable to
purchase such coverage voluntarily provided by private insurers. These market
mechanisms and pooling arrangements include the Massachusetts Commonwealth
Automobile Reinsurers ("CAR"), the Maine Workers' Compensation Residual Market
Pool ("MWCRP") and the Michigan Catastrophic Claims Association ("MCCA").
At December 31, 1996, the MCCA and CAR were the only two reinsurers which
represented 10% or more of the Regional Property and Casualty segment's
reinsurance business. As a servicing carrier in Massachusetts, the Company
cedes a significant portion of its private passenger and commercial automobile
premiums to CAR. Net premiums earned and losses and loss adjustment expenses
ceded to CAR for the years ended December 31, 1996, 1995 and 1994 were $38.0
million and $21.8 million, $49.1 million and $33.7 million, and $50.0 million
and $29.8 million, respectively.
From 1988 through 1992, the Company, in the Regional Property and Casualty
segment, was a servicing carrier in Maine, and ceded a significant portion of
its workers' compensation premiums to the Maine Workers' Compensation Residual
Market Pool, which is administered by The National Council on Compensation
Insurance ("NCCI"). The Company was involved in legal proceedings regarding
the MWCRP's deficit which through a legislative settlement issued on June 23,
1995, provided for an initial funding of $220.0 million of which the insurance
carriers were responsible for $65.0 million. Hanover paid its allocation of
$4.2 million in December 1995. Some of the smaller carriers appealed this
decision. The Company's right to recover reinsurance balances for claims
properly paid is not at issue in any such proceedings. The Company expects to
collect its reinsurance balance; however, funding of the cash flow needs of
the MWCRP may in the future be affected by issues related to certain
litigation, the outcome of which the Company cannot predict. See "Legal
Proceedings" on page 28 of this Form 10-K which is incorporated herein by
reference.
The Company ceded to MCCA premiums earned and losses and loss adjustment
expenses in 1996, 1995 and 1994 of $50.5 million and $(52.9) million, $66.8
million and $62.9 million, and $80.0 million and $24.2 million, respectively.
Because the MCCA is supported by assessments permitted by statute and all
amounts billed by the Company to CAR, MWCRP and MCCA have been paid when due,
the Company believes that it has no significant exposure to uncollectible
reinsurance balances.
The reserve for losses and loss adjustment expenses at December 31, 1996 and
1995 is shown gross of recoverable on unpaid losses of $626.9 million and
$763.5 million, respectively. The significant decrease in the reinsurance
recoverable on unpaid losses is primarily attributable to an overall decrease
in reinsurance activity at both Hanover and Citizens. The decrease at Hanover
is specifically related to a decrease in ceded losses on its
15
servicing carrier business. The decrease at Citizens in 1996 is due to the
MCCA's favorable development on prior year reserves exceeding the losses and
LAE incurred during the current year. The aggregate losses and LAE ceded have
no impact on the Company's consolidated statements of income. Losses and LAE
ceded were $2.2 million, $229.1 million and $160.4 million in 1996, 1995 and
1994, respectively. Ceded premiums earned were $232.6 million, $296.2 million
and $291.9 million in 1996, 1995 and 1994, respectively.
Reference is made to "Reinsurance" in Note 16 on pages 72 and 73 of the
Notes to Consolidated Financial Statements of the 1996 Annual Report to
Shareholders, which is incorporated herein by reference.
Reference is also made to "Reinsurance Facilities" on page 7 of this Form
10-K which is incorporated herein by reference.
CORPORATE RISK MANAGEMENT SERVICES
General
The Corporate Risk Management Services segment provides managed care medical
group insurance products and administrative services as well as other group
insurance coverages, such as group life, dental and disability products, to
corporate employers. As of December 31, 1996, this segment insured and/or
provided administrative services to the employee benefit plans of over 2,700
employers covering 619,435 employee lives. For the year ended December 31,
1996, this segment accounted for approximately $361.5 million, or 11.0%, of
consolidated revenues and $20.7 million, or 6.2%, of consolidated income
before taxes.
The Company's strategy emphasizes risk sharing arrangements rather than
traditional indemnity medical insurance products. The Company's risk sharing
arrangements consist of providing stop-loss indemnity insurance coverage for
self-insured employers with 100 to 5,000 employees together with managed care
and administrative services for coverage provided by the employer and the
Company. This risk sharing approach enables the Company to provide more
managed care, administrative and other services with less exposure to losses
than traditional indemnity medical insurance. In addition, by emphasizing risk
sharing arrangements, the segment has demonstrated more stable profitability
by decreasing its exposure to unpredictable increases in health care costs.
As a result of this strategy, revenues from risk sharing arrangements and
administrative service only contracts have increased $24.1 million, or 23.0%,
from $104.2 million in 1994 to $128.3 million in 1996. Traditional indemnity
medical product revenues decreased $19.7 million, or 32.7%, from 1994 to 1996.
The Company is also leveraging the CRMS segment's managed care and claims
management expertise to capitalize on emerging opportunities with its Regional
Property and Casualty segment affiliates. New legislation in many states will
permit the cost containment approaches that have been used to manage employee
medical and disability costs to be applied to control workers' compensation
and the medical component of automobile insurance. In response, the Company
has collaborated with its affiliated Regional Property and Casualty segment's
claims operations to apply CRMS' expertise in medical management and claims
processing to the Company's workers' compensation business and the medical
component of its automobile insurance business. Claims examiners ensure that
appropriate medical care is provided to insureds and that bills from health
care providers are reasonable. This integrated managed care and claims
adjudication system can now manage medical claims covered by workers'
compensation, automobile insurance or a health benefit plan. The Company
believes that its capability of providing 24-hour managed care to effectively
manage claims for both casualty and employee benefit products is a competitive
advantage.
The Company is also emphasizing the CRMS segment's group life, dental and
disability products. These lines of coverage have historically provided more
stable profitability for the Company than medical coverages, by decreasing the
Company's exposure to unpredictable increases in healthcare costs and the
underlying risks which are assumed by employers. In order to enhance sales of
these products, each has been redesigned to be available as part of a full
service package or on a stand-alone basis.
Health Care Regulation and Reform
There continue to be a number of legislative and regulatory proposals
introduced at the federal and state level to reform the current health care
system. At the federal level, recent proposals have focused on benefits,
confidentiality and Medicare reform. State legislation adopted over the past
few years generally limits the flexibility of insurers with respect to rating
and underwriting practices for employer groups with less than 50 employees, or
in some states, less than 100 employees. In addition, several states have
enacted so-called "any
16
willing provider" laws and managed care reform legislation which may decrease
the demand for managed care programs. While future legislative activity is
unknown, it is probable that limitations on insurers that market health
insurance to small employers will increase. It is also possible that many
states will increase the size of the employers considered a protected class
and will expand reforms to include the non-group market. However, the
Company's rating and underwriting practices are consistent with the objectives
of small group reform. For example, the Company does not experience rate small
cases, nor does it refuse coverage to newly eligible individuals within small
employer groups because of medical histories. Because of its emphasis on
managed care, management believes that it will continue to be able to operate
effectively in the event of small group reform, even if specific states expand
the existing limitations.
The Company believes that the proposed federal and state level health care
reforms would, if enacted, substantially expand access to and mandate the
amounts of health care coverage while limiting or eliminating insurers'
underwriting flexibility and restrict the level of profitability of health
insurers and managed care providers. The Company cannot predict whether any of
the current proposals will be enacted and what particular impact such
proposals may have on the Company's employee benefit services business.
Products
The following table summarizes premiums by product line for the CRMS segment
for the years ended December 31.
1996 1995 1994
------ ------ ------
(IN MILLIONS)
Health
Medical
Fully insured...................................... $ 40.6 $ 44.6 $ 60.3
Risk sharing....................................... 83.2 83.0 77.1
Dental
Fully insured...................................... 21.3 13.1 11.3
Risk sharing....................................... 2.7 2.8 2.8
Short-term disability
Fully insured...................................... 6.5 5.5 4.1
Risk sharing....................................... 0.5 0.5 0.6
Long-term disability
Fully insured...................................... 8.5 9.0 7.6
Reinsurance assumed (1)................................ 57.5 44.9 43.4
Other (2)
Fully insured...................................... 8.3 8.1 8.1
Risk sharing....................................... 18.1 13.3 9.0
------ ------ ------
Total health........................................... 247.2 224.8 224.3
Accidental death & dismemberment....................... 5.0 4.5 3.8
Other reinsurance assumed.............................. 0.4 1.1 1.9
Life................................................... 50.3 42.3 38.0
------ ------ ------
Total CRMS premiums.................................... $302.9 $272.7 $268.0
====== ====== ======
ASO (3)................................................ $ 23.8 $ 18.7 $ 14.7
====== ====== ======
Total premiums and premium equivalents................. $884.3 $786.1 $727.7
====== ====== ======
- --------
(1) Represents special risk arrangements whereby the Company assumes a limited
amount of risk by participating in a pool administered by a third party.
Such arrangements provide insurance coverage to companies for certain high
limit and excess loss risks.
(2) Represents premiums primarily related to customized products sold to
customers providing for stop-loss coverage and/or administrative services.
(3) Administrative services only ("ASO") fees are included in other income in
the financial information contained elsewhere herein.
17
Risk Sharing Arrangements
The Company participates in risk sharing arrangements primarily for medical,
dental and short-term disability coverage. In accordance with its strategy to
emphasize risk sharing arrangements with its customers, the Company offers
several funding options that allow employers to share in the risk of their
plan. ASO plans provide employers with a self-funded arrangement in which the
Company provides claims administration and other services selected by the
employer. The Company also provides specific and aggregate stop-loss insurance
coverage for its ASO plans.
Other Group Coverage
The Company's group life, accidental death and dismemberment ("AD&D"),
disability and dental products are offered in conjunction with medical
insurance coverages or as stand alone products. The Company offers features in
its group life insurance which include fixed or variable pricing, or
traditional and supplemental contributory group term life insurance.
Accidental death and dismemberment insurance may be included with group term
life insurance to pay additional amounts for losses due to an accident. The
Company offers weekly disability income insurance to cover employees for loss
of wages during a short period of disability, long term disability insurance
either with weekly coverage or on a stand-alone basis and dental insurance for
preventive and diagnostic services, routine restorative services and major
restorative services.
Special Risk Arrangements
The Company also provides other special risk arrangements, often taking a
limited share of the risk through reinsurance pools (administered through
Third Party Administrators ("TPAs") or managing general underwriters), to
spread risk and limit exposure in each arrangement. These programs provide a
variety of insurance coverages, including high limit AD&D, high limit
disability income, excess loss medical reinsurance for self-funded plans,
aviation, organ transplant, occupational accident and travel accident.
Traditional Products
The Company offers full indemnity products for medical, surgical and
hospital expense coverage resulting from illness or injury. Many options are
available for deductible amounts and coinsurance levels.
Marketing
The Company sells its CRMS segment's products and services primarily through
approximately 50 sales representatives employed by the Company. These
representatives assist independent producers (for example, agents, brokers and
consultants who represent the purchasers of the Company's products) in the
marketing of these products, and provide assistance with plan design issues
and ongoing service.
The Company continues to expand its distribution channels primarily to
enhance the growth of its non-medical insurance coverages. The Company is
focusing on three distribution channels. First, the Company is capitalizing on
its special risk arrangements with TPAs to promote sales of group life and
disability coverages. Second, the Company continues to form strategic
alliances with Health Maintenance Organizations ("HMOs") and other managed
care entities to distribute group life, disability and dental plans. Third,
the Company is building cross-marketing programs with other segments to
capitalize on divisional distribution systems and products already in place.
The Company has also established regional offices to market non-medical
products through these new distribution channels and added three offices in
1996. The Company plans to open additional regional offices in the future.
Reinsurance
The Company purchases reinsurance for the CRMS segment's group life
insurance, accidental death and dismemberment, group health, stop-loss and
occupational accident coverages. The Company retains a maximum
18
exposure of $500,000 on life policies and $250,000 on AD&D policies. The
Company also has reinsurance arrangements to further limit the Company's
liability with respect to policies for certain employers and groups. Although
reinsurance does not legally discharge the ceding insurer from its primary
liability for the full amount of policies reinsured, it does make the assuming
insurer liable to the ceding unsurer to the extent of the reinsurance ceded.
The Company maintains a gross reserve for reinsured liabilities.
The Company participates in a catastrophic reinsurance pool for this segment
for coverage against catastrophic life losses from the same event. Under the
pool arrangement, the Company shares in approximately 1.5% of the pool's
losses. The Company purchases reinsurance which limits the Company's share of
annual pool claim losses to $500,000.
With respect to this segment's group health policies, the Company purchases
specific stop-loss coverage for individual major medical claims over $350,000
once such excess claims exceed a minimum aggregate limit of $5.8 million. The
Company also purchases catastrophic coverage for three or more claims arising
from the same event. Under this coverage the Company is reimbursed for medical
and long term disability claims paid in excess of $500,000 in total as a
result of the event. The Company purchases reinsurance protection for long
term disability payments, covering a specific percent, generally approximately
50%, of each long term disability policy, with a few exceptions, and purchases
reinsurance for organ transplants.
The Company reinsures 90% of the risk associated with its specific and
aggregate stop-loss insurance policies issued as part of risk sharing
arrangements. This reinsurance is ceded to a group of ten reinsurers,
including FAFLIC, who share in the risk assumed. Stop-loss coverage provided
under Competitive Funding Option plans is not included in this reinsurance
coverage. The Company also reinsures 100% of the risk associated with its
occupational accident policies. This risk is ceded to a reinsurance pool
consisting of twelve reinsurers, including FAFLIC, who share in the risk
assumed. As a member in this reinsurance pool, FAFLIC assumes 12.5% of the
overall risk.
For the year ended December 31, 1996, the Company ceded approximately $74.5
million of premiums associated with its aggregate stop-loss policies and
approximately $8.0 million of premiums for the remaining direct insurance
coverages. As of December 31, 1996, the Company had no material amounts due
from reinsurers.
Competition
The Company competes with many insurance companies and other entities in
selling its CRMS products. Competition exists for employer groups, for the
employees who are the ultimate consumers of the Company's products sold
through the CRMS segment and for the independent producers who represent
purchasers of the Company's products. Additionally, most currently insured
employer groups receive annual rate adjustments, and employers may seek
competitive quotations from several sources prior to renewal.
The Company competes primarily with national and regional health insurance
companies and other managed care providers. Many of the Company's competitors
have greater capital resources, local market presence and greater name
recognition than the Company. The Company also competes with Blue Cross and
Blue Shield plans, which in some markets have dominant market share. Most Blue
Cross and Blue Shield plans are non-profit enterprises that do not necessarily
pursue profitability to the same extent as for-profit competitors do. The
Company also competes with HMOs, some of which are non-profit enterprises. In
addition, in its risk sharing and administrative service businesses, the
Company also competes with TPAs.
The Company believes, based upon its knowledge of the market, that in the
current environment, the principal competitive factors in the sale of managed
care medical products are price, breadth of managed care network arrangements,
name recognition, technology and management information systems, distribution
systems, quality of customer service, product line flexibility and variety,
and financial stability. As a result, the Company believes that its managed
care expertise, access to managed care networks, commitment to claims
management
19
and customer service, and its advanced claims management and information
systems enable it to compete effectively in these markets. Although the
Company cannot predict the effect of current federal and state health care
reform proposals, the Company believes that such reform measures may increase
competition in the sale of health care products by limiting the ability of the
Company's customers to purchase health care coverage from a wide variety of
health care providers and insurers, by mandating participation by insurers in
regional health care alliances or pools and by limiting rating and
underwriting practices.
ASSET MANAGEMENT
RETAIL FINANCIAL SERVICES
General
The Retail Financial Services segment includes the individual financial
products businesses of FAFLIC and its wholly owned subsidiary AFLIAC, as well
as the Company's registered investment advisor and broker-dealer affiliates.
Through this segment, the Company is a leading provider of investment-oriented
life insurance and annuities to upper income individuals and small businesses
throughout the United States. These products are marketed through the
Company's career agency force of 576 agents and on a wholesale basis to
financial planners and broker/dealers. For the year ended December 31, 1996,
the Retail Financial Services segment accounted for $450.9 million, or 13.8%,
of consolidated revenues and $76.2 million, or 23.0%, of consolidated income
before taxes.
The Company offers a diverse line of products tailored to its customer
market, including variable universal life, variable annuities, universal life
and retirement plan funding products. The main components of the Company's
current strategy in this segment are to: (i) emphasize investment-oriented
insurance products, particularly variable annuities and variable universal
life insurance, (ii) improve the productivity of the career agency
distribution system, (iii) implement a targeted marketing approach emphasizing
value-added service, (iv) leverage the Company's technological resources to
support marketing and client service initiatives and (v) continue to develop
new distribution systems.
The Company is seeking to improve the productivity of its career agents, the
Company's primary distribution system in this segment. Virtually all of the
Company's career agents are registered broker-dealer representatives, licensed
to sell all of the Company's investment products as well as its insurance
products. The Company has implemented a performance-based compensation system
which rewards agents and agencies based upon sales of products which provide
greater profits for the Company. The Company has also instituted higher
performance standards for agency retention, and requires that such standards
be achieved earlier, in order to elevate the productivity of its agent sales
force.
In addition to its agency distribution system, the Company has established
several alternative distribution channels which have made significant
contributions to the overall growth of variable product sales in this segment.
Products sold through these channels include Allmerica Select life and annuity
products, which are distributed through independent broker-dealers and
financial planners, as well as annuity products sold through alliances with
mutual fund partners such as Delaware Group ("Delaware"), Pioneer Group
("Pioneer") and Zurich Kemper Investments ("Kemper"). The contribution of
these alternative distribution channels has grown from 34.3% of statutory
annuity premiums and deposits in 1994 to 46.5% in 1996. The Company's strategy
is to pursue additional alternative distribution channels and to seek to
increase sales under existing distribution channels.
The Company has developed a number of new marketing and client service
initiatives in order to encourage sales of its products and improve customer
satisfaction. As part of its focus on the sale of investment-oriented
insurance products, the Company has emphasized a financial planning approach
utilizing face-to-face presentations and seminar programs to address different
client needs. In order to identify a favorable prospective
20
client base, the Company has developed a system utilizing advanced demographic
screening and telemarketing techniques. The Company also regularly delivers
seminars focused on retirement planning to these prospective clients. During
1996, the Company delivered approximately 300 seminars nationally with an
average of more than 60 attendees.
The Company has also utilized its technological resources to support its
marketing and client service initiatives in this segment. The Company has
developed automated portfolio rebalancing capabilities and graphical quarterly
report statements which are used to establish and monitor the desired mix of
investments by individual contract and policyholder.
According to 1996 A.M Best's Policy Reports, the Company is among the twenty
largest writers of individual variable annuity contracts and of individual
variable universal life insurance policies in the United States in 1995, based
on statutory separate account premiums and deposits. Sales of variable
products represented approximately 89.7%, 84.1% and 80.1% of this segment's
statutory premiums and deposits in 1996, 1995 and 1994, respectively. From
1994 to 1996, income before taxes from this segment improved $62.0 million,
from $14.2 million to $76.2 million. Statutory premiums and deposits, a common
industry benchmark for sales achievement, totalled $1,616.9 million, $1,060.8
million and $1,063.3 million in 1996, 1995 and 1994, respectively.
Products
The following table reflects premiums and deposits on a statutory accounting
practices ("SAP") basis, including universal life and investment-oriented
contract deposits, for the segment's major product lines for the years ended
December 31. For 1996 and 1995, Closed Block premiums and deposits have been
combined on a line-by-line basis with premiums and deposits outside the Closed
Block for comparability purposes. Receipts from various products are treated
differently under GAAP and SAP. Under GAAP, universal life, variable universal
life and annuity deposits are not included in revenues but are recorded
directly to policyholder account balances.
1996 1995 1994
-------- -------- --------
(IN MILLIONS)
Statutory Premiums and Deposits
Variable universal life........................ $ 117.2 $ 90.4 $ 86.2
Separate account annuities..................... 1,160.9 647.8 564.6
General account annuities...................... 147.9 128.8 173.5
Retirement investment account annuities........ 24.5 25.6 27.1
Universal life................................. 71.6 77.2 93.0
Traditional life............................... 61.9 59.1 86.8
Individual health.............................. 32.9 31.9 32.0
Other.......................................... -- -- 0.1
-------- -------- --------
Total premiums and deposits.................. $1,616.9 $1,060.8 $1,063.3
======== ======== ========
While the Company continues to offer certain traditional insurance products,
its current focus for new business in this segment is on the sale of variable
products.
Variable Products
The Company's variable products offered through this segment include
variable universal life insurance and variable annuities. The Company's
variable universal life insurance products combine the flexible terms of the
Company's universal life insurance policy with separate account investment
opportunities. The Company also offers a variable joint life product through
this segment. The Company's variable annuities offer the investment
opportunities of the Company's separate accounts and provide a vehicle for
tax-deferred savings. These products are sold pursuant to registration
statements under the Securities Act or exemptions from registration
thereunder.
21
The Company seeks to achieve product distinction with respect to its
variable products on the basis of quality and diversity of the separate
account investment options underlying these products. The Company's variable
universal life and annuity products offer a variety of account investment
options with choices ranging from money market funds to international equity
funds. The number of these investment options has increased, from 33 in 1994
to 60 in 1996, including those underlying the products sold through
alternative distribution channels. For management of these separate accounts,
the Company supplements its in-house expertise in managing fixed income assets
with the equity management expertise of well-known mutual fund advisors, such
as Fidelity Investments, as well as other independent management firms who
specialize in the management of institutional assets. Additionally, the
Company utilizes the services of an experienced investment consultant to the
pension industry to assist it in the selection of these institutional managers
and in the ongoing monitoring of their performance.
Traditional Products
Historically, the Company's primary insurance products offered in this
segment were traditional life insurance products, including whole life,
universal life and term life insurance, as well as fixed annuities, disability
income policies and retirement plan funding products. Upon completion of the
Company's demutualization in October 1995, a Closed Block of all existing
traditional participating life and annuity policies was established for the
payment of future benefits, policyholders' dividends and certain expenses and
taxes relating to these policies. As a result of the Company's conversion to a
stock life insurance company, participating policies are no longer offered.
The Company ceased offering term life insurance in March 1995 and ceased
offering its single premium fixed annuity product in the fourth quarter of
1995. In addition, the Company ceased offering its disability income products
in January, 1996.
The Company's universal life insurance product is an interest-sensitive
product which offers flexibility in arranging the amount of insurance
coverage, the premium level and the premium payment period. The Company also
offers joint life products through this segment designed to meet estate
planning needs. These products offer flexible premiums and benefits and cover
two lives, with benefits paid at the first or second death, depending on the
policy. In addition, the Company offers a funding vehicle for pension plans of
small to medium-sized employers which provides both general account and
separate account investment options.
Distribution
The Company's primary distribution channel for this segment is its national
career agency sales force of 576 agents, housed in 24 general agencies located
in or adjacent to most of the major metropolitan centers in the United States.
Virtually all of these agents are licensed both as insurance agents and
securities broker-dealers by the National Association of Securities Dealers
("NASD"), qualifying them to sell the full range of the Company's products.
The Company has focused on improving the productivity and reducing the cost of
its career agency system through performance-based compensation, higher
performance standards for agency retention and agency training programs. As
part of this strategy, the Company has decreased the number of agents from 800
at the end of 1994 to 576 at December 31, 1996. The Company also regularly
conducts comprehensive financial planning seminars and face-to-face
presentations to address different investment objectives of clients.
The Company has established several alternative distribution channels for
this segment's products utilizing independent broker-dealers and financial
planners. Through these distribution channels, the Company has obtained access
to over 260 distribution firms employing over 40,000 sales personnel. In
addition, establishment of these channels has enabled the Company to offer a
broader range of investment options through alliances with Delaware, Pioneer
and Kemper mutual funds. During 1996, total statutory premiums and deposits
from sales of variable annuities through these channels totalled $619.8
million, compared to $262.8 million in 1994.
22
Underwriting
Life insurance underwriting involves a determination of the type and amount
of risk which an insurer is willing to accept and the price charged to do so.
The Company's insurance underwriting standards for this segment attempt to
produce mortality results consistent with the assumptions used in product
pricing. Underwriting also determines the amount and type of reinsurance
levels appropriate for a particular risk profile and thereby allows
competitive risk selection. Underwriting rules and guidelines are based on the
mortality experience of the Company, as well as of the insurance industry and
the general population. The Company also uses a variety of medical tests to
evaluate certain policy applications, based on the size of the policy, the age
of the applicant and other factors.
The Company's product specifications are designed to prevent anti-selection.
Mortality assumptions are thoroughly communicated and monitored. The
underwriting department tracks the profitability indicators of business by
each general agent, including the mix of business, percentage of substandard
and declined cases and placement ratio. Ongoing internal underwriting audits,
conducted at multiple levels, monitor consistency of underwriting requirements
and philosophy. Routine independent underwriting audits conducted by its
reinsurers have supported the Company's underwriting policies and procedures.
Insurance Reserves
The Company has established liabilities for policyholders' account balances
and future policy benefits in the consolidated balance sheets included in the
1996 Annual Report to Shareholders, the applicable portions of which are
incorporated herein by reference, to meet obligations on various policies and
contracts. Policyholders' account balances for universal life and investment-
type policies are equal to cumulative account balances: deposits plus credited
interest, less expense and mortality charges and withdrawals. Future policy
benefits for traditional products are computed on the basis of assumed
investment yields, mortality, persistency, morbidity and expenses (including a
margin for adverse deviation), which are established at the time of issuance
of a policy and generally vary by product, year of issue and policy duration.
Reinsurance
Consistent with the general practice in the life insurance industry, the
Company has reinsured portions of the coverage provided by this segment's
insurance products with other insurance companies. Insurance is ceded
principally to reduce net liability on individual risks, to provide protection
against large losses and to obtain a greater diversification of risk. Although
reinsurance does not legally discharge the ceding insurer from its primary
liability for the full amount of policies reinsured, it does make the
reinsurers liable to the insurer to the extent of the reinsurance ceded. The
Company maintains a gross reserve for reinsurance liabilities. The Company
ceded approximately 2.8% of this segment's total statutory life insurance
premiums in 1996.
With respect to life policies of the Retail Financial Services segment, the
Company has reinsurance agreements in place, established on an annual term,
for both automatic and facultative reinsurance. Under automatic reinsurance,
the reinsurer is automatically bound for up to three times the Company's
retention, which currently is $2 million per life, with certain restrictions
that determine the binding authority with the various reinsurers.
For life policies greater than $8 million, the Company obtains facultative
reinsurance. Prior to issuing facultative reinsurance, the facultative
reinsurer reviews all of the underwriting information relating to the policies
and reinsures on a policy by policy basis. Depending on the nature of the risk
and the size of the policy, the facultative reinsurance could be provided by
one company or several. The Company sometimes facultatively reinsures certain
policies under $2 million which do not satisfy the Company's underwriting
guidelines.
The Company seeks to enter into reinsurance treaties with highly rated
reinsurers. In 1996, the two largest reinsurers for life insurance in this
segment, Connecticut General and St. Louis Re, represented 55.3% of this
segment's life reinsurance ceded based upon statutory premium in that year.
All of the reinsurers utilized by this
23
segment have received an A.M. Best rating of "A- (Excellent)" or better
(Best's Insurance Reports 1996 edition). The Company believes that it has
established appropriate reinsurance coverage for this segment based upon its
net retained insured liabilities compared to its surplus. Based on its review
of its reinsurers' financial positions and reputations in the reinsurance
marketplace, the Company believes that its reinsurers are financially sound.
In 1995, the Company entered into two 100% coinsurance agreements. One was
with Protective Life Insurance Company to reinsure its yearly renewable term
business. The other was with American Heritage Life Insurance Company to
reinsure its non-qualified payroll universal life business.
The Company also obtains catastrophe reinsurance for life insurance in this
segment through a catastrophe accident pool. The maximum pool reinsurance
available per company is $50 million and the maximum pool reinsurance
available for a single event is $125 million. Any amounts in excess of these
limits are the responsibility of the company suffering the loss. Each
participant in the pool pays a premium based on the share of claims paid by
the pool. The Company's share of pool losses is approximately 2.5%. There have
been three claims for which the Company's share was approximately $80,000
since the Company entered the pool on January 1, 1989. The pool is
administered by Lincoln National, and approximately 125 companies currently
participate.
For its disability income coverages, the company purchases reinsurance for
100% of coverage over a specified retention, generally between $1,000 and
$5,000 per month, per policy. This coverage is provided by Lincoln National,
Mercantile and General Life Reassurance Company of America, and North American
Reassurance Company, depending on the dates policies are or were issued. In
1995, the Company entered into a 100% coinsurance agreement with Protective
Life Insurance Company for the Company's yearly renewable term life insurance.
Competition
There is strong competition among insurance companies seeking clients for
the types of insurance, annuities and investment products sold by the Company
in this segment. As of December 31, 1996, there were over 1,700 companies that
offer life insurance in the United States, most of which offer one or more
products similar to those offered by the Company. In some cases these products
are offered through similar marketing techniques. In addition, the Company may
face additional competition from banks and other financial institutions should
current regulatory restrictions on the sale of insurance and securities by
these institutions be repealed.
The Company believes that, based upon its extensive experience in the
market, the principal competitive factors affecting the sale of its life
insurance and related investment products are price, financial strength and
claims-paying ratings, size and strength of agency force, range of product
lines, product quality, reputation and name recognition, value-added service
and, with respect to variable insurance and annuity products, investment
management performance of the underlying separate accounts. Accordingly,
management believes that the Company's strong financial strength and claims-
paying ratings, the quality and diversity of the separate accounts underlying
its investment-based products, the NASD licensing of approximately ninety-five
percent (95%) of its agents and its reputation in the insurance industry
enable it to compete effectively in the markets in which it operates.
INSTITUTIONAL SERVICES
General
The Company has historically offered plan design, investment and participant
recordkeeping services to defined benefit and defined contribution retirement
plans of corporate employers and sold GICs and annuities to corporate
retirement plans. The Company conducts its operations in this segment through
FAFLIC and its subsidiaries. For the year ended December 31, 1996, this
segment accounted for approximately $266.7 million, or 8.1%, of consolidated
revenues, and income before taxes of $52.8 million, or 15.9%, of consolidated
income before taxes.
24
The Company provides consulting and investment services to defined benefit
and defined contribution retirement plans of corporate employers, as well as
the sale of group annuities to corporate pension plans. The Company also
offers participant recordkeeping and administrative services to defined
benefit retirement plans. The Company provides administration and
recordkeeping for approximately 553 qualified pension and profit sharing plans
which have assets totaling $2.5 billion and cover approximately 105,000
participants. To address the decrease in the market for defined benefit plans
sponsored by employers, the Company has focused on increasing sales to defined
contribution plans, targeting plans with 25 to 1,500 participants. Based upon
internal studies, management believes the size of this market provides the
greatest opportunity in this line of business. In addition, the Company
provides investment only plan services to approximately 210 plans with
aggregate assets under management of $1.1 billion.
Since late 1995, the Company has offered its products for sale directly at
the worksite through trained and licensed sales representatives. By using
education and personalized consulting to increase employee purchases, the
Company seeks to lower acquisition costs and increase employee participation
levels.
In March 1995, the Company entered into an agreement with TSSG, a subsidiary
of First Data Corporation, pursuant to which the Company sold its mutual fund
processing business and agreed not to engage in this business for four years
after closing. In 1996, the Company received a non-recurring $4.8 million
contingent payment related to this sale.
Products and Services
Retirement Plan Products and Services
Through the Institutional Services segment, the Company offers defined
contribution and defined benefit retirement plan investment options, as well
as compliance support, asset allocation services and actuarial benefit
calculations. The Company also offers full service recordkeeping for defined
benefit retirement plans. Participants in defined contribution plans serviced
by the Company have the option to invest their contributions to the plan in
the Company's general account or choose from one of the Company's separate
account investment options. The Company targets plans covering 25 to 1,500
employees. The Company also offers annuity products to retiring participants
in serviced defined benefit plans and to fund terminating benefit plans.
Historically, the Company offered two types of Guaranteed Investment
Contracts, or GICs. One is the traditional GIC; the other is the synthetic
GIC. The traditional GIC provides a fixed guaranteed interest rate and fixed
maturity for each contract. Some of the traditional GICs provide for a
specific lump sum deposit and no withdrawals prior to maturity. Other
traditional GICs allow for window deposits and/or benefit-sensitive
withdrawals prior to maturity, for which the Company builds an additional risk
charge into the guaranteed interest rate. The synthetic GIC is similar to the
traditional GIC, except that the underlying investments are generally held and
managed by a third party, in accordance with specific investment guidelines,
and the Company periodically resets the guaranteed interest rate for in-force
funds, based on the actual investment experience of the funds.
In 1996, total traditional GIC sales were less than $10.0 million, and total
synthetic GIC sales were less than $20.0 million. These amounts are immaterial
to the Company's operating income. The low volume of new GIC business reflects
the reduced focus on these products since the reduction of the Company's
financial strength ratings in 1995. Management believes that due to the
reduced ratings, it is currently not economical for the Company to compete in
this market.
Other Services
The Company also offers telemarketing services through this segment which
utilize experienced telemarketing management and program execution. The
Company offers these services to retail and financial clients.
25
Distribution
The Company distributes retirement products through a dedicated salesforce
that sells directly to customers and through intermediaries. In addition to
the Home Office, the Company maintains seven regional sales and service
offices located in strategic financial markets.
Competition
The principal competitive factors in the Company's retirement services
provided to defined benefit and defined contribution customers are price, fund
performance, and the ability to provide high quality service. Competition
comes from other insurance companies, mutual fund companies and banks. The
sector of the retirement services market in which the Company most often
competes is the market for small to medium plans that desire a full spectrum
of investment and recordkeeping services. In March 1995, the recordkeeping
function was outsourced to a third party administrator.
INVESTMENT PORTFOLIO
General
At December 31, 1996, the Company managed $9.9 billion of investment assets,
including $772.7 million of investment assets in the Closed Block. These
investments are generally of high quality and broadly diversified across asset
classes and individual investment risks. The major categories of investment
assets are: fixed maturities, which includes both investment grade and below
investment grade public and private debt securities; equity securities;
mortgage loans, principally on commercial properties; real estate, which
consists primarily of investments in commercial properties; policy loans and
other long-term investments. The remainder of the investment assets is
comprised of cash and cash equivalents.
Management has an integrated approach to developing an investment strategy
for the Company that maximizes income, while incorporating overall asset
allocation, business segment objectives, and asset/liability management
tailored to specific insurance or investment product requirements. The
Company's integrated approach and the execution of the investment strategy is
founded upon a value orientation. The Company's investment professionals seek
to identify undervalued securities in the markets through extensive
fundamental research and credit analysis. Management believes this research-
driven, value orientation is a key to achieving the overall investment
objectives of producing superior rates of return, preserving capital, and
meeting the financial goals of the Company's business segments.
The appropriate asset allocation for the Company (the selection of broad
investment categories such as fixed maturities, equity securities, mortgages
and real estate) is determined by management initially through a process that
focuses overall on the types of businesses in each segment that the Company
engages in and the level of surplus (net worth) required to support these
businesses. Next, at the segment level, asset classes are selected to produce
cash flows and have maturities which match product requirements.
At the segment level, the Company has developed an asset/liability
management approach tailored to specific insurance, investment product, and
income objectives. The investment assets of the Company are then managed in
over 33 portfolio segments consistent with specific products or groups of
products having similar liability characteristics. As part of this approach,
management develops investment guidelines for each portfolio consistent with
the return objectives, risk tolerance, liquidity, time horizon, tax and
regulatory requirements of the related product or business segment. Specific
investments frequently meet the requirements of, and are acquired by, more
than one investment portfolio (or investment segment of the general account of
FAFLIC or AFLIAC, with each investment segment holding a pro rata interest in
such investments and the cash flows therefrom). Management has a general
policy of diversifying investments both within and across all portfolios. The
Company monitors the credit quality of its investments and its exposure to
individual borrowers, industries, sectors, and, in the case of mortgages and
real estate, property types and geographic locations. In 1996, management made
further investments in fixed maturities with lower credit quality and longer
durations, as well as incremental investments in limited partnerships, to meet
income objectives. All investments are subject to diversification requirements
under insurance laws.
26
Consistent with this management approach, portfolio managers maintain close
working relationships with the managers of related product lines within the
Regional Property and Casualty, Corporate Risk Management Services, Retail
Financial Services, Institutional Services, and Allmerica Asset Management
segments. Changes in the outlook for investment markets or the returns
generated by portfolio holdings are reflected as appropriate on a timely basis
in the pricing of the Company's products and services.
RATING AGENCIES
Insurance companies are rated by rating agencies to provide both industry
and participants and insurance consumers meaningful information on specific
insurance companies. Higher ratings generally indicate financial stability and
a stronger ability to pay claims.
Hanover received an A.M. Best financial condition rating of A (Excellent) in
1996. Citizens has received an A.M. Best financial condition rating of A+
(Superior) in each year since 1968. FAFLIC and AFLIAC received A.M. Best
financial condition ratings of A (Excellent) in 1996 (Best's Insurance
Reports, 1996 edition).
FAFLIC was given a Duff & Phelps claims-paying ability rating of AA (Very
High) in September 1996 (Duff & Phelps Credit Rating Company, September 1996).
FAFLIC and AFLIAC were given Moody's financial strength ratings of A1 (Good)
in September 1996 (Moody's Investment Credit Reports, September 1996).
In September 1996, FAFLIC and AFLIAC received S&P claims-paying ability
ratings of A+ (Good). Hanover, together with its subsidiaries, including
Citizens Insurance, was given an AA- (Excellent) S&P claims-paying ability
rating (Standard & Poor's Insurance Rating Analysis, September, 1996).
Management believes that its strong ratings are important factors in
marketing the products of its insurance companies to its agents and customers,
since rating information is broadly disseminated and generally used throughout
the industry. Insurance company ratings are assigned to an insurer based upon
factors 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.
EMPLOYEES
The Company has approximately 6,800 employees located throughout the
country. Management believes relations with employees and agents are good.
ITEM 2
PROPERTIES
The Company's headquarters are located at 440 Lincoln Street, Worcester,
Massachusetts and consist primarily of approximately 727,000 square feet of
office and conference space owned in fee and include the headquarters of
Hanover.
Citizens Insurance owns its home office, located at 645 W. Grand River,
Howell, Michigan, which is approximately 119,000 square feet. Citizens also
owns a three-building complex located at 808 North Highlander Way, Howell,
Michigan, with 155,000 square feet, where various business operations are
conducted.
The Company leases office space for its sales force throughout the United
States. The leased property houses agency offices and group insurance sales
offices. Hanover also leases offices throughout the country for its field
employees.
The Company believes that its facilities are adequate for its present needs
in all material respects.
27
ITEM 3
LEGAL PROCEEDINGS
Reference is made to Note 20 on page 75 of the Notes to Consolidated
Financial Statements of the 1996 Annual Report to Shareholders, the applicable
portions of which are incorporated herein by reference.
MAINE WORKERS COMPENSATION RESIDUAL MARKET POOL
On June 23, 1995, the governor of Maine approved a legislative settlement
for the Maine Workers' Compensation Residual Market Pool deficit for the Years
1988 through 1992. The settlement provides for an initial funding of $220.0
million toward the deficit. The insurance carriers were liable for $65.0
million and employers would contribute $110.0 million payable through
surcharges on premiums over the course of the next ten years. The major
insurers are responsible for 90% of the $65.0 million. Hanover's allocated
share of the settlement is approximately $4.2 million, which was paid in
December 1995. The remainder of the deficit of $45.0 million will be paid by
the Maine Guaranty Fund, payable in quarterly contributions over ten years. A
group of smaller carriers filed litigation to appeal the settlement. The
Company believes that adequate reserves have been established for any
additional liability.
ALLMERICA P&C AND AFC MERGER
Shortly after AFC publicly disclosed its proposal regarding the Merger,
three separate stockholders of Allmerica P&C, Leslie Susser, Harbor Finance
Partners and William A. Kass, IRA-Simplified Employee Pension, filed lawsuits
in the Delaware Chancery Court against AFC, Allmerica P&C and the directors of
Allmerica P&C and the directors of AFC who are also on the board of directors
of Allmerica P&C (the "Delaware Actions"). An additional lawsuit challenging
the Merger was filed by another stockholder of Allmerica P&C, Daniel Bruno, in
the Worcester County (Massachusetts) Superior Court (the "Massachusetts
Action" and , together with the Delaware Actions, the "Actions"). The named
plaintiff in each of the Actions purports to maintain each individual action
as a class action on behalf of the public stockholders of Allmerica P&C
(excluding AFC, Allmerica P&C and the other defendants and any person, firm,
trust, corporation or any other entity related to or affiliated with any of
the defendants) (the "Public Stockholders"). In each of the Actions, the
plaintiff alleged that under the terms of the proposed Merger AFC would
acquire the Allmerica P&C Common Stock at a price that is substantially below
the fair price of such stock and that certain officers and/or directors of AFC
and/or Allmerica P&C breached fiduciary duties owed to Allmerica P&C and the
Public Stockholders in connection with the proposed Merger. The plaintiffs
sought injunctive relief prohibiting AFC from completing the Merger or, in the
alternative, compensatory damages. On February 19, 1997, the parties to the
Delaware Actions executed a Memorandum of Understanding (the "MOU")
memorializing an agreement-in-principle to settle the Delaware Actions. Under
the terms of the MOU, the parties to the Delaware Action have agreed to use
their best efforts to execute and present to the Delaware Chancery Court on or
before April 30, 1997, a formal Stipulation of Settlement. In the event that
the Delaware Chancery Court approves the proposed settlement, it is
anticipated that the Delaware Actions will be dismissed with prejudice as to
the individual plaintiffs and the class of Public Stockholders. In connection
with the MOU, AFC and Allmerica P&C have agreed that they will not oppose an
application to the court by plaintiffs' counsel for an aggregate award of
attorneys' fees and expenses in an amount not to exceed $995,000.00.
SALES PRACTICES
A number of civil jury verdicts have been returned against life and health
insurers in the jurisdictions in which the Company does business involving the
insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents, and other matters. Some of the lawsuits have resulted in the
award of substantial judgments against the insurer, including material amounts
of punitive damages. In some states, juries have substantial discretion in
awarding punitive damages in these circumstances. The Company and its
subsidiaries, like other life and health insurers, from time to time are
involved in such litigation. Although the outcome of any litigation cannot be
predicted with certainty, to date, no such lawsuit has resulted in the award
of any material amount of damages against the Company.
28
In December 1996, the Company received notice from the Securities and
Exchange Commission (the "Commission") that it would be conducting a limited
inspection concerning the Company's marketing and sales practices associated
with variable insurance products. The Commission requested that certain
information be provided to it by the Company, which the Company promptly
complied with. No litigation has been instituted, nor has the Commission
initiated any further action with respect to this matter.
OTHER
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the opinion of management, based
on the advice of legal counsel, the ultimate resolution of these proceedings
will not have a material effect on the Company's consolidated financial
statements.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.
29
PART II
ITEM 5
MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
Reference is made to the "Shareholder Information" on page 78 of the 1996
Annual Report to Shareholders, the applicable portions of which are
incorporated herein by reference, which displays (i) the principal market for
the common stock of AFC, (ii) the frequency and amount of dividends paid
thereon during such period, and (iii) the approximate number of holders of
common shares as of February 28, 1997.
Dividends by the Company are funded from dividends paid to the Company from
FAFLIC, which are subject to restrictions imposed by state insurance laws and
regulations with respect to dividends paid to the Company. Reference is made
to "Liquidity and Capital Resources" on pages 48-49 of Management's Discussion
and Analysis of Financial Condition and Results of Operations and to Note 13
on page 70 of the Notes to Consolidated Financial Statements of the 1996
Annual Report to Shareholders, the applicable portions of which are
incorporated herein by reference.
The payment of future dividends, if any, on the Company's Common Stock will
be a business decision made by the Board of Directors from time to time based
upon the results of operations and financial condition of the Company and such
other factors as the Board of Directors considers relevant.
ITEM 6
SELECTED FINANCIAL DATA
Reference is made to the "Five Year Summary of Selected Financial
Highlights" on page 31 of the 1996 Annual Report to Shareholders, which is
incorporated herein by reference.
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 32-49 of the 1996 Annual Report
to Shareholders, which is incorporated herein by reference.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements on pages 51-54
and the accompanying Notes to Consolidated Financial Statements on pages 55-76
of the 1996 Annual Report to Shareholders which meet the requirements of
Regulation S-X, and which include a summary of quarterly results of
consolidated operations (see Note 22 of Notes to Consolidated Financial
Statements--page 76), which is incorporated herein by reference.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
30
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
Set forth below is biographical information concerning the directors of the
Company.
MICHAEL P. ANGELINI, 54
Director since February 1995
Chairman, Audit Committee
Mr. Angelini has been a Director of AFC since February 1995, of FAFLIC from
August 1984 to April 1996, and of Allmerica P&C since August 1992. He served
as a Director of Hanover from December 1991 through December 1992. Mr.
Angelini is a partner at the law firm of Bowditch & Dewey, with which he has
been associated since 1968, and is a Director of Flagship Bank & Trust
Company.
DAVID A. BARRETT, 69
Director since February 1995
Audit Committee
Mr. Barrett has been a Director of AFC since February 1995, of FAFLIC from
March 1976 to April 1996, of Allmerica P&C since August 1992 and of Hanover
from December 1991 to December 1992. Mr. Barrett was executive director of
Worcester Memorial Hospital, Inc. from 1968 until January 1983, and served as
President and Chief Executive Officer of that organization until October 1988.
Mr. Barrett served as President and Chief Executive Officer of Medical Center
of Central Mass., Inc. from October 1988 to April 1992, and currently is a
consultant to that organization, now known as Memorial Health Care.
GAIL L. HARRISON, 49
Director since February 1995
Ms. Harrison has been a Director of AFC since February 1995, of FAFLIC from
March 1986 to April 1996, of Allmerica P&C since August 1992, and of Hanover
from December 1991 to December 1992. Since February 1981, Ms. Harrison has
been affiliated with The Wexler Group (formerly Wexler, Reynolds, Harrison &
Shule, Inc.), a government relations consulting firm.
ROBERT P. HENDERSON, 65
Director since September 1996
Mr. Henderson has been a Director of AFC since September 1996. Mr. Henderson
has been the Chairman of Greylock Management Corporation, a venture capital
firm, since 1983. Mr. Henderson is also a Director of Cabot Corporation and
Filenes Basement, a Trustee of the Museum of Fine Arts in Boston,
Massachusetts, and a Member of Corporation of the New England Deaconess
Hospital. Mr. Henderson is a former Chairman of the Federal Reserve Bank of
Boston.
J. TERRENCE MURRAY, 57
Director since February 1995
Mr. Murray has been a Director of AFC since February 1995 and of FAFLIC from
January 1992 to April 1996. Mr. Murray is the Chairman, President and Chief
Executive Officer of Fleet Financial Group, Inc., a bank holding company,
where he has been employed since July 1962. Mr. Murray is also a Director of
A.T. Cross Co., a writing instrument company, and CVS Corporation, a drugstore
chain.
31
ROBERT J. MURRAY, 55
Director since May 1996
Mr. Murray has been a Director of AFC since May 1996. He has been Chairman,
President and Chief Executive Officer of New England Business Service, Inc.
("NEBS"), a supplier of business forms, since December 1995 and has served on
the Board of Directors of NEBS since 1991. Prior to joining NEBS, Mr. Murray
was employed by The Gillette Company, Inc. ("Gillette"), a manufacturing
company, beginning in 1961. He served as a Corporate Vice President of
Gillette beginning in 1987 and as the Executive Vice President of Gillette's
North Atlantic Group from January 1991 to December 1995. Mr. Murray is also a
Director of North American Mortgage Company, LoJack Corporation and Fleet
National Bank, as well as a Trustee of Boston College.
JOHN F. O'BRIEN, 53
Director, Chief Executive Officer and President of the Company since February
1995
Mr. O'Brien has been a Director, Chief Executive Officer and President of
AFC since February 1995. He has also served as a Director, Chief Executive
Officer and President of FAFLIC since August 1989. In addition to his
positions with AFC and FAFLIC, Mr. O'Brien has served as a Director, President
and Chief Executive Officer of Allmerica P&C since August 1992, and has been a
Director of Hanover since September 1989, Citizens Insurance since March 1992
and Citizens, for which he also serves as Chief Executive Officer, since
December 1992. Mr. O'Brien is also a trustee or director and executive officer
of Allmerica Investment Trust, Allmerica Securities Trust, and Allmerica
Funds. Additionally, Mr. O'Brien is a director and/or holds offices at various
other non-public FAFLIC affiliates including SMA Financial Corp. and AFLIAC.
Mr. O'Brien also currently serves as a Director of The TJX Companies, Inc., an
off-price family apparel retailer, ABIOMED, Inc., a medical device company,
Cabot Corporation, a diversified specialty chemicals and materials and energy
company, The Life Insurance Association of Massachusetts, and The American
Council of Life Insurance. He also currently serves as a member of the
executive committee of the Mass Capital Resource Company, a Massachusetts
investment partnership. Prior to joining FAFLIC, Mr. O'Brien served as an
officer of FMR Corp., the parent company of various financial services
companies in the Fidelity Group and a director and/or an executive officer at
various other of FMR Corp.'s affiliates.
JOHN L. SPRAGUE, 66
Director since February 1995
Audit Committee
Mr. Sprague has been a Director of AFC since February 1995 and of FAFLIC
from September 1972 to April 1996. Mr. Sprague has been President of John L.
Sprague Associates, Inc., a consulting company for technology companies, since
January 1988. He served as President and Chief Executive Officer of Sprague
Electric Company, a semiconductor company, from December 1980 to January 1988.
Mr. Sprague is also a Director of Aerovox Corp., a manufacturing company,
Sipex Corporation and California MicroDevices Corporation, an electronic
components manufacturer.
ROBERT G. STACHLER, 67
Director since February 1995
Compensation Committee
Mr. Stachler has been a Director of AFC since February 1995, of FAFLIC from
March 1978 to April 1996, of Allmerica P&C since August 1992, and of Hanover
from April 1990 to December 1992. Mr. Stachler has been a partner at the law
firm of Taft, Stettinius & Hollister since 1964.
32
HERBERT M. VARNUM, 59
Director since February 1995
Compensation Committee
Mr. Varnum has been a Director of AFC since February 1995, of FAFLIC from
March 1979 to April 1996, of Allmerica P&C since August 1992, and of Hanover
from December 1991 through December 1992. Mr. Varnum was employed by Quabaug
Corporation, a manufacturing company, beginning in 1960 and served as
President and Chief Executive Officer from 1982 to 1989, and as Chairman and
Chief Executive Officer from January 1990 until his retirement in June 1995.
RICHARD M. WALL, 68
Director since February 1995
Compensation Committee
Mr. Wall has been a Director of AFC since February 1995, of FAFLIC from
March 1986 to April 1996, of Allmerica P&C since August 1992, and of Hanover
from December 1991 through December 1992. Mr. Wall has been General Counsel
and assistant to the Chairman and Chief Executive Officer of FLEXcon Company,
Inc., a plastics manufacturing company, since November 1985.
EXECUTIVE OFFICERS OF THE REGISTRANT
JOHN F. O'BRIEN, 53
Director, Chief Executive Officer and President of the Company since February
1995
See biography under "Directors of the Registrant" above.
BRUCE C. ANDERSON, 53
Vice President of the Company since February 1995
Mr. Anderson has been Vice President of AFC since February 1995 and Vice
President of Allmerica P&C and Citizens since March 1997. Mr. Anderson has
been employed by FAFLIC since 1967 and has been Vice President of FAFLIC since
October 1984.
RICHARD J. BAKER, 65
Vice President and Secretary of the Company since February 1995
Mr. Baker has been Vice President and Secretary of AFC since February 1995,
Vice President and Assistant Secretary of FAFLIC since 1973 and April 1996,
respectively, and has been employed by FAFLIC since 1959. He has served as
Assistant Secretary of Allmerica P&C since October 1992, Vice President and
Secretary of Allmerica P&C since May 1995, and as Vice President and Secretary
of Citizens since September 1993 and January 1993, respectively. Mr. Baker has
also served as Vice President of AFLIAC since January 1982 and as Director
from June 1993 to April 1996. In addition, Mr. Baker is a director and/or
executive officer at various other non-public affiliates.
JOHN P. KAVANAUGH, 42
Vice President and Chief Investment Officer of the Company since 1996
Mr. Kavanaugh has been Vice President and Chief Investment Officer of AFC
since September 1996, has been employed by FAFLIC since 1983, and has been
Vice President of FAFLIC since December 1991 and Vice President of AFLIAC
since January 1992. Mr. Kavanaugh has also served as Director and Chief
Investment Officer of FAFLIC, Hanover, Citizens Insurance and AFLIAC since
August 1996, and Vice President and Chief Investment Officer of Allmerica P&C
and Citizens since September 1996. Mr. Kavanaugh is also a director and/or
executive officer at various other non-public affiliates.
33
JOHN F. KELLY, 58
Vice President and General Counsel of the Company since February 1995
Mr. Kelly has been Vice President, General Counsel and Assistant Secretary
of AFC since February 1995, has been employed by FAFLIC since July 1968, and
has been Senior Vice President and General Counsel of FAFLIC since February
1986. In addition to his positions with AFC and FAFLIC, Mr. Kelly has been
Vice President and General Counsel of Allmerica P&C since August 1992,
Assistant Secretary of Allmerica P&C since May 1995, Assistant Secretary of
Citizens since December 1992, and Vice President, General Counsel and
Assistant Secretary of Citizens since September 1993. Mr. Kelly was Secretary
of Allmerica P&C from August 1992 to May 1995. Mr. Kelly has been a Director
of AFLIAC since October 1982 and is a director and/or executive officer at
various other non-public affiliates.
J. BARRY MAY, 49
Vice President of the Company since February 1997
Mr. May has been Vice President of AFC since February 1997, Vice President
of Allmerica P&C and President of Hanover since September 1996 and Vice
President of Citizens since March 1997. He has been a Director of Hanover and
Citizens Insurance since September 1996. Mr. May served as Vice President of
Hanover from May 1995 to September 1996, as Regional Vice President from
February 1993 to May 1995 and as a General Manager of Hanover from June 1989
to May 1995. Mr. May has been employed by Hanover since 1985.
JAMES R. MCAULIFFE, 52
Vice President of the Company since February 1995
Mr. McAuliffe has been Vice President of AFC from February 1995 through
December 1995 and since February 1997, Vice President of Allmerica P&C since
August 1992, a Director of Allmerica P&C from August 1992 through December
1994, a Director and Vice President of Citizens since December 1992, and a
Director of AFLIAC from April 1987 through May 1995 and since May 1996. Mr.
McAuliffe has been President of Citizens Insurance since December 1994. Mr.
McAuliffe has been employed by FAFLIC since 1968, and served as Vice President
and Chief Investment Officer of FAFLIC from November 1986 through December
1994. Mr. McAuliffe also served as Vice President and Chief Investment Officer
of Allmerica P&C from August 1992 through December 1994, and Vice President
and Chief Investment Officer of AFLIAC from December 1986 through May 1995.
Additionally, Mr. McAuliffe is a director and/or executive officer at various
other non-public affiliates.
EDWARD J. PARRY, III, 37
Vice President and Treasurer of the Company since February 1995
Chief Financial Officer of the Company since December 1996
Mr. Parry has been Chief Financial Officer of AFC since December 1996. He
has also been Vice President and Treasurer of AFC since February 1995. He has
served as Chief Financial Officer of FAFLIC, AFLIAC, Allmerica P&C, Hanover,
Citizens and Citizens Insurance since December 1996 and as Vice President and
Treasurer of FAFLIC, AFLIAC, Allmerica P&C and Hanover since February 1993 and
of Citizens since September 1993 and December 1992, respectively. Mr. Parry is
also a director and/or executive officer at various other non-public
affiliates. Prior to joining FAFLIC in July 1992, Mr. Parry was employed by
the accounting firm of Price Waterhouse from July 1987 through July 1992.
RICHARD M. REILLY, 58
Vice President of the Company since February 1997
Mr. Reilly has been Vice President of AFC and FAFLIC since February 1997 and
November 1990, respectively, and Vice President of Allmerica P&C and Citizens
since March 1997. He has also been a Director and Vice President of AFLIAC
since November 1990 and President and Chief Executive Officer of AFLIAC since
August 1995. Mr. Reilly was Vice President of AFC from February 1995 through
December 1995.
34
Additionally, Mr. Reilly has been the President of Allmerica Investment Trust,
Allmerica Funds, and Allmerica Securities Trust, each a registered investment
company, since February 1991, April 1991 and February 1991, respectively. Mr.
Reilly is also a director and/or holds an executive office at various other
non-public affiliates. Prior to his affiliation with FAFLIC, he was executive
officer of Fidelity Management and Research Company from 1969 to 1987 and
Oppenheimer Capital from 1987 to 1990.
LARRY C. RENFRO, 46
Vice President of the Company since February 1997
Mr. Renfro has been a Vice President of AFC and FAFLIC since February 1997
and April 1990, respectively, and Vice President of Allmerica P&C and Citizens
since March 1997. He has served as Director, President and Chief Executive
Officer of 440 Financial Group of Worcester, Inc. (a former subsidiary of
FAFLIC) from May 1990 to March 1995. Mr. Renfro has also served as Vice
President of Allmerica P&C from October 1992 through December 1995 and as Vice
President of AFC from February 1995 through December 1995. From August 1989
through March 1990, Mr. Renfro was an Executive Vice President at State Street
Bank & Trust Company. From March 1988 through July 1989, Mr. Renfro served as
President and Chief Executive Officer of Boston Financial Data Services,
Incorporated, a subsidiary of State Street Bank & Trust Company. From April
1981 through March 1988, Mr. Renfro held various executive offices at Fidelity
Investments, including Managing Director of Fidelity Management & Research
Company. Mr. Renfro is currently a Director of LoJack Corporation, a
manufacturer of anti-theft systems.
ERIC A. SIMONSEN, 51
Vice President of the Company since February 1995
Mr. Simonsen has been Vice President of AFC since February 1995. He has been
a Director and Vice President of APY since August 1992, of Citizens since
December 1992 and of AFLIAC since September 1990. He has served as Vice
President and as a Director of FAFLIC since September 1990 and April 1996,
respectively. Mr. Simonsen has been President of Allmerica Service Company,
Inc. since December 1996. Mr. Simonsen was Chief Financial Officer of AFC from
February 1995 to December 1996, of FAFLIC and AFLIAC from September 1990 to
December 1996, of Allmerica P&C from August 1992 to December 1996 and of
Citizens from December 1992 to December 1996. Mr. Simonsen is also a director
and/or executive officer at various other non-public affiliates. From April
1987 to September 1990, Mr. Simonsen served as a Principal and Chief Financial
Officer of The Lincoln Group, Inc., a privately owned group of manufacturing
companies.
PHILLIP E. SOULE, 47
Vice President of the Company since February 1997
Mr. Soule has been Vice President of AFC, Citizens, and FAFLIC since
February 1997, March 1997 and February 1987, respectively, and of Allmerica
P&C since September 1996. He was Vice President of AFC from February 1995
through December 1995. Mr. Soule has been employed by FAFLIC since 1972 in
various capacities.
35
ITEM 11
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all plan and non-plan compensation awarded
to, earned by, or paid to the Chief Executive Officer of AFC, and the four
other most highly compensated executive officers of AFC (collectively, the
"Named Executive Officers"). Because AFC is a holding company, it does not pay
any compensation to its executive officers. The Named Executive Officers,
unless otherwise indicated, receive compensation in their capacities as
executive officers of FAFLIC, which is then reimbursed, in accordance with
AFC's policy and intercompany service agreements, by its various subsidiaries
for services rendered to such subsidiaries.
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------- ------------
OTHER
ANNUAL LTIP ALL OTHER
COMPEN- PAY- COMPEN-
NAME AND BONUS SATION OUTS SATION
PRINCIPAL POSITION YEAR SALARY ($) ($)(1) ($)(2) ($)(3) ($)(4)
------------------ ---- ---------- --------- ------- ------------ ---------
John F. O'Brien....... 1996 850,000 1,816,000 109,422 500,000 120,227
President and Chief 1995 775,000 775,000 109,422 250,000 120,227
Executive Officer 1994 725,000 400,000 132,922 0 161,402
Larry C. Renfro....... 1996 370,000 667,609 11,275 160,000 4,500
Vice President 1995 340,000 390,150 17,070 200,000 0
1994 340,000 95,000 10,250 240,000 21,420
Eric A. Simonsen...... 1996 370,000 406,436 12,215 160,000 4,500
Vice President 1995 305,000 99,430 18,492 210,000 4,500
1994 305,000 81,282 -- 260,000 19,215
Phillip E. Soule...... 1996 295,000 254,991 6,577 120,000 4,500
Vice President 1995 265,000 85,993 9,958 120,000 4,500
1994 245,000 91,508 3,208 140,000 15,435
Richard M. Reilly..... 1996 270,000 256,893 7,517 120,000 4,500
Vice President 1995 210,000 58,380 8,463 130,000 4,500
1994 210,000 74,760 -- 130,000 13,230
- --------
(1) Amounts shown for 1996 include the following special bonus payments,
discussed in more detail in the Compensation Committee Report, which
payments are intended by the Company to facilitate the purchase of AFC
common stock by the executive officers in 1997: $1,000,000 for Mr.
O'Brien, $150,000 for Mr. Renfro, $250,000 for Mr. Simonsen, $150,000 for
Mr. Soule and $150,000 for Mr. Reilly. All other amounts shown are bonuses
earned pursuant to FAFLIC's Incentive Compensation Plan, except with
respect to the amounts reported for Mr. Renfro in 1996 and 1995, which
also include payments of $335,384 and $255,000, respectively, in
connection with the sale of FAFLIC's mutual fund servicing business,
discussed below.
(2) The amounts shown reflect the payment of taxes in the amount of $109,422
in 1996, $109,422 in 1995 and $109,850 in 1994 in connection with the
payment by FAFLIC of a life insurance premium on behalf of Mr. O'Brien.
All other amounts shown include interest earned on long-term incentive
compensation paid, or deferred at the election of the Named Executive
Officer, in the respective year. No Named Executive Officer received any
perquisites or other personal benefits from any source for his services to
FAFLIC or any subsidiary with an aggregate value exceeding the lesser of
$50,000 or 10% of cash compensation.
(3) Amounts shown include installment payments vesting and received by the
Named Executive Officers in the respective year pursuant to awards which
were earned in 1992, 1993, 1995 and 1996 under FAFLIC's Long-Term
Performance Unit Plan (the "Long-Term Performance Plan"). No such cash
amounts were earned in 1994 by the Named Executive Officers in respect of
units granted under the Long-Term Performance Plan with values
determinable based on FAFLIC's surplus level at the end of 1994.
36
(4) Amounts shown include $4,500 paid to each of the Named Executive Officers
by FAFLIC during 1996 in the form of employer contributions to each Named
Executive Officer's 401(k) and related post-retirement accounts pursuant
to FAFLIC's 401(k) Matched Savings Plan ("Matched Savings Plan") (in
effect beginning in 1995) (except amounts contributed on behalf of Messrs.
O'Brien and Reilly in 1996, which are attributable to the Executive Non-
Qualified Retirement Plan) as well as pursuant to FAFLIC's Excess Benefit
Retirement Plan ("Excess Benefit Plan") as described more fully below. The
amount shown for Mr. O'Brien in 1996 also reflects the payment by FAFLIC
of a life insurance premium of $115,727.
OPTION GRANTS
The Company maintains a long-term stock incentive plan pursuant to which
stock options covering shares of the Company's Common Stock may be granted to
key employees.
In 1996, the Company did not grant any options to the Named Executive
Officers.
LONG-TERM INCENTIVE AWARDS
Neither the Company nor FAFLIC made any awards to Named Executive Officers
under the Long-Term Performance Plan in 1996.
EMPLOYMENT AGREEMENTS AND NON-SOLICITATION AGREEMENTS
In connection with the sale of FAFLIC's mutual fund servicing business to
The Shareholder Services Group, Inc. ("TSSG") and related transactions in
March 1995, and in consideration of the agreement by Mr. Renfro not to engage
in this business for four years, AFC agreed to pay Mr. Renfro (i) a one-time
bonus payment of $350,000 in 1995 ($95,000 of which represents a payment under
FAFLIC's Incentive Compensation Plan in respect of his 1994 performance), and
(ii) annual contingent payments based upon the prospective performance of the
businesses sold or assigned in the TSSG transactions for four years with
certain guaranteed minimum payments up to a maximum aggregate amount for four
years of $3.7 million. The agreement also provides that, in the event Mr.
Renfro is terminated without cause, he will receive $25,000 per month until
March 31, 1998 plus $600,000 (less any contingent payments made under (ii)
above). In the event of any such termination without cause, the agreement
provides that Mr. Renfro would be subject to confidentiality and non-
competition restrictions during the payment period.
As of December 31, 1996, substantially all of the Company's executive
officers had entered into non-solicitation agreements ("Non-Solicitation
Agreements") with the Company. The Non-Solicitation Agreements provide that,
during employment and for a period of two years after termination, the
executive officer will not recruit or solicit, attempt to induce, or assist or
encourage others to recruit or solicit, any employee, agent or broker of the
Company to terminate employment with the Company. The Non-Solicitation
Agreements prohibit the executive officers from soliciting the business or
patronage of any policyholders or existing or prospective clients, customers
or accounts of the Company that were contacted, solicited or served while the
executive officer was employed by the Company. Finally, the Non-Solicitation
Agreements provide that all proprietary information relating to the Company's
business and all software, works of authorship and other developments created
during employment by the Company are the sole property of the Company.
EMPLOYMENT CONTINUITY PLAN
In December 1996 the AFC Board of Directors voted to adopt the Allmerica
Financial Corporation Employment Continuity Plan (the "Employment Continuity
Plan"). The purposes of the Employment Continuity Plan are (i) to secure
senior management's objectivity and ensure focus on behalf of shareholder
interest in the event of actions or occurrences that could lead to a Change of
Control, and (ii) to ensure, in the event of a Change in Control resulting in
payment under the Employment Continuity Plan, that senior management does not
37
compete in the business of the Company, solicit Company employees or disclose
any confidential or propriety information of the Company. The Employment
Continuity Plan is administered by the AFC Board of Directors. All of the
Named Executive Officers were named as participants in the Employment
Continuity Plan at its adoption.
In the event of a Change in Control (defined below) of the Company and
subsequent involuntary termination of a participant within a two year period
after the Change in Control, or voluntary termination of the participant in
the 13th month after a Change in Control, the Employment Continuity Plan
authorizes the payment of specified benefits to eligible participants. These
include a lump-sum cash payment equal to a Multiplier (defined below) times a
participant's base salary, average bonus for the preceding three years, and
the amount that would be credited under a cash balance pension plan sponsored
by the Company or its affiliates. The Multiplier is three (3) for the Chief
Executive Office and two (2) for all other participants. Additionally, the
Employment Continuity Plan provides for continued coverage under the health
and welfare benefit plans sponsored by the Company and its affiliates, the
lump-sum actuarial equivalent for grandfathered benefits earned under the
retirement plan for "transition group" employees for the number of years
commensurate with the Multiplier, 75% of a participant's maximum bonus
potential pro-rated for service performed in the year of termination, and
outplacement services. The Chief Executive Officer is also entitled to a
gross-up payment when the Change in Control payment or other benefit under the
plan is subject to the excise tax imposed by section 4999 of the Internal
Revenue Code.
For purposes of the Employment Continuity Plan, a Change in Control is
defined as follows: (i) a change in the composition of the Board of Directors
such that the Incumbent Directors (as defined in the Employment Continuity
Plan) at the beginning of any consecutive twenty-four month period cease to
constitute a majority of the Board; (ii) any person or group is or becomes the
beneficial owner of 35% or more of the Company's voting stock outstanding;
(iii) a merger or consolidation of the Company or any affiliate that requires
shareholder approval, unless the shareholders immediately prior to the merger
or consolidation own more than 50% of the total voting stock of the successor
corporation or a majority of the board of directors of the successor
corporation were Incumbent Directors immediately prior to the merger or
consolidation; or (iv) the approval by shareholders of a plan of liquidation
or dissolution of the Company or the sale of all or substantially all of the
Company's assets.
In the event of a Change of Control, for all stock awards and stock options
granted to a participant pursuant to the Company's Long-Term Stock Incentive
Plan that do not otherwise vest immediately after the Change of Control, the
participant will be paid a lump sum amount equal to (i) the fair market value
of all stock awards as of the date of the Change of Control (excluding stock
options) and (ii) with respect to stock options, the excess of the fair market
value of the Company's common stock as of the date of the Change of Control
over the stock option exercise price.
The payment of benefits under the Employment Continuity Plan is contingent
upon the Company's receipt of a signed waiver and release from the participant
that release certain claims the participant may have and precludes the
participant from competing with the Company for a period of two years.
PENSION BENEFITS
FAFLIC, Hanover and Citizens each maintain a tax-qualified, non-contributory
defined benefit retirement plan ("Pension Plan") for the benefit of eligible
employees.
Until December 31, 1994, annual benefits under the Pension Plan were based
primarily upon each employee's years of service and compensation during the
highest five consecutive plan years of employment or the last 60 months if
greater. Such benefits under the Pension Plan were frozen as of December 31,
1994 for most participants, with the exception of certain grandfathered
employees, including Mr. Soule. These benefits will be paid to participants as
a monthly annuity at age 65 unless a participant terminates with 15 or more
years of service in which case monthly benefits may commence anytime after the
participant's 55th birthday. Effective as of January 1, 1995, the Pension Plan
was converted into a cash balance plan, such that benefits are no longer
determined primarily by final average compensation and years of service.
Instead, annually each employee
38
accrues a benefit that is equal to a percentage of the employee's salary,
similar to a defined contribution plan arrangement. Amounts contributed by the
employer to an employee are allocated to a memorandum account as to which the
employee is permitted to make investment elections from among choices provided
by the employer. Upon termination of employment of a participant, the amount
in the participant's memorandum account as of such date is eligible for
distribution. If the amount in the participant's memorandum account plus the
present value of the benefit frozen under the Pension Plan as of December 31,
1994 is less than $3,500, all benefits are distributed immediately in a lump
sum.
The estimated annual benefits payable under the Pension Plan upon retirement
at normal retirement age for each of the Named Executive Officers is as
follows: Mr. O'Brien: $428,138; Mr. Renfro: $258,033;
Mr. Simonsen: $151,262; Mr. Soule: $491,745; Mr. Reilly: $53,640. Such figures
include amounts that have accrued under the Pension Plan as in effect on
December 31, 1994, including, $355,841 for Mr. Soule. With respect to benefits
attributable to the cash balance component of the Pension Plan, it was assumed
that each individual's salary and bonus for the years until retirement were as
shown in the Summary Compensation Table; that employer allocations were made
to the Pension Plan at a rate of 7% of eligible compensation (7% is the actual
amount accrued in 1996, although the plan only guarantees an accrual rate of
0.5%); and that investment earnings accrued to each participant's memorandum
account under the Pension Plan at a rate of 6% per year.
The estimated annual benefits under the Pension Plan shown for each of the
Named Executive Officers are not reduced to reflect the limitations imposed by
Federal tax laws, which place upper limits on the benefits which may be
provided to any individual by tax-qualified pension plans. FAFLIC, Hanover and
Citizens Insurance each have adopted an Excess Benefit Plan, an unfunded, non-
qualified plan, which provides that it will pay directly the difference
between the retirement benefit normally calculated under the Pension Plan and
the maximum amount which may be paid from the Pension Plan consistent with
Federal tax law. In addition, certain employees of FAFLIC and its subsidiaries
may participate, in the discretion of the Board of Directors, in either an
unfunded, Non-Qualified Executive Retirement Plan or an unfunded, Non-
Qualified Executive Deferred Compensation Plan. Under the Non-Qualified
Executive Retirement Plan, participating employees may (i) elect to defer
compensation in an amount not to exceed the annual dollar limitation set forth
in the Internal Revenue Code in respect of defined contribution plans, (ii)
elect to defer additional compensation in an amount not to exceed 12.5% of the
participant's annual salary, (iii) receive and defer the amount, if any, that
the participant would have received as a matching employer's contribution
under his employer's 401(k) Matched Savings Plan, and (iv) receive and defer
the amount, if any, that the participant would have been credited under his
employer's Cash Balance and Excess Benefit Plans had the participant
participated in such plan during the year. Under the Non-Qualified Executive
Deferred Compensation Plan, certain other employees may elect to defer up to
12.5% of their annual salaries. In both cases, AFC shall from time to time
designate one or more investments in which each participant's accounts shall
be deemed to be invested for the purpose of determining the participant's
gains and income on such account. Participation in the Non-Qualified Executive
Retirement Plan is in lieu of participation in the corresponding qualified
retirement and/or pension plans of FAFLIC, Hanover or Citizens.
COMPENSATION COMMITTEE REPORT
General. The Compensation Committee ("Committee") of the Board of Directors
is comprised of the Directors whose names appear at the end of this report,
none of whom is an employee of AFC or of any affiliate or subsidiary of AFC.
Among other duties, the Committee has oversight responsibility with respect to
compensation matters involving Directors and executive officers of AFC. As a
holding company, AFC has no employees of its own and does not pay any
compensation to its officers. Officers who are employees of FAFLIC, Hanover or
Citizens Insurance are compensated directly by their respective employers. In
addition, a portion of the salaries and other compensation paid by FAFLIC to
its employees, who provide services to Hanover or Citizens Insurance, is
allocated to such companies. This report reflects the compensation philosophy
of AFC, FAFLIC, Hanover and Citizens Insurance as endorsed by the Committee.
39
Compensation Philosophy. The Executive Compensation Program is designed to
support the following objectives:
.to attract and retain individuals key to the future success of AFC and its
subsidiaries;
.to align the interests of executives with those of shareholders;
.to motivate and reward the profitable growth of AFC;
.to ensure that AFC has competitive opportunities for key personnel.
The key elements of the Executive Compensation Program consist of base
salary, annual incentive compensation and long-term incentive compensation. A
general description of each element and the review taken by the Committee for
the 1996 fiscal period is presented in the following material.
Base Salary. The chief goals of AFC and its subsidiaries are to improve
market focus in order to identify profitable opportunities that capitalize on
competitive strengths; to provide quality, value-added services that are
flexible and responsive to customer needs; to capitalize on growth
opportunities in targeted markets with innovative, market-driven products and
services that can be distributed broadly and cost-effectively; and to build
financial strength with effective business strategies that generate superior
financial performance and deliver solid returns on capital. In furtherance of
these goals, annual base salaries of the Named Executive Officers and other
key executives are set at levels considered to be competitive with amounts
paid to executive officers with comparable qualifications, experience and
responsibilities at competing companies, based on published surveys and proxy
information, which include base salary, total cash compensation data, and
other SEC required salary disclosures.
Annual Incentive Compensation. Annual incentive compensation for employees
of FAFLIC, Hanover and Citizens Insurance is tied to the achievement of
significant financial performance goals.
FAFLIC, Hanover and Citizens Insurance maintain a consolidated incentive
plan which provides supplementary cash compensation as an incentive to key
employees who, through exceptional performance, contribute materially to the
success of the companies. For 1996, the incentive plan had two components: (a)
the corporate and business unit return on equity; and (b) the successful
completion of individual performance goals. Awards under the incentive plan
may range from 0% to 100% of a participant's base salary.
Long-Term Compensation. FAFLIC maintains a Long-Term Performance Unit Plan
("Long-Term Performance Plan"). The Boards of both Hanover and Citizens
Insurance have ratified the participation of certain of their officers in the
Long-Term Performance Plan.
The objectives of the Long-Term Performance Plan include providing
incentives to attract and retain top executives and achieving significant
long-term financial results for FAFLIC and its subsidiaries. Criteria
considered in determining participation in the Long-Term Performance Plan
include the direct and measurable impact the executive has on longer-term
financial results, the influence the individual has on strategic direction and
the degree of risk inherent in the individual's business decisions. Previously
awarded units are payable dependent upon specific increases in capital,
surplus and equity position determined at of the end of a three-year plan
cycle and payments are made subject to a subsequent three-year vesting cycle.
The last three-year plan cycle under the Long-Term Performance Plan began in
1995. Therefore, no Named Executive Officers were awarded Long-Term
Performance Plan units in 1996, although certain awards made in 1995 will
continue to vest through 1999. Commencing in 1997, long-term incentive
compensation awards will be made to the Named Executive Officers pursuant to
AFC's Long-Term Stock Incentive Plan.
AFC, Allmerica P&C and Citizens Corporation each have in place Long Term
Stock Incentive Plans (the "Stock Plans"). The objectives of each of the Stock
Plans include providing incentives for participants to make substantial
contributions to the company's long-term business growth, enhancing the
company's ability to attract and retain executive officers and other key
employees, rewarding participants for their contributions to the success of
the company, and aligning the interests of executive officers and other key
employees with those of
40
the company's stockholders. Up to 2,350,000 shares are available for awards
under the AFC plan, up to 1,000,000 shares are available for awards under
Allmerica P&C's plan and up to 200,000 shares are available for awards under
Citizens Corporation's plan. In connection with its conversion from a mutual
life insurance company to a stock life insurance company in October 1995,
State Mutual Life Assurance Company of America, FAFLIC's predecessor, agreed
with the Commissioner of Insurance of the Commonwealth of Massachusetts, in
the Plan of Reorganization dated February 28, 1995 (the "Plan of
Reorganization"), that certain executive officers of FAFLIC and AFC would not
be permitted to acquire AFC stock, and would not be eligible to participate in
any stock-based compensation plan, until one year after the demutualization
was completed. As a result, during 1996 no stock-based awards were made to the
ineligible executive officers, which included the Named Executive Officers.
Factors to be considered in determining the grant of options under the
respective stock plans include the contribution of each executive to the long-
term performance of AFC, Allmerica P&C or Citizens Corporation, respectively,
and the importance of such executive's responsibilities within the
organization.
Special Cash Bonus. In evaluating the total compensation of the Named
Executive Officers and certain other executive officers of FAFLIC and Hanover,
the Compensation Committee also considered the importance of individual stock
ownership of executive officers to the future performance of the Company. Due
to the restrictions imposed by the Plan of Reorganization prohibiting the
Named Executive Officers and certain other executive officers of AFC and
FAFLIC from acquiring AFC stock or participating in AFC's Stock Plan until
October 1996, the Compensation Committee approved a special cash bonus payment
to these executives with the intent that the bonus be used to purchase an
equal amount of AFC Common Stock. As an incentive to encourage such purchases,
for each share of AFC Common Stock purchased with such bonus funds, certain of
the Named Executive Officers will be awarded one share of restricted stock
pursuant to the AFC Stock Plan.
Compensation of the Chief Executive Officer. John F. O'Brien, President and
Chief Executive Officer of AFC, serves as President and Chief Executive
Officer of FAFLIC, and as Chairman of the Board of Hanover and of Citizens
Insurance.
In approving the 1996 compensation package for Mr. O'Brien, the Compensation
Committee compared Mr. O'Brien's compensation against the comparative base
salaries, annual and long-term incentives and other compensation of chief
executives of a peer group of companies. The peer goup companies included (i)
insurance companies identified as having distribution systems,
products/product mix and/or markets similar to FAFLIC and its subsidiaries;
(ii) a subset of insurance companies that were identified by scope of
financial activity (such as assets, revenue, and net written premium); and
(iii) a subset of financial service companies that provide for a
stratification of salary data based on similarity in the nature and scope of
business activities. The Compensation Committee assumes (a) that such
independent variables are meaningful in determining CEO compensation, and (b)
that a correlation exists between pay and such variables. However, the
approach does not consider variances in the business strategies and goals of
each company, the relative competitive positions of the companies, and the
personal characteristics and accomplishments of the individual executives.
Therefore, the review of Mr. O'Brien's compensation by the Compensation
Committee also included an assessment of the performance of FAFLIC and its
subsidiaries in terms of profitability and growth in the various business
lines, as well as an evaluation of the capital positions of the companies, the
implementation of significant cost controls and other strategic initiatives.
In comparison to the peer group of companies, Mr. O'Brien's base salary was
near the median, while the potential for incentive compensation, as a
percentage of base salary, was below the median.
Mr. O'Brien's 1996 incentive compensation performance measures included a
corporate goal based upon GAAP Consolidated Net Income Return on Equity of
AFC, business unit Return on Equity, focus goals relating to earnings per
share, revenue, AFC's stock price and individual performance goals. Individual
performance goals included significant improvement in earnings and capital;
development of alternate distribution systems; initiatives to improve
technology; and continued development and implementation of a strategic plan
for the Company. Achievement of individual performance goals and other
initiatives undertaken by Mr. O'Brien in 1996 resulted in performance that
exceeded expectations.
41
The Compensation Committee carefully reviewed Mr. O'Brien's personal
achievements against his 1996 goals and based on its evaluation, the Committee
approved Mr. O'Brien's annual incentive compensation award of 96% of his base
salary, out of a maximum potential of 100% of base salary. In addition, the
Committee approved a special bonus award to Mr. O'Brien in the amount of
$1,000,000, based on the reasons discussed in the paragraph entitled "Special
Cash Bonus" above.
The Committee believes that the executive compensation policies of AFC and
its subsidiaries are appropriate both to attract and retain corporate officers
and other key employees of outstanding abilities and to motivate them to
perform to the full extent of their abilities.
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the
Internal Revenue Code, enacted in 1993, generally disallows a tax deduction to
public companies for compensation over $1 million paid to the corporation's
Chief Executive Officer and its four other most highly compensated executive
officers. Qualifying performance-based compensation will not be subject to the
deduction limit if certain requirements are met. In 1996, the compensation
paid to the Chief Executive Officer exceeded the limit imposed by Section
162(m). The Committee monitors the impact of Section 162(m) in order to
balance the benefits of favorable tax treatment with a need to apply prudent
judgment in carrying out AFC's compensation philosophy, recognizing that under
certain circumstances it may be appropriate to exceed the deduction limit.
Members of the Compensation Committee:
Herbert M. Varnum, Chair
Robert G. Stachler
Richard M. Wall
DIRECTOR COMPENSATION
Non-employee Directors of AFC who are not also directors of APY receive an
annual retainer of $20,000. Non-employee Directors of AFC who are also
directors of APY receive an aggregate retainer of $30,000. In addition, non-
employee Directors of AFC receive $1,500 per meeting of the Board of Directors
and $1,000 for each meeting of a committee thereof that they attend. Mr.
O'Brien, the only Employee Director, is not paid any fees or additional
compensation for service as a member of the Board of Directors or any of its
committees. All Directors are reimbursed for reasonable travel and other
expenses of attending meetings of the Board of Directors and committees of the
Board of Directors.
As of the date of the annual meeting in 1997, Non-employee Directors of AFC
will receive an annual retainer of 1,400 shares of AFC stock payable on the
first business day following the annual meeting. Chairpersons of committees
will receive a $4,000 annual retainer. In addition, Non-employee Directors of
AFC will receive $1,500 per meeting of the Board of Directors and $1,000 for
each meeting of a committee thereof that they attend.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires executive
officers and Directors, and persons who beneficially own more than ten percent
(10%) of the Common Stock, to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission (the "SEC")
and the New York Stock Exchange (the "NYSE"). Such persons are required by SEC
regulations to provide to AFC copies of all their Section 16(a) filings. Based
solely on a review of the forms furnished to AFC and written representations
from AFC's executive officers and Directors, AFC believes that during 1996
there was full compliance with all Section 16(a) filing requirements.
CERTAIN BUSINESS RELATIONSHIPS
The Company's subsidiaries or affiliates have, from time to time, retained
the services of Bowditch & Dewey, LLP, a law firm in which Mr. Angelini, a
Director of the Company, is a partner.
42
COMMON STOCK PERFORMANCE CHART
The following graph compares the performance of the Company's Common Stock
since its initial public offering on October 11, 1995 with the performance of
the S&P 500 Index and with the performance of an industry peer group comprised
of a composite of two published indices--the S&P Property-Casualty Insurance
Index and the S&P Life Insurance Index. Returns of the latter two indices have
been weighted according to their respective aggregate market capitalization at
the beginning of each period shown on the graph. The graph plots the changes
in the value of an initial $100 investment over the indicated time periods,
assuming reinvestment of all dividends.
COMPARISON OF 14 MONTH CUMULATIVE TOTAL RETURN *
AMONG ALLMERICA FINANCIAL CORPORATION,
THE S&P 500 INDEX AND A PEER GROUP
[GRAPH APPEARS HERE]
- --------
* $100 invested on 10/11/95 in stock or index--including reinvestment of
dividends. Fiscal year ending December 31.
The insurance composite is a market value weighted composite of the S&P
Property-Casualty Insurance and the S&P Life Insurance indices. The components
of the insurance composite have been weighted in accordance with the
respective aggregate market capitalization of the companies in each index as
of the date of Allmerica Financial Corporation's public offering and at the
beginning of each period shown on the graph, as indicated below:
10/11/95 12/95 3/96 6/96 9/96 12/96
-------- ------ ------ ------ ------ ------
S&P Property-Casualty.......... 62.09% 62.73% 61.13% 60.78% 59.62% 61.47%
S&P Life....................... 37.91% 37.27% 38.87% 39.22% 40.38% 38.53%
------ ------ ------ ------ ------ ------
Total.......................... 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ====== ======
The Compensation Committee Report and Stock Price Performance Graph above
shall not be deemed incorporated by reference by any general statement
incorporating by reference this Annual Report on Form 10-K into any filing
under the Securities Act of 1933 or the Securities Exchange Act of 1934,
except to the extent that AFC specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such acts.
43
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock of AFC,
APY and Citizens Corporation owned as of March 17, 1997 by (i) each Director
of AFC, (ii) the named executive officers in the Summary Compensation Table
appearing later in this Proxy Statement, (iii) all officers and directors of
AFC as a group and (iv) each person who is known by AFC to be the beneficial
owner of more than five percent of the Common Stock as of such date. This
information has been furnished by the persons listed in the table.
NUMBER OF SHARES OF NUMBER OF SHARES OF NUMBER OF SHARES OF
NAME OF COMMON STOCK OF COMMON STOCK OF COMMON STOCK OF
BENEFICIAL OWNER AFC* APY* CITIZENS*
---------------- ------------------- ------------------- -------------------
Michael P. Angelini..... 54 3,000 --
David A. Barrett........ 285 600 1,000(1)
Gail L. Harrison........ 82 450 --
Robert P. Henderson..... -- -- --
J. Terrence Murray...... 69 -- --
Robert J. Murray........ -- -- --
John F. O'Brien......... 270(2) 16,000 1,000
Richard M. Reilly....... 98(3) -- --
Larry C. Renfro......... 88(4) -- --
Eric A. Simonsen........ 146(5) 9,000(6) 3,000(7)
Phillip E. Soule........ 652(8) 300 100
John L. Sprague......... 220 -- --
Robert G. Stachler...... 171 -- --
Herbert M. Varnum....... 76 600 --
Richard M. Wall......... 180 -- --
Directors and executive
officers as a group (22
persons)............... 21,674(9) 40,400 12,500
Holder of Greater Than Five Percent of Common Stock
10.43% of shares of AFC Common
FMR Corp................ 5,233,970(10) Stock outstanding
82 Devonshire Street
Boston MA 02109
- --------
* With the exception of FMR Corp.'s holdings of AFC Common Stock, each of the
amounts represents less than 1% of the outstanding shares of Common Stock
as of March 22, 1996. As to shares beneficially owned, each person has sole
voting and investment power, except as indicated in other footnotes to this
table.
(1) Shares owned by Mr. Barrett's spouse. Mr. Barrett disclaims beneficial
ownership with respect to such shares.
(2) Includes 198 shares held for the benefit of Mr. O'Brien by the trustees
of the First Allmerica Financial Life Insurance Company's Employees'
401(k) Matched Savings Plan (the "FAFLIC Plan").
(3) Shares held for the benefit of Mr. Reilly by the trustees of the FAFLIC
Plan.
(4) Shares held for the benefit of Mr. Renfro by the trustees of the FAFLIC
Plan.
(5) Shares held for the benefit of Mr. Simonsen by the trustees of the FAFLIC
Plan.
(6) Includes an aggregate of 3,000 shares of Common Stock of APY held in
trusts for the benefit of Mr. Simonsen's children. Mr. Simonsen is
trustee of the trusts and he disclaims beneficial ownership of the shares
held in the trusts.
(7) Includes an aggregate of 1,000 shares of Common Stock of Citizens held in
trusts for the benefit of Mr. Simonsen's children. Mr. Simonsen is
trustee of the trusts and he disclaims beneficial ownership of the shares
held in the trusts.
44
(8) Includes 596 shares held for the benefit of Mr. Soule by the trustees of
the FAFLIC Plan.
(9) Includes 18,683 shares held by the trustees of the FAFLIC Plan. See notes
2-5 and 8 above.
(10) Based on a Schedule 13G dated February 14, 1997 filed by FMR Corp., which
has sole dispositive power overall 5,226,920 shares and sole voting power
over 289,820 shares.
As of March 17, 1997, there were no persons other than FMR Corp. known to
AFC to be the beneficial owners of more than 5% of the outstanding shares of
Common Stock.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AFC's subsidiary, FAFLIC, currently provides various centralized
administrative and management services, operating support and office space to
Allmerica P&C and its subsidiaries, as well as to other FAFLIC subsidiaries.
Effective in 1970, Allmerica P&C's predecessor entered into an agreement with
FAFLIC pursuant to which FAFLIC agreed to provide services to Allmerica P&C in
accordance with FAFLIC's cost allocation policy. FAFLIC's cost allocation
policy is based on state insurance law requirements that all cost allocations
be on a fair and reasonable basis between entities and product lines within
FAFLIC's holding company structure and also are designed to meet regulations
imposed by taxing authorities. Services provided by FAFLIC include investment
services, portfolio management, and a certain amount of accounting, financial,
legal and administrative services, operations relating to servicing and
underwriting of policies and information and data systems. FAFLIC's cost
allocation and distribution policies are subject to review by various state
and federal regulatory agencies. AFC intends to continue to provide such
services on the same cost allocation basis to Allmerica P&C and its
subsidiaries immediately following the Merger Transactions.
Administrative charges (excluding rental charges) incurred by FAFLIC and
charged to Allmerica P&C were $58.0 million, $50.8 million and $63.1 million
for the years ended December 31, 1996, 1995 and 1994, respectively. Allmerica
P&C leases its principal office from FAFLIC, with which it shares most of the
facility. The annual rental charge was $1.3 million for each of the years
ended December 31, 1996, 1995 and 1994. The rent is triple net, with rent
based on cost using a fluctuating interest rate. FAFLIC believes that such
terms are no less favorable to Allmerica P&C than if the property was leased
to a non-affiliate.
In April 1996, Ms. Harrison and Messrs. Angelini, Barrett, J.T. Murray,
Sprague, Stachler, Varnum and Wall resigned their positions as Directors of
FAFLIC, the Company's operating subsidiary, in connection with the Company's
restructuring following the demutualization of FAFLIC's predecessor, State
Mutual Life Assurance Company of America. FAFLIC's subsequent Board of
Directors, consisting of insiders, terminated a FAFLIC policy that provided
FAFLIC's directors with periodic cash payments upon retirement from the FAFLIC
Board based on years of service with that company. Accrued benefits under the
terminated policy, which will be paid to the former FAFLIC directors in one
lump sum in 1997, had the following values as of December 17, 1996: $33,074
for Mr. Angelini; $166,851 for Mr. Barrett; $23,910 for Ms. Harrison; $18,417
for Mr. J.T. Murray; $137,745 for Mr. Sprague; $126,798 for Mr. Stachler;
$72,913 for Mr. Varnum; and $76,229 for Mr. Wall. Until the amounts above are
disbursed, the funds are accruing interest at the rate of 7% per annum.
45
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The consolidated financial statements and accompanying notes thereto on
pages 51 through 76 of the 1996 Annual Report to Shareholders have been
incorporated herein by reference in their entirety.
ANNUAL
REPORT
PAGE(S)
--------
Report of Independent Accountants................................. 50
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994.............................................. 51
Consolidated Balance Sheets as of December 31, 1996 and 1995...... 52
Consolidated Statements of Shareholders' Equity for the years
ended
December 31, 1996, 1995 and 1994................................. 53
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994.......................................... 54
Notes to Consolidated Financial Statements........................ 55-76
(A)(2) FINANCIAL STATEMENT SCHEDULES
PAGE NO. IN
SCHEDULE THIS REPORT
-------- -----------
Report of Independent Accountants on Financial
Statement Schedules.................................... 51
Summary of Investments--Other than Investments in
I Related Parties........................................ 52
II Condensed Financial Information of Registrant.......... 53-55
III Supplementary Insurance Information.................... 56-58
IV Reinsurance............................................ 59
V Valuation and Qualifying Accounts...................... 60
VI Supplemental Information concerning Property/Casualty
Insurance Operations................................... 61
(A)(3) EXHIBIT INDEX
Exhibits filed as part of this Form 10-K are as follows:
2.1 Plan of Reorganization.+
2.2 Stock and Asset Purchase Agreement by an among State Mutual Life
Assurance Company of America, 440 Financial Group of Worcester, Inc., and
The Shareholder Services Group, Inc. dated as of March 9, 1995.+
2.3 Agreement and Plan of Merger, dated as of February 19, 1997, among AFC,
Allmerica Property and Casualty Companies, Inc. and APY Acquisition,
Inc.++++
3.1 Certificate of Incorporation of AFC.+
3.2 By-Laws of AFC.+
4 Specimen Certificate of Common Stock.+
4.1 Form of Indenture relating to the Debentures between the Registrant and
State Street Bank & Trust Company, as trustee.++
4.2 Form of Global Debenture.++
4.3 Amended and Restated Declaration of Trust of AFC Capital Trust I dated
February 3, 1997.+++++
4.4 Indenture dated February 3, 1997 relating to the Junior Subordinated
Debentures of AFC.+++++
46
4.5 Series A Capital Securities Guarantee Agreement dated February 3,
1997.+++++
4.6 Common Securities Guarantee Agreement dated February 3, 1997.+++++
4.7 Registration Rights Agreement dated February 3, 1997.+++++
10.1 Consolidated Income Tax Agreement between Allmerica Financial
Corporation and certain subsidiaries dated January 1, 1996.+++
10.2 Consolidated Service Agreement between State Mutual Life Assurance
Company of America and its subsidiaries, dated September 30, 1993.+
10.2.1 Addendum to the Consolidated Service Agreement between State Mutual
Life Assurance Company of America and its subsidiaries, dated October
9, 1995.+++
10.2.2 Addendum to the Consolidated Service Agreement between State Mutual
Life Assurance Company of America and its subsidiaries, dated November
30, 1995.+++
10.3 Administrative Services Agreement between State Mutual Life Assurance
Company of America and The Hanover Insurance Company, dated July 19,
1989.+
10.4 First Allmerica Financial Life Insurance Company Employees' 401(k)
Matched Savings Plan incorporated by reference to Exhibit 10.1 to the
Allmerica Financial Corporation Registration Statement on Form 8-K (No.
333-576) and incorporated herein by reference originally filed with the
Commission on January 24, 1996.
10.5 State Mutual Life Assurance Company of America Excess Benefit
Retirement Plan.+
10.6 State Mutual Life Assurance Company of America Supplemental Executive
Retirement Plan.+
10.7 State Mutual Incentive Compensation Plan.+
10.8 State Mutual Companies Long-Term Performance Unit Plan.+
10.9 Indenture of Lease between State Mutual Life Assurance Company of
America and the Hanover Insurance Company dated July 3, 1984 and
corrected First Amendment to Indenture of Lease dated December 20,
1993.+
10.11 Lease dated November 1993 by and between Connecticut General Life
Insurance Company and State Mutual Life Assurance Company of America,
including amendments thereto, relating to property in Marlborough,
Massachusetts.+
10.12 Lease dated March 23, 1993 by and between Aetna Life Insurance Company
and State Mutual Life Assurance Company of America, including
amendments thereto, relating to property in Atlanta, Georgia.+
10.13 Stockholder Services Agreement dated as of January 1, 1992 between
Private Healthcare Systems, Inc. and Group Healthcare Network, Inc., a
wholly-owned subsidiary of State Mutual Life Assurance Company of
America.+
10.14 Lease dated January 26, 1995 by and between Citizens Insurance and
Upper Peninsula Commission for Area Progress, Inc., including
amendments thereto, relating to property in Escanaba, Michigan.+
10.15 Compensation Agreement between State Mutual Life Assurance of America
and Larry E. Renfro.+
10.16 Trust Indenture for the State Mutual Life Assurance Company of America
Employees' 401(k) Matched Savings Plan between State Mutual Life
Assurance Company of America and Bank of Boston/Worcester.+
10.17 State Mutual Life Assurance Company of America Non-Qualified Executive
Retirement Plan.+
10.18 State Mutual Life Assurance Company of America Non-Qualified Executive
Deferred Compensation Plan.+
10.19 The Allmerica Financial Cash Balance Pension Plan incorporated by
reference to Exhibit 10.19 to the Allmerica Financial Corporation
September 30, 1995 report on Form 10-Q and incorporated herein by
reference.
10.20 The Allmerica Financial Corporation Employment Continuity Plan
10.21 Form of Non-Solicitation Agreement executed by substantially all of the
executive officers of AFC.
11 Statement regarding computation of per share earnings.
13 Annual Report to Shareholders for 1996.
21 Subsidiaries of AFC.
23 Consent of Price Waterhouse LLP.
24 Power of Attorney.
47
27 Financial Data Schedule.
99.1 Internal Revenue Service Ruling dated April 15, 1995.+
99.2 Important Factors Regarding Forward Looking Statements.
- --------
+ Incorporated herein by reference to the correspondingly numbered exhibit
contained in the Registrant's Registration Statement on Form S-1 (No.
33-91766) originally filed with the Commission on May 1, 1995.
++ Incorporated herein by reference to the correspondingly numbered exhibit
contained in the Registrant's Registration Statement on Form S-1 (No.
33-96764) originally filed with the Commission on September 11, 1995.
+++ Incorporated herein by reference to the correspondingly numbered exhibit
contained in the Registrant's 1995 Annual Report on Form 10-K originally
filed with the Commission on March 28, 1996.
++++ Incorporated by herein by reference to Exhibit I of the Current Report
of the Registrant (Commission File No. 1-13754) filed February 20, 1997.
+++++ Incorporated herein by reference to Exhibits 2, 3, 4, 5 and 6,
respectively, contained in the Registrant's Current Report on Form 8-K
filed on February 5, 1997.
(B) REPORTS ON FORM 8-K
On December 18, 1996, a report on Form 8-K was filed reporting under item 5,
Other Events, the announcement by the Registrant that AFC's Board of Directors
had made a proposal to the Board of Directors of Allmerica P&C to acquire the
shares of Common Stock of Allmerica P&C that AFC and its subsidiaries do not
already own.
On February 5, 1997, a report on Form 8-K was filed reporting under item 5,
Other Events, the announcement of the sale of $300 million of Capital
Securities issued by AFC Capital Trust I.
On February 20, 1997, a report on Form 8-K was filed reporting under item 5,
Other Events, the announcement that the Company and Allmerica P&C entered into
an Agreement and Plan of Merger.
48
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES AND
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
Date: March 18, 1997 /s/ John F. O'Brien
By: _________________________________
JOHN F. O'BRIEN,
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Date: March 18, 1997
/s/ John F. O'Brien
By: _________________________________
JOHN F. O'BRIEN,
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
Date: March 18, 1997
/s/ Edward J. Parry, III
By: _________________________________
EDWARD J. PARRY III,
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND PRINCIPAL ACCOUNTING
OFFICER
Date: March 18, 1997
*
By: _________________________________
MICHAEL P. ANGELINI,
DIRECTOR
Date: March 18, 1997
By: _________________________________
DAVID A. BARRETT,
DIRECTOR
Date: March 18, 1997
*
By: _________________________________
GAIL L. HARRISON,
DIRECTOR
Date: March 18, 1997
By: _________________________________
ROBERT P. HENDERSON,
DIRECTOR
49
Date: March 18, 1997
*
By: _________________________________
J. TERRENCE MURRAY,
DIRECTOR
Date: March 18, 1997
*
By: _________________________________
ROBERT J. MURRAY,
DIRECTOR
Date: March 18, 1997
*
By: _________________________________
JOHN L. SPRAGUE,
DIRECTOR
Date: March 18, 1997
*
By: _________________________________
ROBERT G. STACHLER,
DIRECTOR
Date: March 18, 1997
*
By: _________________________________
HERBERT M. VARNUM,
DIRECTOR
Date: March 18, 1997
*
By: _________________________________
RICHARD M. WALL,
DIRECTOR
/s/ John F. O'Brien
*By: ________________________________
JOHN F. O'BRIEN,
ATTORNEY-IN-FACT
50
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Allmerica Financial Corporation
Our audits of the consolidated financial statements referred to in our
report dated February 3, 1997, except as to Notes 1 and 2, which are as of
February 19, 1997, appearing in the Allmerica Financial Corporation 1996
Annual Report to Shareholders (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedules listed in Item
14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules
present fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
As discussed in the accompanying notes to the consolidated financial
statements, the Company changed its method of accounting for investments (Note
1) and postemployment benefits (Note 11) in 1994.
/s/ Price Waterhouse LLP
_____________________________________
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1997, except as to Notes
1 and 2, which are as of February
19, 1997
51
SCHEDULE I
ALLMERICA FINANCIAL CORPORATION
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
AMOUNT AT
WHICH SHOWN
IN THE BALANCE
TYPE OF INVESTMENT COST (1) VALUE SHEET
- ------------------ -------- ------- --------------
(IN MILLIONS)
Fixed maturities:
Bonds:
United States Government and government
agencies and authorities.................. $ 520.8 $ 530.7 $ 530.7
States, municipalities and political subdi-
visions................................... 2,228.8 2,269.6 2,269.6
Foreign governments........................ 108.8 116.2 116.2
Public utilities........................... 495.7 508.3 508.3
Convertibles and bonds with warrants at-
tached.................................... 1.1 1.3 1.3
All other corporate bonds.................. 3,844.8 3,952.8 3,952.8
Redeemable preferred stocks.................. 105.5 108.9 108.9
-------- ------- --------
Total fixed maturities..................... 7,305.5 7,487.8 7,487.8
-------- ------- --------
Equity securities:
Common stocks:
Public utilities........................... 4.9 5.5 5.5
Banks, trust and insurance companies....... 30.6 55.1 55.1
Industrial, miscellaneous and all other.... 281.4 401.5 401.5
Nonredeemable preferred stocks............... 11.3 11.5 11.5
-------- ------- --------
Total equity securities.................... 328.2 473.6 473.6
-------- ------- --------
Mortgage loans on real estate.................. 650.1 XXXXXX 650.1
Real estate (2)................................ 120.7 XXXXXX 120.7
Policy loans................................... 132.4 XXXXXX 132.4
Other long-term investments.................... 128.8 XXXXXX 128.8
-------- --------
Total investments.......................... $8,665.7 XXXXXX $8,993.4
======== ========
- --------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums and
accretion of discounts.
(2) Includes $106.6 million of real estate acquired through foreclosure.
52
SCHEDULE II
ALLMERICA FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
------ ------ -----
(IN MILLIONS)
Revenues
Net investment income................................. $ 2.7 $ 0.4 $ --
Net realized investment losses........................ (0.9) -- --
------ ------ -----
Total revenues...................................... 1.8 0.4 38.0
------ ------ -----
Expenses
Interest expense...................................... 15.3 3.2 --
Operating expenses.................................... 3.3 0.3 --
------ ------ -----
Total expenses...................................... 18.6 3.5 --
------ ------ -----
Net income before federal income taxes and equity in net
income of unconsolidated subsidiaries.................. (16.8) (3.1) 38.0
Federal income tax benefit.............................. 5.9 -- --
Equity in net income of unconsolidated subsidiaries
prior to demutualization............................... -- 93.2 38.0
Equity in net income of unconsolidated subsidiaries
subsequent to demutualization.......................... 192.8 43.8 --
------ ------ -----
Net income.............................................. $181.9 $133.9 $38.0
====== ====== =====
The condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto. Allmerica Financial
Corporation ("AFC") was incorporated under Delaware law on January 12, 1995,
for the purpose of becoming the parent holding company of First Allmerica
Financial Insurance Company ("FAFLIC"). Accordingly, the financial information
reflects the equity in the financial position and results of operations of
FAFLIC for the periods prior to the date of demutualization as if AFC had been
the parent of FAFLIC at that time.
53
SCHEDULE II
(CONTINUED)
ALLMERICA FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
BALANCE SHEETS
DECEMBER 31,
---------------------------
1996 1995
------------- -------------
(IN MILLIONS, EXCEPT SHARE
AND PER SHARE DATA)
ASSETS
Fixed maturities-at fair value (amortized cost of
$26.4).......................................... $ 26.2 $ --
Equity securities-at fair value (amortized cost
of $0.4)........................................ 0.6 --
Cash............................................. 2.5 52.9
Investment in unconsolidated subsidiaries........ 1,896.3 1,724.2
Accrued investment income........................ 0.4 0.2
Other assets..................................... 5.2 2.3
------------- -------------
Total assets................................... $1,931.2 $1,779.6
============= =============
LIABILITIES
Expenses and taxes payable....................... $ 1.1 $ 0.2
Deferred income taxes............................ 0.1 --
Dividends payable................................ 2.5 2.5
Interest payable................................. 3.3 3.2
Long-term debt................................... 199.5 199.5
------------- -------------
Total liabilities.............................. 206.5 205.4
------------- -------------
Shareholders' Equity
Preferred stock, par value $0.01 per share, 20.0
million shares authorized, none issued.......... -- --
Common stock, par value $0.01 per share, 300.0
million shares authorized, 50.1 million shares
issued and outstanding at December 31, 1996 and
December 31, 1995............................... 0.5 0.5
Additional paid-in-capital....................... 1,382.5 1,382.5
Unrealized appreciation on investments, net...... 131.6 153.0
Retained earnings................................ 210.1 38.2
------------- -------------
Total shareholders' equity..................... 1,724.7 1,574.2
------------- -------------
Total liabilities and shareholders' equity..... $1,931.2 $1,779.6
============= =============
The condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto. Allmerica Financial
Corporation ("AFC") was incorporated under Delaware law on January 12, 1995,
for the purpose of becoming the parent holding company of First Allmerica
Financial Insurance Company ("FAFLIC"). Accordingly, the financial information
reflects the equity in the financial position and results of operations of
FAFLIC for the periods prior to the date of demutualization as if AFC had been
the parent of FAFLIC at that time.
54
SCHEDULE II (CONTINUED)
ALLMERICA FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
------- ------- ------
(IN MILLIONS)
Cash flows from operating activities
Net income, including net income prior to
demutualization................................... $ 181.9 $ 133.9 $ 38.0
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of First Allmerica
Financial Life Insurance Company................. (192.8) (137.0) (38.0)
Net realized investment losses.................... 0.9 -- --
Change in accrued investment income............... (0.2) (0.2) --
Change in expenses and taxes payable.............. 0.9 0.2 --
Change in dividends payable....................... -- 2.5 --
Change in debt interest payable................... 0.1 3.2 --
Other, net........................................ (3.6) (2.5)
------- ------- ------
Net cash (used in) provided by operating
activities......................................... (12.8) 0.1 --
------- ------- ------
Cash flows from investing activities Capital
contributed to unconsolidated subsidiaries......... -- (392.4) --
Proceeds from disposals and maturities of
available-for- sale fixed maturities.............. 32.7 -- --
Purchase of available-for-sale fixed maturities.... (59.6) -- --
Purchase of equity securities...................... (0.7) -- --
------- ------- ------
Net cash used in investing activities............... (27.6) (392.4) --
------- ------- ------
Cash flow from financing activities Net proceeds
from issuance of common stock...................... -- 248.0 --
Net proceeds from issuance of debt securities...... -- 197.2 --
Dividends paid to shareholders..................... (10.0) -- --
------- ------- ------
Net cash (used in) provided by financing
activities......................................... (10.0) 445.2 --
------- ------- ------
Net change in cash and cash equivalents............. (50.4) 52.9 --
Cash and cash equivalents at beginning of the
period............................................. 52.9 -- --
------- ------- ------
Cash and cash equivalents at end of the period...... $ 2.5 $ 52.9 $ --
======= ======= ======
The condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto. Allmerica Financial
Corporation ("AFC") was incorporated under Delaware law on January 12, 1995,
for the purpose of becoming the parent holding company of First Allmerica
Financial Insurance Company ("FAFLIC"). Accordingly, the financial information
reflects the equity in the financial position and results of operations of
FAFLIC for the periods prior to the date of demutualization as if AFC had been
the parent of FAFLIC at that time.
55
SCHEDULE III
ALLMERICA FINANCIAL CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 1996
FUTURE
POLICY AMORTIZA-
BENEFITS, OTHER BENEFITS, TION OF
DEFERRED LOSSES, POLICY CLAIMS, DEFERRED
POLICY CLAIMS AND CLAIMS AND NET INVEST- LOSSES AND POLICY OTHER PREM-
ACQUISI- LOSS UNEARNED BENEFITS PREMIUM MENT SETTLEMENT ACQUISI- OPERATING IUMS
TION COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES TION COSTS EXPENSES WRITTEN
---------- ---------- -------- ---------- -------- ----------- ---------- ---------- --------- --------
(IN MILLIONS)
RISK MANAGEMENT
Regional Property
and Casualty.... $164.2 $2,744.1 $815.1 $12.8 $1,898.3 $235.4 $1,383.4 $422.6 $190.0 $1,914.4
Corporate Risk
Management
Services........ 2.9 299.0 4.7 11.1 302.9 21.7 211.3 3.1 126.4 --
RETIREMENT AND
ASSET MANAGEMENT
Retail Financial
Services........ 649.0 2,225.5 2.7 120.1 34.0 198.7 202.2 54.9 117.6 --
Institutional
Services........ 6.6 289.2 -- 1,916.4 1.1 214.0 160.1 2.9 50.9 --
Allmerica Asset
Management...... -- -- -- -- -- 0.1 -- -- 7.7 --
Corporate........ -- -- -- -- -- 2.7 -- -- 18.6 --
Eliminations..... -- -- -- -- -- -- -- -- (8.7) --
------ -------- ------ -------- -------- ------ -------- ------ ------ --------
Total........... $822.7 $5,557.8 $822.5 $2,060.4 $2,236.3 $672.6 $1,957.0 $483.5 $502.5 $1,914.4
====== ======== ====== ======== ======== ====== ======== ====== ====== ========
56
SCHEDULE III (CONTINUED)
ALLMERICA FINANCIAL CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 1995
FUTURE
POLICY AMORTIZA-
BENEFITS, OTHER BENEFITS, TION OF
DEFERRED LOSSES, POLICY CLAIMS, DEFERRED
POLICY CLAIMS AND CLAIMS AND NET INVEST- LOSSES AND POLICY OTHER PREM-
ACQUISI- LOSS UNEARNED BENEFITS PREMIUM MENT SETTLEMENT ACQUISI- OPERATING IUMS
TION COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES TION COSTS EXPENSES WRITTEN
---------- ---------- -------- ---------- -------- ----------- ---------- ---------- --------- --------
(IN MILLIONS)
RISK MANAGEMENT
Regional Property
and Casualty.... $157.5 $2,896.0 $797.3 $ 12.8 $1,863.2 $209.6 $1,300.3 $409.1 $179.4 $1,885.3
Corporate Risk
Management
Services........ 2.3 282.4 0.8 9.4 272.7 17.6 197.2 2.7 110.3 --
RETIREMENT AND
ASSET MANAGEMENT
Retail Financial
Services........ 569.4 2,248.2 2.8 148.7 86.6 216.3 295.0 55.3 101.2 --
Institutional
Services........ 6.5 294.0 -- 2,566.5 0.3 266.4 217.8 3.2 66.4 --
Allmerica Asset
Management...... -- -- -- -- -- 0.2 -- -- 2.1 --
Corporate........ -- -- -- -- -- 0.4 -- -- 3.5 --
Eliminations..... -- -- -- -- -- -- -- -- (4.4) --
------ -------- ------ -------- -------- ------ -------- ------ ------ --------
Total........... $735.7 $5,720.6 $800.9 $2,737.4 $2,222.8 $710.5 $2,010.3 $470.3 $458.5 $1,885.3
====== ======== ====== ======== ======== ====== ======== ====== ====== ========
57
SCHEDULE III (CONTINUED)
ALLMERICA FINANCIAL CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 1994
FUTURE
POLICY AMORTIZA-
BENEFITS, OTHER BENEFITS, TION OF
DEFERRED LOSSES, POLICY CLAIMS, DEFERRED
POLICY CLAIMS AND CLAIMS AND NET INVEST- LOSSES AND POLICY OTHER PREM-
ACQUISI- LOSS UNEARNED BENEFITS PREMIUM MENT SETTLEMENT ACQUISI- OPERATING IUMS
TION COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES TION COSTS EXPENSES WRITTEN
---------- ---------- -------- ---------- -------- ----------- ---------- ---------- --------- --------
(IN MILLIONS)
RISK MANAGEMENT
Regional Property
and Casualty.... $155.0 $2,821.7 $793.2 $11.9 $1,791.3 $202.4 $1,315.5 $390.3 $185.9 $1,822.9
Corporate Risk
Management
Services........ 2.2 248.1 0.6 10.0 268.0 14.0 182.6 2.5 97.4 --
RETIREMENT AND
ASSET MANAGEMENT
Retail Financial
Services........ 637.5 3,037.2 2.8 260.5 121.6 223.9 300.8 79.5 113.4 --
Institutional
Services........ 8.1 300.9 -- 3,153.3 0.9 302.8 248.1 3.4 142.0 --
Allmerica Asset
Management...... -- -- -- -- -- -- -- -- 2.1 --
Eliminations..... -- -- -- -- -- -- -- -- (21.9) --
------ -------- ------ -------- -------- ------ -------- ------ ------ --------
Total........... $802.8 $6,407.9 $796.6 $3,435.7 $2,181.8 $743.1 $2,047.0 $475.7 $518.9 $1,822.9
====== ======== ====== ======== ======== ====== ======== ====== ====== ========
58
SCHEDULE IV
ALLMERICA FINANCIAL CORPORATION
REINSURANCE
DECEMBER 31,
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
--------- --------- ---------- --------- -----------
(IN MILLIONS)
1996
Life insurance in force... $41,943.1 $7,135.8 $559.2 $35,366.5 1.58%
========= ======== ====== ========= =====
Premiums:
Life insurance.......... $ 72.0 $ 18.1 $ 5.9 $ 59.8 9.85%
Accident and health
insurance.............. 317.1 120.8 81.9 278.2 29.41%
Property and casualty
insurance.............. 2,018.5 232.6 112.4 1,898.3 5.92%
--------- -------- ------ ---------
Total premiums............ $ 2,407.6 $ 371.5 $200.2 $ 2,236.3 8.78%
========= ======== ====== ========= =====
1995
Life insurance in force... $40,274.2 $8,003.1 $585.6 $32,856.7 1.78%
========= ======== ====== ========= =====
Premiums:
Life insurance.......... $ 131.4 $ 33.8 $ 1.8 $ 99.4 1.80%
Accident and health
insurance.............. 307.5 116.5 69.2 260.2 26.59%
Property and casualty
insurance.............. 2,021.7 296.2 137.7 1,863.2 7.39%
--------- -------- ------ ---------
Total premiums............ $ 2,460.6 $ 446.5 $208.7 $ 2,222.8 9.39%
========= ======== ====== ========= =====
1994
Life insurance in force... $41,812.5 $2,301.2 $649.1 $40,160.4 1.62%
Premiums:
Life insurance.......... $ 144.4 $ 9.5 $ 2.5 $ 137.4 1.80%
Accident and health
insurance.............. 302.8 101.5 51.8 253.1 20.47%
Property and casualty
insurance.............. 1,967.1 291.9 116.1 1,791.3 6.48%
--------- -------- ------ ---------
Total premiums............ $ 2,414.3 $ 402.9 $170.4 $ 2,181.8 7.81%
========= ======== ====== ========= =====
59
SCHEDULE V
ALLMERICA FINANCIAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31,
ADDITIONS
---------------------
DEDUCTIONS
BALANCE AT CHARGED TO CHARGED TO FROM BALANCE AT
BEGINNING OF COSTS AND OTHER ALLOWANCE END OF
PERIOD EXPENSE ACCOUNTS ACCOUNT PERIOD
------------ ---------- ---------- ---------- ----------
(IN MILLIONS)
1996
Mortgage loans.......... $33.8 $ 5.5 $-- $19.7 $19.6
Real estate............. 19.6 -- -- 4.7 14.9
Allowance for doubtful
accounts............... 4.6 6.8 -- 6.9 4.5
----- ----- ---- ----- -----
$58.0 $12.3 $-- $31.3 $39.0
===== ===== ==== ===== =====
1995
Mortgage loans.......... $47.2 $ 1.5 $-- $14.9 $33.8
Real estate............. 22.9 (0.6) -- 2.7 19.6
Allowance for doubtful
accounts............... 4.7 5.3 -- 5.4 4.6
----- ----- ---- ----- -----
$74.8 $ 6.2 $-- $23.0 $58.0
===== ===== ==== ===== =====
1994
Mortgage loans.......... $73.8 $14.6 $-- $41.2 $47.2
Real estate............. 21.0 3.2 -- 1.3 22.9
Allowance for doubtful
accounts............... 3.5 4.1 -- 2.9 4.7
----- ----- ---- ----- -----
$98.3 $21.9 $-- $45.4 $74.8
===== ===== ==== ===== =====
60
SCHEDULE VI
ALLMERICA FINANCIAL CORPORATION
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
DISCOUNT, IF
RESERVES FOR ANY,
DEFERRED LOSSES AND DEDUCTED
POLICY LOSS FROM NET NET
ACQUISITION ADJUSTMENT PREVIOUS UNEARNED PREMIUMS INVESTMENT
AFFILIATION WITH REGISTRANT COSTS EXPENSES(2) COLUMN(1) PREMIUMS(2) EARNED INCOME
--------------------------- ----------- ------------ ------------ ----------- -------- ----------
(IN MILLIONS)
Consolidated Property and
Casualty Subsidiaries
1996................... $164.2 $2,744.1 $-- $815.1 $1,898.3 $235.4
====== ======== ==== ====== ======== ======
1995................... $157.5 $2,896.0 $-- $797.3 $1,863.2 $209.6
====== ======== ==== ====== ======== ======
1994................... $155.0 $2,821.7 $-- $793.2 $1,791.3 $202.4
====== ======== ==== ====== ======== ======
LOSSES AND LOSS
ADJUSTMENT EXPENSES
------------------------
AMORTIZATION
OF DEFERRED PAID LOSSES
POLICY AND LOSS
ACQUISITION ADJUSTMENT NET PREMIUMS
CURRENT YEAR PRIOR YEARS EXPENSES EXPENSES WRITTEN
------------ ----------- ------------ ----------- ------------
1996......... $1,513.3 $(141.4) $422.6 $1,387.2 $1,914.4
======== ======= ====== ======== ========
1995......... $1,427.3 $(137.6) $409.1 $1,266.5 $1,885.3
======== ======= ====== ======== ========
1994......... $1,434.8 $(128.1) $390.3 $1,217.1 $1,822.9
======== ======= ====== ======== ========
- --------
(1) The Company does not employ any discounting techniques.
(2) Reserves for losses and loss adjustment expenses are shown gross of $626.9
million, $763.5 million and $712.5 million of reinsurance recoverable on
unpaid losses in 1996, 1995 and 1994, respectively. Unearned premiums are
shown gross of prepaid premiums of $45.5 million, $43.8 million and $61.9
million in 1996, 1995 and 1994, respectively.
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AFC9610K