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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, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM: TO
COMMISSION FILE NUMBER: 1-13754
ALLMERICA FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3263626
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
440 LINCOLN STREET, WORCESTER, 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, TOGETHER
WITH STOCK PURCHASE RIGHTS
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 March 13, 1998 the aggregate market
value of the voting and non-voting stock held by nonaffiliates of the
registrant was $3,315,209,036.
The number of shares outstanding of the registrant's common stock, $.01 par
value, was 59,979,641 shares outstanding as of March 13, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Allmerica Financial Corporation's Annual Report to Shareholders
for 1997 are incorporated by reference in Parts I, II, and IV. Portions of
Allmerica Financial Corporation's Proxy Statement of Annual Meeting of
Shareholders to be held May 12, 1998 are incorporated by reference in Part
III.
Total number of pages, including cover page:
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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. The consolidated
financial statements of AFC include the accounts of First Allmerica Financial
Life Insurance Company ("FAFLIC"), its wholly-owned life insurance subsidiary,
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC"), non-
insurance subsidiaries (principally brokerage and investment advisory
subsidiaries) and Allmerica Property & Casualty Companies, Inc. ("Allmerica
P&C", a wholly-owned non-insurance holding company).
Allmerica P&C and a wholly-owned subsidiary of the Company merged on July
16, 1997. Through the merger, the Company acquired all of the outstanding
common stock of Allmerica P&C that it did not already own in exchange for cash
of $425.6 million and approximately 9.7 million shares of AFC stock valued at
$372.5 million. Total consideration was allocated to the minority interest in
the assets and liabilities based on their fair values. The minority interest
acquired totaled $703.5 million. A total of $90.6 million, representing the
fair values of the net assets acquired, net of deferred taxes, has been
allocated to goodwill and is being amortized over a 40-year period.
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 funded a portion of
the aforementioned acquisition of the 24.2 million publicly held shares of
Allmerica P&C. On August 7, 1997, AFC and the Trust exchanged the Series A
Capital Securities for a like amount of Series B Capital Securities and
related guarantees which are registered under the Securities Act of 1933 as
required under the terms of the initial transaction.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Accumulation. Within these broad areas,
the Company operates principally in five operating segments. These segments
are Regional Property and Casualty; Corporate Risk Management Services
("CRMS"); Allmerica Financial Services ("AFS"); Institutional Services; and
Allmerica Asset Management ("AAM"). In addition to the five operating
segments, the Company also has a Corporate segment, which consists primarily
of cash, investments, corporate debt and Capital Securities.
Information with respect to each of the Company's segments is included in
"Segment Results" on pages 30-40 in Management's Discussion and Analysis of
Financial Condition and Results of Operations and in Note 14 on page 70 of the
Notes to the Consolidated Financial Statements included in the 1997 Annual
Report to Shareholders, the applicable portions of which are incorporated
herein by reference.
DESCRIPTION OF BUSINESS BY SEGMENT
Following is a discussion of each of the Company's five operating segments.
2
RISK MANAGEMENT
REGIONAL PROPERTY AND CASUALTY
General
The Company's Regional Property and Casualty segment is composed of its
wholly-owned subsidiary, Allmerica P&C, which consists of The Hanover
Insurance Company ("Hanover") and Hanover's 82.5%-owned subsidiary, Citizens
Corporation ("Citizens"). For the year ended December 31, 1997, the Regional
Property and Casualty segment accounted for approximately $2,275.3 million, or
67.0%, of consolidated revenues and approximately $158.2 million, or 52.2%, 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 have an historically strong regional focus
and both place heavy emphasis on underwriting profitability and loss reserve
adequacy. As of December 31, 1996, 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.
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.
In 1996, the Company, in the Regional Property and Casualty segment, began
the process of consolidating certain operations of Hanover and Citizens which
are intended to achieve process improvements and efficiencies in operations.
These operations include claims, finance, policy processing and administrative
functions. In 1997, Citizens upgraded its claims processing automation and
consolidated many of its Michigan claims offices into a regional claims center
based in Howell. At Hanover, claim office consolidation also occurred into
central locations reducing the number of offices from twenty-eight to
nineteen. Additionally, Citizens increased claim draft authority for its
agents and implemented a network of auto repair facilities to streamline
damage appraisal and repair. Citizens and Hanover also began reengineering its
processing of commercial lines business, redefining underwriting roles and
providing more authority to agents to price and bind standard accounts.
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.
3
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 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. Amgro also offers loans to
independent agencies at competitive rates.
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. Hanover's business is
concentrated in the Northeast, primarily Massachusetts, New York, New Jersey
and Maine. Citizens' business is predominantly in Michigan and continues to
expand into Indiana and Ohio.
The Company markets property and casualty insurance products through
approximately 2,500 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.
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. The Regional Property and Casualty
segment 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 at Hanover, and a Regional Agents Advisory
Council at Citizens, consisting of agent representatives. These councils seek
to coordinate marketing efforts, support implementation of the Company's
strategies and enhance local market presence. Citizens' position as a
principal provider with many of its agencies is evidenced by its high average
premiums written per agency of approximately $1.6 million in 1997 in Michigan.
Over the past few years, Hanover has begun 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. Also, the Company, through
the Regional Property and Casualty segment, is exploring sales through banks
and electronic commerce. 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.
4
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 $1,097.8 million, or 56.2%, of the
Regional Property and Casualty segment's consolidated net premium earned in
1997. 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 1997, the Company completed 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.
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. The Company believes that these
investments in technology will, over time, create technological efficiencies
and provide capacity for enhanced service to customers.
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 eleven
branch/sales underwriting 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.
In 1997, Hanover reached an agreement with Travelers Property Casualty to
facilitate Travelers' writing of certain Hanover Insurance policies, as they
expire, in Alabama, California, Kansas, Mississippi, Missouri, Texas and
Vermont. In these seven states, Hanover has approximately 250 agents
generating approximately $90 million in premium annually. Hanover has ceased
writing substantially all personal and commercial policies in these states
except for employer and association-sponsored group property and casualty
business, surety bonds and specialty program commercial policies. The plan was
conditioned upon the appropriate regulatory approval in each state. The
Company has received substantially all of the appropriate regulatory approvals
as of December 31, 1997.
Citizens
Citizens accounted for approximately $855.3 million, or 43.8%, of the
Regional Property and Casualty segment's consolidated net premium earned in
1997. Citizens' products are also marketed through independent agencies which
provide specialized knowledge of property and casualty products, local market
conditions and targeted customer characteristics.
Citizens seeks to pursue profitable growth in existing markets by
establishing long-term relationships with larger, well-established agencies.
To solidify its relationship with higher quality agents, Citizens offers
enhanced profit sharing agreements, recognition awards and maintains local
presence through five branch offices and three claims offices in Michigan,
Indiana and Ohio. In addition, Citizens continues to maintain long-term
pricing and underwriting integrity to remain a stable market for the
independent agents.
5
In 1997, Citizens completed the process of consolidating certain operations
with Hanover to achieve process improvements and efficiencies in operations
including claims, finance, policy processing and administrative functions.
Additionally, during 1997 Citizens relocated many of its claims functions to a
regional office in Michigan to provide for better client service and gain
operational efficiencies.
Citizens has been successful in developing and marketing groups in both
personal and commercial segments that are tailored for members of
associations, financial institutions and employers in Michigan, Indiana and
Ohio. The organizations may choose to make Citizens' programs available to
their members or employees 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 or
employees. As of December 31, 1997, Citizens had approximately 144 group
programs in-force, 114 of which were in personal lines and 30 of which were in
commercial lines. Revenue from personal and commercial lines groups accounts
for nearly 50 percent of Citizens' total premium volume.
Citizens continues its use of agency-company interface ("ACI") technology,
which enables agents to electronically submit personal lines policies for
review and rating. In addition, 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 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 proportional to 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
incurred an underwriting loss from participation in such mechanisms, mandatory
pools and underwriting associations of $12.9 million, $5.3 million and $2.8
million in 1997, 1996 and 1995 relating primarily to coverages for personal
and commercial automobile, personal and commercial property, and workers'
compensation. The increase in the underwriting loss is primarily related to
Hanover's participation in the Massachusetts Commonwealth Automobile
Reinsurers ("CAR") pool which is consistent with the rate decrease and higher
actual loss activity experienced in the overall Massachusetts automobile
market.
Assigned Risk Plans
Assigned risk plans are the most common type of shared market mechanism.
Many states, including Massachusetts, Illinois, New Jersey and New York
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 that
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.
6
A type of reinsurance mechanism that exists in New Jersey, The New Jersey
Unsatisfied Claim and Judgment Fund ("NJUCJF"), covers no-fault first party
medical losses in excess of $0.8 million. All automobile 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
this fund comes from assessments against automobile insurers based upon their
proportionate market share of the state's automobile liability 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.
At December 31, 1997, CAR was the only reinsurer 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, 1997, 1996 and 1995 were $32.3 million and $28.2
million, $38.0 million and $21.8 million, and $49.1 million and $33.7 million,
respectively.
The Company ceded to the Michigan Catastrophic Claims Association ("MCCA")
premiums earned of $9.8 million, $50.5 million and $66.8 million in 1997, 1996
and 1995, respectively. Losses and loss adjustment expenses ceded in 1997,
1996 and 1995 were $(0.8) million, $(52.9) million and $62.9 million,
respectively. The decrease in earned premiums ceded to MCCA reflects a
reduction in premiums charged per policyholder by MCCA. In 1997 and 1996, the
MCCA's favorable development on prior year reserves exceeded the losses and
LAE incurred during the year.
At December 31, 1997 and 1996, the Company, in the Regional Property and
Casualty segment, had reinsurance recoverable on paid and unpaid losses from
CAR of $45.7 million and $57.6 million and from MCCA of $280.2 million and
$292.0 million, respectively. 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 CAR, because CAR is a
mandated pool supported by all insurance companies licensed to write
automobile insurance in the Commonwealth of Massachusetts. In addition, the
MCCA (i) 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.
Reference is made to Note 16 on pages 71 and 72 and Note 20 on pages 74 and
75 of the Notes to Consolidated Financial Statements of the 1997 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.
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,
7
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 shared 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 Connecticut, Illinois,
New Hampshire, Maine, New Jersey 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 basis
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, including
those with exclusive agent representation, 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 usually compete in both personal
and commercial lines. Hanover and Citizens market through independent agents
and therefore 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 few years, the competitive environment in Massachusetts has
increased substantially. Approximately 34% of Hanover's personal automobile
business is currently written in this state. Effective January 1, 1998 and
January 1, 1997, Massachusetts personal automobile rates decreased 4.0% 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 100 group programs throughout the state, including
a large group plan in the state with approximately 347,000 eligible members.
In 1997, Hanover began offering a 10% discount on automobile insurance for its
safest drivers. As a result, policyholders have the ability to 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 Massachusetts.
In Michigan, Citizens competes in personal lines with a number of direct
writers and regional and local companies, several of which are larger than
Citizens. Citizens is the largest writer of property and casualty insurance in
Michigan through independent agents. Citizens' principal competition in the
Michigan homeowners line is from direct writers, including State Farm Group.
Citizens also faces competition from the two largest direct writers in
Michigan, Auto Club Michigan Group and State Farm Group, in the personal
automobile line. 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. This new legislation has removed barriers to
entrance into the market for national agency
8
companies, which have not been significant competitive forces in Michigan in
the personal lines of property and casualty insurance in previous years. This
was, in part, due to Michigan's prior insurance regulatory environment which
required 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.
Although the Company believes that this new legislation will encourage
national companies to return or enter into the state, the Company has not
assessed the impact of this law.
Citizens faces commercial lines competition principally from national agency
companies, and regional and local companies, many of which have financial
resources substantially greater than those of Citizens. Citizens is the second
leading writer in Michigan in its three primary commercial lines combined:
commercial automobile, workers' compensation, and commercial multiple peril.
The commercial 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 workers' compensation insurance
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. In March 1997, Citizens
introduced workers' compensation product and pricing alternatives, written
through Citizens Insurance Company of Ohio and Citizens Insurance Company of
the Midwest. These vehicles enable greater pricing flexibility, particularly
for writing preferred risks in medium and large workers' compensation
accounts. By the end of 1997, rate filings effective January 1, 1998 by
companies indicated either small decreases for selected classes of business or
even some rate increases.
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
a target combined ratio in each of its product lines regardless of market
conditions. This strategy seeks to achieve measured growth and consistent
profitability on a continuing basis. 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
underwriting results. Hanover and Citizens rely on information provided by
their local agents and both also rely 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 staff
strategically located throughout its operating territories. All claims staff
members work closely with the agents to settle claims rapidly and cost-
effectively.
9
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.
The Company, in the Regional Property and Casualty segment, utilizes claims
processing technology which allows smaller and more routine claims to be
processed at centralized locations. The Company expects that approximately 70%
of its personal lines claims will be processed at these locations, thereby
increasing efficiency and reducing operating costs.
Citizens has instituted a program under which participating agents have
settlement authority for many property loss claims. Based upon the program
experience, the Regional Property and Casualty segment believes that this
program contributes to lower LAE experience and to its higher customer
satisfaction ratings by permitting the early and direct settlement of such
small claims. Approximately 30.1% and 26.6% of the number of total paid claims
reported to Citizens in the years ended December 31, 1997 and 1996,
respectively, were settled under this program.
Hanover and Citizens have increased usage of the managed care expertise of
the Allmerica Financial's Corporate Risk Management Services segment in the
analysis of medical services and pricing in the management of workers'
compensation and medical claims on its automobile policies. Hanover and
Citizens' use of this capability has demonstrated reduced 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 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 34, 35 and 36 of Management's Discussion and Analysis of Financial
Condition and Results of Operations of the 1997 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.
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.
10
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:
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
Statutory reserve for losses and LAE............ $2,047.2 $2,113.2 $2,123.0
GAAP adjustments:
Reinsurance recoverable on unpaid losses...... 576.7 626.9 763.5
Other(*)...................................... (8.5) 4.0 9.5
-------- -------- --------
GAAP reserve for losses and LAE................. $2,615.4 $2,744.1 $2,896.0
======== ======== ========
- --------
(*) Primarily represents other statutory liabilities reclassified as loss
adjustment expense reserves for GAAP reporting and purchase accounting
adjustments.
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 1987 through 1997 for the Company.
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN MILLIONS) YEAR ENDED DECEMBER 31,
Net reserve for
losses and
LAE(1)......... $2,038.7 $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
Cumulative
amount paid as
of(2):
One year later
............... -- 732.1 627.6 614.3 566.9 564.3 569.0 561.5 521.1 465.3 384.3
Two years later
............... -- -- 1,008.3 940.7 884.4 862.7 888.0 874.5 820.2 725.3 616.4
Three years
later ......... -- -- -- 1,172.8 1,078.1 1,068.4 1,077.1 1,074.3 1,009.3 901.5 764.5
Four years later
............... -- -- -- -- 1,210.9 1,184.1 1,207.1 1,186.4 1,130.1 1,009.7 862.1
Five years later
............... -- -- -- -- -- 1,267.5 1,279.4 1,265.4 1,192.7 1,078.8 926.0
Six years later
............... -- -- -- -- -- -- 1,337.2 1,314.2 1,240.9 1,116.2 969.7
Seven years
later ......... -- -- -- -- -- -- -- 1,355.3 1,271.4 1,147.4 993.5
Eight years
later ......... -- -- -- -- -- -- -- -- 1,301.6 1,170.4 1,016.5
Nine years later
............... -- -- -- -- -- -- -- -- -- 1,192.5 1,034.6
Ten years
later-- ....... -- -- -- -- -- -- -- -- -- -- 1,052.0
Net reserve re-
estimated as
of(3):
End of year..... 2,038.7 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
One year later
............... -- 1,989.3 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
Two years later
............... -- -- 1,874.3 1,859.4 1,767.4 1,762.8 1,717.7 1,601.9 1,449.0 1,262.0 1,096.4
Three years
later ......... -- -- -- 1,780.3 1,691.5 1,703.3 1,670.8 1,614.3 1,471.7 1,290.2 1,125.3
Four years later
............... -- -- -- -- 1,676.3 1,658.9 1,654.1 1,597.6 1,484.7 1,312.3 1,155.1
Five years later
............... -- -- -- -- -- 1,637.3 1,634.6 1,594.3 1,482.3 1,322.1 1,175.2
Six years later
............... -- -- -- -- -- -- 1,630.6 1,588.7 1,486.9 1,328.6 1,188.5
Seven years
later ......... -- -- -- -- -- -- -- 1,593.1 1,488.4 1,340.7 1,201.2
Eight years
later ......... -- -- -- -- -- -- -- -- 1,552.1 1,403.7 1,215.4
Nine years later
............... -- -- -- -- -- -- -- -- -- 1,412.8 1,226.8
Ten years
later.......... -- -- -- -- -- -- -- -- -- -- 1,238.6
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Deficiency)
Redundancy,
net(4,5,6)..... $ -- $ 127.9 $ 258.2 $ 329.0 $ 343.3 $ 299.6 $ 141.8 $ (42.5) $ (225.8) $ (261.9) $ (230.6)
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
- --------
(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.
11
(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, 1997 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 1997 for the Company:
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------- --------
(IN MILLIONS)
Reserve for losses and
LAE:
Gross liability....... $2,615.4 $2,744.1 $2,896.0 $2,821.7 $2,717.3 $2,598.9
Reinsurance
recoverable.......... 576.7 626.9 763.5 712.4 697.7 662.0
-------- -------- -------- -------- --------- --------
Net liability....... $2,038.7 $2,117.2 $2,132.5 $2,109.3 $2,019.6 $1,936.9
======== ======== ======== ======== ========= ========
One year later:
Gross re-estimated
liability............ $2,541.9 $2,587.8 $2,593.5 $2,500.5 $2,460.5
Re-estimated
recoverable.......... 552.7 596.7 621.8 609.0 592.4
-------- -------- -------- --------- --------
Net re-estimated
liability.......... $1,989.2 $1,991.1 $1,971.7 $1,891.5 $1,868.1
======== ======== ======== ========= ========
Two years later:
Gross re-estimated
liability............ $2,427.7 $2,339.2 $2,333.3 $2,341.9
Re-estimated
recoverable.......... 553.5 479.8 565.9 579.1
-------- -------- --------- --------
Net re-estimated
liability.......... $1,874.2 $1,859.4 $1,767.4 $1,762.8
======== ======== ========= ========
Three years later:
Gross re-estimated
liability............ $2,227.0 $2,145.5 $2,257.3
Re-estimated
recoverable.......... 446.8 454.0 554.0
-------- --------- --------
Net re-estimated
liability.......... $1,780.2 $1,691.5 $1,703.3
======== ========= ========
Four years later:
Gross re-estimated
liability............ $2,102.0 $2,168.2
Re-estimated
recoverable.......... 425.7 509.3
--------- --------
Net re-estimated
liability.......... $1,676.3 $1,658.9
========= ========
Five years later:
Gross re-estimated
liability............ $2,027.3
Re-estimated
recoverable.......... 390.0
--------
Net re-estimated
liability.......... $1,637.3
========
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.
12
The Company determines the appropriate amount of reinsurance based on the
Company's evaluation of the risks accepted and analyses prepared by
consultants and reinsurers and on market conditions including the availability
and pricing of reinsurance. The Company, in the Regional Property and Casualty
segment, has reinsurance for casualty business.
Under the 1997 casualty reinsurance program, the reinsurers are responsible
for 100% of the amount of each loss in excess of $0.5 million per occurrence
up to $30.5 million for general liability and workers' compensation.
Additionally, this reinsurance covers workers' compensation losses in excess
of $30.5 million to $60.5 million per occurrence. Amounts in excess of $60.5
million are retained 100% by the Company.
Under the 1997 catastrophe reinsurance program Hanover retains the first
$25.0 million of loss per occurrence and all amounts in excess of $180.0
million, 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. Citizens retains 5% of losses in excess of $10.0
million, up to $25.0 million, and 10% of losses in excess of $25.0 million up
to $180.0 million. Amounts in excess of $180.0 million are retained 100% by
Citizens. In 1996, Citizens had additional catastrophe coverage which
reinsured 90% of $5.0 million for aggregated catastrophe losses in excess of
$5.0 million which individually exceed $1.0 million. In 1997 and 1996, the
Company, in the Regional Property and Casualty segment, recovered $1.2 million
and $4.6 million on its catastrophe coverage, respectively. In 1995, the
Company, in the Regional Property and Casualty segment did not exceed the
minimum catastrophe levels.
Effective January 1, 1998, the Company, in the Regional Property and
Casualty segment, modified its catastrophe reinsurance program to include a
higher retention. Under the 1998 catastrophe reinsurance program, the Company
retains the first $45.0 million. For losses in excess of $45.0 million and up
to $180.0 million, the Company, in the Regional Property and Casualty segment,
retains 10% of the loss. Amounts in excess of $180.0 million are retained 100%
by the Company, in the Regional Property and Casualty segment. The casualty
reinsurance program for 1998 is consistent with the program utilized in 1997.
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 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 CAR and MCCA.
The reserve for losses and loss adjustment expenses at December 31, 1997 and
1996 is shown gross of recoverable on unpaid losses of $576.7 million and
$626.9 million, respectively. The 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 servicing carrier business. The
decrease at Citizens in 1997 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 $120.6 million,
$2.2 million and $229.1 million in 1997, 1996 and 1995, respectively. Earned
premiums ceded were $195.1 million, $232.6 million and $296.2 million in 1997,
1996 and 1995, respectively.
13
Reference is made to "Reinsurance" in Note 16 on pages 71 and 72 of the
Notes to Consolidated Financial Statements of the 1997 Annual Report to
Shareholders, which is incorporated herein by reference.
Reference is also made to "Reinsurance Facilities and Pools" on pages 7 and
8 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, 1997, this segment insured and/or
provided administrative services to the employee benefit plans of over 2,700
employers covering 630,467 employee lives. For the year ended December 31,
1997, this segment accounted for approximately $396.1 million, or 11.7%, of
consolidated revenues and $19.3 million, or 6.4%, of consolidated income
before taxes.
The Company's strategy emphasizes risk sharing and administrative services
only 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 and administrative service arrangements,
the segment has demonstrated more stable profitability by decreasing its
exposure to unpredictable increases in health care costs.
The Company continues to leverage the CRMS segment's managed care and claims
management expertise to capitalize on opportunities with its Regional Property
and Casualty segment affiliates. Legislation in many states permits 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
utilized CRMS' expertise in medical management and claims processing for its
Regional Property and Casualty segment's workers' compensation business and
the medical component of its automobile insurance business. Health care and
other claims professionals 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 now manages medical
claims covered by workers' compensation, automobile insurance and health
benefit plans. The Company's capability of providing 24-hour managed care to
effectively manage claims for both casualty and health benefit products has
demonstrated reduced costs, serves its customers more efficiently and is a
competitive advantage.
In addition, the Company is focusing on its integrated claims handling and
claims management services provided to employers through its MedCompONE
product. MedCompONE is a totally integrated claim management program designed
to minimize the overall costs of occupational and non-occupational illness and
injury. MedCompONE can be provided as a service only agreement or in
conjunction with the Company's stop loss or fully insured indemnity coverage.
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 health care costs and the
underlying risks which are assumed by employers. In order to enhance sales of
these products, each product is available as part of a full service package or
on a stand-alone basis. On January 1, 1998, the Company assumed a block of the
Affinity Group Underwriter business consisting of life, disability, and
medical coverages written and administered through several Third Party
Administrators ("TPAs") in order to expand the marketing possibilities for
CRMS' life and health and property and casualty products.
14
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 managed care
reform, and patient protection and advocacy. State and federal legislation
adopted over the past few years generally limits the flexibility of insurers
with respect to underwriting practices for small employer plans that contain
less than 50 employees, provides for crediting previous coverage for the
purposes of determining pre-existing conditions, and limits the ability to
medically underwrite individual risks in the group market. In addition,
several states have enacted managed care reform legislation which may change
managed care programs. While future legislative activity is unknown, it is
probable that limitations on insurers that utilize managed care programs or
market health insurance to small employers will continue. However, the
Company's rating, underwriting practices, and managed care programs are
consistent with the objectives of current reform initiatives. For example, the
Company does not experience rate small cases, nor does it refuse coverage to
eligible individuals because of medical histories. Also, its managed care
programs provide for coverage outside of the preferred network and allow for
open communication between a doctor and his/her patient. Because of its
emphasis on managed care and risk sharing partnerships, management believes
that it will continue to be able to operate effectively in the event of
further reform, even if specific states expand the existing limitations.
The Company believes that the proposed federal and state health care reforms
would, if enacted, substantially expand access to and mandate the amounts of
health care coverage while limiting or eliminating insurer's flexibility and
restrict the profitability of health insurers and managed care providers. The
Company cannot predict whether any of the current proposals will be enacted or
access the particular impact such proposals may have on the Company's
Corporate Risk Management Services' business.
Products
The following table summarizes premiums by product line for the CRMS segment
for the years ended December 31.
1997 1996 1995
------ ------ ------
(IN MILLIONS)
Health
Medical
Fully insured...................................... $ 41.9 $ 40.6 $ 44.6
Risk sharing....................................... 81.1 83.2 83.0
Dental
Fully insured...................................... 30.0 21.3 13.1
Risk sharing....................................... 2.4 2.7 2.8
Short-term disability
Fully insured...................................... 6.8 6.5 5.5
Risk sharing....................................... 0.3 0.5 0.5
Long-term disability
Fully insured...................................... 9.2 8.5 9.0
Reinsurance assumed (1)................................ 69.3 57.5 44.9
Stop loss (2).......................................... 31.0 26.4 21.4
------ ------ ------
Total health........................................... 272.0 247.2 224.8
Accidental death & dismemberment....................... 5.3 5.0 4.5
Other reinsurance assumed.............................. 5.5 0.4 1.1
Life................................................... 50.2 50.3 42.3
------ ------ ------
Total CRMS premiums.................................... $333.0 $302.9 $272.7
====== ====== ======
ASO (3)................................................ $ 27.6 $ 23.8 $ 18.7
====== ====== ======
Total premiums and premium equivalents................. $936.3 $884.3 $786.1
====== ====== ======
- --------
(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.
15
(2) Represents premiums primarily related to customized products sold to
customers providing for stop loss coverage only or in conjunction with
administrative services.
(3) Administrative services only ("ASO") fees are included in other income in
the financial information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of the Annual
Report to Shareholders, which is incorporated herein by reference.
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. AD&D
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 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, 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 40 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 distribution through growth and leverage of
its existing non-traditional distribution channels. The Company focuses on
three distribution channels to enhance the growth of its non-medical insurance
coverages. 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.
16
Reinsurance
The Company purchases reinsurance for the CRMS segment's group life
insurance, AD&D, group health, stop-loss and occupational accident coverages.
The Company retains a maximum 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 insurer 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
substantially all of its long term disability payments, covering a specific
percent, which generally approximates 50%, of each long term disability
policy. Additionally, the Company purchases reinsurance for medical claims
involving certain 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, 1997, the Company ceded approximately $93.9
million of premiums associated with its aggregate stop loss policies and
approximately $10.3 million of premiums for the remaining direct insurance
coverages. As of December 31, 1997, 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
17
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 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.
RETIREMENT AND ASSET ACCUMULATION
ALLMERICA FINANCIAL SERVICES
General
The Allmerica 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 625 agents, to mutual funds for their
variable annuity customers, and on a wholesale basis to financial planners and
broker-dealers. For the year ended December 31, 1997, the Allmerica Financial
Services segment accounted for $470.6 million, or 13.9%, of consolidated
revenues and $87.4 million, or 28.9%, 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
alternative distribution channels.
The Company's primary distribution system in this segment is its career
agent sales force. Virtually all of the Company's career agents are registered
broker-dealer representatives, licensed to sell all of Allmerica Financial
Services 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"). New deposits of these
alternative distribution channels have grown from 35.9% of statutory annuity
premiums and deposits in 1995 to 66.4% in 1997. 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
18
presentations and seminar programs to address different client needs. In order
to identify a favorable prospective 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 1997, the Company delivered approximately
400 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 re-balancing capabilities and graphical
quarterly report statements which are used to establish and monitor the
desired mix of investments by individual contract and policyholders.
According to 1997 A.M Best's Policy Reports, the Company is among the twenty
largest writers of individual variable annuity contracts and individual
variable universal life insurance policies in the United States in 1996, based
on statutory premiums and deposits. Sales of variable products represented
approximately 94.8%, 89.7% and 84.1% of this segment's statutory premiums and
deposits in 1997, 1996 and 1995, respectively. From 1995 to 1997, income
before taxes from this segment improved $52.2 million, from $35.2 million to
$87.4 million. Statutory premiums and deposits, a common industry benchmark
for sales achievement, totaled $2,733.3 million, $1,616.9 million and $1,060.8
million in 1997, 1996 and 1995, respectively.
Currently, under the Internal Revenue Code, holders of certain life
insurance and annuity products are entitled to tax-favored treatment on these
products. For example, income tax payable by policyholders on investment
earnings under certain life insurance and annuity products is deferred during
the product's accumulation period and is payable, if at all, only when the
insurance or annuity benefits are actually paid or to be paid. Also, for
example, interest on loans up to $50,000 secured by the cash value of certain
insurance policies owned by businesses is eligible for deduction even though
investment earnings during the accumulation period are tax-deferred.
In the past, legislation has been proposed that would have curtailed the
tax-favored treatment of the life insurance and annuity products offered by
the Company. These proposals were not enacted, however, such proposals or
similar proposals are currently under consideration by Congress. If these or
similar proposals directed at limiting the tax-favored treatment of life
insurance policies and annuity contracts were enacted, market demand for such
products offered by the Company would be adversely affected. The Company
cannot predict the impact of such effects.
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 1997, 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.
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
Statutory Premiums and Deposits
Variable universal life........................ $ 148.8 $ 117.2 $ 90.4
Separate account annuities..................... 2,186.1 1,160.9 647.8
General account annuities...................... 234.7 147.9 128.8
Retirement investment account annuities........ 21.8 24.5 25.6
Universal life................................. 60.7 71.6 77.2
Traditional life............................... 58.4 61.9 59.1
Individual health.............................. 22.8 32.9 31.9
-------- -------- --------
Total premiums and deposits.................. $2,733.3 $1,616.9 $1,060.8
======== ======== ========
19
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.
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 41 in 1995 to
69 in 1997, 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 625 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. The
Company also regularly conducts comprehensive financial planning seminars and
face-to-face presentations to address different investment objectives of
clients.
20
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 300 distribution firms employing over 45,000 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 1997, total statutory premiums and deposits
from sales of variable annuities through these channels totalled $1,621.6
million, compared to $287.8 million in 1995.
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
1997 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 2.6% of this segment's total statutory life insurance
premiums in 1997.
With respect to life policies of the Allmerica 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 $2.0 million per life, with certain
restrictions that determine the binding authority with the various reinsurers.
For life policies greater than $8.0 million, the Company obtains facultative
reinsurance. Prior to issuing facultative reinsurance, the facultative
reinsurer reviews all of the underwriting information relating to the
21
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 $2.0 million which do not satisfy the
Company's underwriting guidelines.
The Company seeks to enter into reinsurance treaties with highly rated
reinsurers. In 1997, the two largest reinsurers for life insurance in this
segment, Connecticut General and St. Louis Re, represented 51.5% of this
segment's life reinsurance ceded based upon statutory premium in that year.
All of the reinsurers utilized by this segment have received an A.M. Best
rating of "A- (Excellent)" or better (Best's Insurance Reports, 1997 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.
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 $50.0 million and the maximum pool reinsurance
available for a single event is $125.0 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.
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. In 1997, the
Company entered into a 100% coinsurance agreement with Metropolitan Life
Insurance Company to reinsure substantially all of its individual disability
income business.
Effective January 1, 1998, the Company entered into an agreement with
Reinsurance Group of America, Inc. to reinsure the mortality risk on the
universal life and variable universal life lines of business. Management
believes that this agreement will not have a material effect on the results of
operations or financial position of the Company.
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, 1997, there were approximately 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 substantially all of its
agents and its reputation in the insurance industry enable it to compete
effectively in the markets in which it operates.
22
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 Guaranteed Investment Contracts ("GICs")
and annuities to corporate retirement plans. During 1997, the Company began
offering GICs beyond the corporate retirement market, into the non-qualified
market which includes money market funds, corporate cash management programs
and securities lending collateral programs. The Company conducts its
operations in this segment through FAFLIC and its subsidiaries. For the year
ended December 31, 1997, this segment accounted for approximately $243.4
million, or 7.2%, of consolidated revenues, and income before taxes of $62.4
million, or 20.6%, of consolidated income before taxes.
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 and defined contribution retirement plans. Currently, the Company
provides administration and recordkeeping for approximately 611 qualified
pension and profit sharing plans which have assets totaling $2.9 billion and
cover approximately 117,000 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 178 plans with aggregate assets under management of
$1.0 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.
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 and defined contribution 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 GICs; the traditional GIC and
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.
23
In 1997, the Company expanded its offering of GICs to include non-qualified
GICs. These non-qualified GICs, often referred to as "Funding Agreements" or
"floating rate GICs", typically provide for a guaranteed interest rate which
is associated with an interest rate index, such as LIBOR, with the accrued
interest periodically being paid out and the interest rate reset on
predetermined dates. No other withdrawals are permitted prior to maturity.
Typical maturities are one year or less, but most arrangements provide for
repeated extensions of the maturity upon mutual agreement of both parties.
During 1997, total traditional GIC sales were less than $10.0 million and
floating rate GIC sales were approximately $250 million. There were no sales
of synthetic GICs. The continued low volume of traditional and synthetic GIC
sales reflects the Company's decision to sell these products only when the
profit margins meet the Company's standards. Approximately $225 million of the
floating rate GIC sales occurred in the fourth quarter of 1997. The Company
expects sales growth with respect to the floating rate GICs to continue during
1998.
Other Services
Through this segment, the Company also offers telemarketing services to
retail and financial clients, which utilize experienced telemarketing
management and program execution.
Distribution
The Company distributes retirement products through a dedicated sales force
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. The recordkeeping function is outsourced to a third
party administrator.
INVESTMENT PORTFOLIO
General
At December 31, 1997, the Company held $9.7 billion of investment assets,
including $768.7 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.
24
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.
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 20 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 1997, 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 held by the Company's insurance
subsidiaries are subject to diversification requirements under insurance laws.
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, Allmerica
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.
FAFLIC, AFLIAC, Hanover and Citizens all received an A.M. Best financial
condition rating of A (Excellent) in 1997.
FAFLIC and AFLIAC were given Duff & Phelps claims-paying ability ratings of
AA (Very High) in August 1997.
FAFLIC, AFLIAC and Hanover were given Moody's financial strength ratings of
A1 (Good) in November 1997.
In October 1997, Standard and Poor's upgraded its claims-paying ability
rating for FAFLIC and AFLIAC to AA- (Excellent) from A+ (Good). Hanover,
together with its subsidiaries, including Citizens Insurance, was given an AA-
(Excellent) S&P claims-paying ability rating.
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 6,300 employees located throughout the
country. Management believes relations with employees and agents are good.
25
ITEM 2
PROPERTIES
The Company's headquarters are located at 440 Lincoln Street, Worcester,
Massachusetts and consist primarily of approximately 758,000 rentable square
feet of office and conference space owned in fee and include the headquarters
of Hanover.
Citizens owns its home office, located at 645 W. Grand River, Howell,
Michigan, which is approximately 119,000 rentable square feet. Citizens also
owns a three-building complex located at 808 North Highlander Way, Howell,
Michigan, with 156,000 rentable 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.
ITEM 3
LEGAL PROCEEDINGS
Reference is made to Note 20 on page 74 of the Notes to Consolidated
Financial Statements of the 1997 Annual Report to Shareholders, the applicable
portions of which are incorporated herein by reference.
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.
In July 1997, a lawsuit was instituted in Louisiana against AFC and certain
of its subsidiaries by individual plaintiffs alleging fraud, unfair or
deceptive acts, breach of contract, misrepresentation and related claims in
the sale of life insurance policies. In October 1997, plaintiffs voluntarily
dismissed the Louisiana suit and refiled the action in Federal District Court
in Worcester, Massachusetts. The plaintiffs seek to be certified as a class.
The case is in early stages of discovery and the Company is evaluating the
claims. Although the Company believes it has meritorious defenses to
plaintiffs' claims, there can be no assurance that the claims will be resolved
on a basis which is satisfactory to the Company.
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. Although
the Company believes that adequate reserves have been established for any
additional liability, there can be no assurance that the appeal will be
resolved on a basis which is satisfactory to the Company.
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.
26
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.
27
PART II
ITEM 5
MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
COMMON STOCK AND SHAREHOLDER OWNERSHIP
The common stock of Allmerica Financial Corporation is traded on the New
York Stock Exchange under the symbol "AFC". On March 13, 1998, the Company had
62,233 shareholders of record and 60.0 million shares outstanding. On the same
date, the trading price of the Company's common stock was $63 3/4 per share.
COMMON STOCK PRICES AND DIVIDENDS
HIGH LOW DIVIDENDS
---- ---- ---------
1997
First Quarter....................................... $40 1/4 $32 5/8 $0.05
Second Quarter...................................... $40 3/8 $33 1/2 $0.05
Third Quarter....................................... $45 1/4 $39 1/4 $0.05
Fourth Quarter...................................... $ 51 $42 7/8 $0.05
1996
First Quarter....................................... $ 28 $24 3/4 $0.05
Second Quarter...................................... $30 1/8 $25 1/4 $0.05
Third Quarter....................................... $32 7/8 $27 1/2 $0.05
Fourth Quarter...................................... $33 3/4 $30 1/8 $0.05
1998 DIVIDEND SCHEDULE
Allmerica Financial Corporation declared a cash dividend of $0.05 per share
on December 16, 1997, which was paid on February 16, 1998. The record date for
such dividend was February 2, 1998.
Dividends paid by the Company may be funded from dividends paid to the
Company from its subsidiaries. Dividends from insurance subsidiaries are
subject to restrictions imposed by state insurance laws and regulations.
Reference is made to "Liquidity and Capital Resources" on pages 42-43 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 1997 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 25 of the 1997 Annual Report to Shareholders, which is
incorporated herein by reference.
28
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 26-45 of the 1997 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 47-50
and the accompanying Notes to Consolidated Financial Statements on pages 51-75
of the 1997 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 75), which is incorporated herein by reference.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
29
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
Information regarding Directors of the Company is incorporated herein by
reference from the Proxy Statement for the Annual Meeting of Shareholders to
be held May 12, 1998, to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is biographical information concerning the executive
officers of the Company.
JOHN F. O'BRIEN, 54
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 and Director of
FAFLIC since October 1984 and April 1996, respectively. In addition, Mr.
Anderson is a director and/or executive officer at various other non-public
affiliates.
RICHARD J. BAKER, 66
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 Secretary of FAFLIC from 1973 to April 1996, Vice President
and Assistant Secretary since April 1996, 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.
ROBERT E. BRUCE, 47
Vice President of the Company since July 1997
Mr. Bruce has been Vice President of AFC and Citizens since July 1997 and
Vice President and Director of Citizens and Hanover since August 1997. In
addition, Mr. Bruce has served as Vice President and Director of FAFLIC since
May 1995 and August 1997, respectively, and Chief Information Officer of
FAFLIC since February 1997. Mr. Bruce is also a director and/or executive
officer at various other non-public affiliates. Prior to joining FAFLIC in May
1995, Mr. Bruce was Corporate Manager at Digital Equipment Corporation, a
computer manufacturer, from May 1979 to March 1995.
JOHN P. KAVANAUGH, 43
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
30
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.
JOHN F. KELLY, 59
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 and Director of FAFLIC since April 1996. 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, 50
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 Director
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.
In addition, Mr. May is a director and/or executive officer at various other
non-public affiliates.
JAMES R. MCAULIFFE, 53
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, 38
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.
RICHARD M. REILLY, 59
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
31
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. 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.
ERIC A. SIMONSEN, 52
Vice President of the Company since February 1995
Mr. Simonsen has been Vice President of AFC since February 1995. He has been
a Vice President of APY since August 1992, of Citizens since December 1992 and
of AFLIAC since September 1990. He also served as a director of APY from
August of 1992 to July 1997. In addition, 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 Services Corporation 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.
PHILLIP E. SOULE, 48
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.
ITEM 11
EXECUTIVE COMPENSATION
Incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 12, 1998, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 12, 1998, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 12, 1998, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
32
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 47 through 75 of the 1997 Annual Report to Shareholders have been
incorporated herein by reference in their entirety.
ANNUAL
REPORT
PAGE(S)
-------
Report of Independent Accountants.................................. 46
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995............................................... 47
Consolidated Balance Sheets as of December 31, 1997 and 1996....... 48
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995.................................. 49
Consolidated Statements of Cash Flows for the years ended December
31, 1997,
1996 and 1995..................................................... 50
Notes to Consolidated Financial Statements......................... 51-75
(A)(2) FINANCIAL STATEMENT SCHEDULES
PAGE NO. IN
SCHEDULE THIS REPORT
-------- -----------
Report of Independent Accountants on Financial
Statement Schedules.................................... 39
Summary of Investments--Other than Investments in
I Related Parties........................................ 40
II Condensed Financial Information of Registrant.......... 41-43
III Supplementary Insurance Information.................... 44-46
IV Reinsurance............................................ 47
V Valuation and Qualifying Accounts...................... 48
Supplemental Information concerning Property/Casualty
VI Insurance Operations................................... 49
(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.+++++
4.5 Series A Capital Securities Guarantee Agreement dated February 3,
1997.+++++
4.6 Common Securities Guarantee Agreement dated February 3, 1997.+++++
33
4.7 Registration Rights Agreement dated February 3, 1997.+++++
4.8 Rights Agreement dated as of December 16, 1997, between the Registrant
and First Chicago Trust Company of New York as Rights Agent, filed as
Exhibit 1 to the Company's Form 8-A dated December 17, 1997 is
incorporated herein by reference.
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 Amended and Restated Form of Non-Solicitation Agreement executed by
substantially all of the executive officers of AFC incorporated by
reference to Exhibit 10.21 to the Allmerica Financial Corporation June
30, 1997 report on Form 10-Q and incorporated herein by reference.
34
10.22 Credit agreement dated as of June 17, 1997 between the Registrant and
the Chase Manhattan Bank incorporated by reference to Exhibit 10.22 to
the Allmerica Financial Corporation June 30, 1997 report on Form 10-Q
and incorporated herein by reference.
10.23 Amended Allmerica Financial Corporation Long-Term Stock Incentive Plan.
10.24 The Allmerica Financial Corporation Director Stock Ownership Plan
incorporated by reference to Exhibit 10.21 to the Allmerica Financial
Corporation June 30, 1996 report on Form 10-Q and incorporated herein by
reference.
10.25 Reinsurance Agreement dated September 29, 1997 between First Allmerica
Financial Life Insurance Company and Metropolitan Life Insurance
Company.
10.26 Consolidated Service Agreement between Allmerica Financial Corporation
and its subsidiaries, dated January 1, 1998.
10.27 Deferral Agreement, dated April 4, 1997, between Allmerica Financial
Corporation and John F. O'Brien.
10.28 Severance Agreement, dated September 25, 1997, between First Allmerica
Financial Life Insurance Company and Larry C. Renfro.
11 Statement regarding computation of per share earnings.
13 The following sections of the Annual Report to Shareholders for 1997
("1997 Annual Report") which are expressly incorporated by reference
into this Annual Report on Form 10-K:
. Management's Discussion and Analysis of Financial Condition and
Results of Operations at pages 26 through 45 of the 1997 Annual
Report.
. Consolidated Financial Statements and Notes thereto at pages 47
through 75 of the 1997 Annual Report.
. Independent Auditors' Report at page 46 of the 1997 Annual Report.
. The information appearing under the caption "Five Year Summary of
Selected Financial Highlights" at page 25 of the 1997 Annual Report.
. The information appearing under the caption "Shareholder Information"
at page 77 of the 1997 Annual Report.
21 Subsidiaries of AFC.
23 Consent of Price Waterhouse LLP.
24 Power of Attorney.
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.
++++++ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's 1996 Annual Report on Form 10-K
originally filed with the Commission on March 24, 1997.
35
(B) REPORTS ON FORM 8-K
On December 17, 1997, the Registrant filed a report on Form 8-K relating to
the declaration by its Board of Directors of one purchase right for every
outstanding share of its common stock, $.01 par value (the "Rights"). The
Rights were distributed to stockholders of record as of the close of business
on December 29, 1997. The terms of the Rights are set forth in a Rights
Agreement dated as of December 16, 1997 (the "Rights Agreement") between the
Registrant and First Chicago Trust Company of New York. The Rights Agreement
also provides for the issuance of one Right for every share of Common Stock
which is issued or sold after that date.
36
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, 1998 /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, 1998
/s/ John F. O'Brien
By: _________________________________
JOHN F. O'BRIEN,
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
Date: March 18, 1998
/s/ Edward J. Parry, III
By: _________________________________
EDWARD J. PARRY III,
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER, TREASURER AND PRINCIPAL
ACCOUNTING OFFICER
Date: March 18, 1998
*
By: _________________________________
MICHAEL P. ANGELINI,
DIRECTOR
Date: March 18, 1998
*
By: _________________________________
GAIL L. HARRISON,
DIRECTOR
Date: March 18, 1998
*
By: _________________________________
ROBERT P. HENDERSON,
DIRECTOR
Date: March 18, 1998
*
By: _________________________________
M HOWARD JACOBSON,
DIRECTOR
37
Date: March 18, 1998
By: _________________________________
J. TERRENCE MURRAY,
DIRECTOR
Date: March 18, 1998
*
By: _________________________________
ROBERT J. MURRAY,
DIRECTOR
Date: March 18, 1998
*
By: _________________________________
JOHN L. SPRAGUE,
DIRECTOR
Date: March 18, 1998
*
By: _________________________________
ROBERT G. STACHLER,
DIRECTOR
Date: March 18, 1998
*
By: _________________________________
HERBERT M. VARNUM,
DIRECTOR
Date: March 18, 1998
*
By: _________________________________
RICHARD M. WALL,
DIRECTOR
/s/ John F. O'Brien
*By: ________________________________
JOHN F. O'BRIEN,
ATTORNEY-IN-FACT
38
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, 1998, appearing in the Allmerica Financial Corporation 1997
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.
/s/ Price Waterhouse LLP
_____________________________________
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1998
39
SCHEDULE I
ALLMERICA FINANCIAL CORPORATION
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
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 ................ $ 293.5 $ 302.8 $ 302.8
States, municipalities and political
subdivisions ............................ 2,200.6 2,275.8 2,275.8
Foreign governments ...................... 111.6 118.0 118.0
Public utilities ......................... 384.9 397.4 397.4
All other corporate bonds ................ 3,802.3 3,949.5 3,949.5
Redeemable preferred stocks ................ 260.0 270.2 270.2
--------- ------- ---------
Total fixed maturities ................... 7,052.9 7,313.7 7,313.7
--------- ------- ---------
Equity securities:
Common stocks:
Public utilities ......................... 4.3 4.6 4.6
Banks, trust and insurance companies ..... 35.9 62.5 62.5
Industrial, miscellaneous and all other .. 281.3 395.1 395.1
Nonredeemable preferred stocks ............. 19.6 16.8 16.8
--------- ------- ---------
Total equity securities .................. 341.1 479.0 479.0
--------- ------- ---------
Mortgage loans on real estate ................ 567.5 XXXXXX 567.5
Real estate (2) .............................. 50.3 XXXXXX 50.3
Policy loans ................................. 141.9 XXXXXX 141.9
Other long-term investments .................. 148.3 XXXXXX 148.3
--------- ---------
Total investments ........................ $ 8,302.0 XXXXXX $ 8,700.7
========= =========
- --------
(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 $35.8 million of real estate acquired through foreclosure.
40
SCHEDULE II
ALLMERICA FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
------ ------ ------
(IN MILLIONS)
Revenues
Net investment income............................... $ 11.4 $ 2.7 $ 0.4
Net realized investment losses...................... (0.2) (0.9) --
------ ------ ------
Total revenues.................................... 11.2 1.8 0.4
------ ------ ------
Expenses
Interest expense.................................... 41.1 15.3 3.2
Operating expenses.................................. 5.0 3.3 0.3
------ ------ ------
Total expenses.................................... 46.1 18.6 3.5
------ ------ ------
Net income before federal income taxes and equity in
net income of unconsolidated subsidiaries............ (34.9) (16.8) (3.1)
Income tax benefit:
Federal............................................. 11.8 5.9 --
State............................................... 0.5 -- --
Equity in net income of unconsolidated subsidiaries
prior to demutualization............................. -- -- 93.2
Equity in net income of unconsolidated subsidiaries
subsequent to demutualization........................ 231.8 192.8 43.8
------ ------ ------
Net income............................................ $209.2 $181.9 $133.9
====== ====== ======
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.
41
SCHEDULE II
(CONTINUED)
ALLMERICA FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
BALANCE SHEETS
DECEMBER 31,
---------------------------
1997 1996
------------- -------------
(IN MILLIONS, EXCEPT SHARE
AND PER SHARE DATA)
ASSETS
Fixed maturities-at fair value (amortized cost of
$3.4)........................................... $ 3.5 $ 26.2
Equity securities-at fair value.................. -- 0.6
Cash............................................. 0.9 2.5
Investment in unconsolidated subsidiaries........ 2,898.7 1,896.3
Accrued investment income........................ 0.1 0.4
Other assets..................................... 4.7 5.1
------------- -------------
Total assets................................... $2,907.9 $1,931.1
============= =============
LIABILITIES
Expenses and taxes payable....................... $ 2.0 $ 1.1
Deferred income taxes............................ -- --
Dividends payable................................ 3.0 2.5
Interest payable................................. 12.8 3.3
Long-term debt................................... 508.8 199.5
------------- -------------
Total liabilities.............................. 526.6 206.4
------------- -------------
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, 60.0 million and 50.1
million shares issued and outstanding at Decem-
ber 31, 1997 and December 31, 1996, respective-
ly.............................................. 0.6 0.5
Additional paid-in capital....................... 1,755.1 1,382.5
Unrealized appreciation on investments, net...... 217.3 131.6
Retained earnings................................ 408.3 210.1
------------- -------------
Total shareholders' equity..................... 2,381.3 1,724.7
------------- -------------
Total liabilities and shareholders' equity..... $2,907.9 $1,931.1
============= =============
The condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto.
42
SCHEDULE II (CONTINUED)
ALLMERICA FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
------- ------- -------
(IN MILLIONS)
Cash flows from operating activities
Net income, including net income prior to
demutualization................................... $ 209.2 $ 181.9 $ 133.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries.... (231.8) (192.8) (137.0)
Net realized investment losses.................... 0.2 0.9 --
Change in accrued investment income............... 0.3 (0.2) (0.2)
Change in expenses and taxes payable.............. 0.9 0.9 0.2
Change in dividends payable....................... 0.5 -- 2.5
Change in debt interest payable................... 9.5 0.1 3.2
Other, net........................................ (0.6) (3.6) (2.5)
------- ------- -------
Net cash (used in) provided by operating activi-
ties............................................... (11.8) (12.8) 0.1
------- ------- -------
Cash flows from investing activities
Capital contributed to unconsolidated subsidiar-
ies............................................... (79.9) -- (392.4)
Proceeds from disposals and maturities of
available-for-sale fixed maturities............... 98.7 32.7 --
Purchase of available-for-sale fixed maturities.... (74.9) (59.6) --
Purchase of minority interest in Allmerica P&C..... (425.6) -- --
Proceeds from sale of common stock of subsidiary... 195.0 -- --
Purchase of equity securities...................... -- (0.7) --
------- ------- -------
Net cash used in investing activities............... (286.7) (27.6) (392.4)
------- ------- -------
Cash flow from financing activities
Increase in long-term debt......................... 9.3 -- --
Net proceeds from issuance of common stock......... 2.8 -- 248.0
Proceeds from the issuance of mandatorily
redeemable preferred securities of a subsidiary
trust holding solely junior subordinated
debentures of the Company......................... 296.3 -- --
Net proceeds from issuance of debt securities...... -- -- 197.2
Dividends paid to shareholders..................... (11.5) (10.0) --
------- ------- -------
Net cash provided by (used in) financing activi-
ties............................................... 296.9 (10.0) 445.2
------- ------- -------
Net change in cash and cash equivalents............. (1.6) (50.4) 52.9
Cash and cash equivalents at beginning of the peri-
od................................................. 2.5 52.9 --
------- ------- -------
Cash and cash equivalents at end of the period...... $ 0.9 $ 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.
43
SCHEDULE III
ALLMERICA FINANCIAL CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 1997
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.... $167.2 $2,615.4 $838.3 $ 10.8 $1,953.1 $255.7 $1,445.5 $413.2 $210.2 $1,991.8
Corporate Risk
Management
Services........ 2.9 331.4 6.3 9.2 333.0 22.7 238.9 3.3 134.8 --
RETIREMENT AND
ASSET
ACCUMULATION
Allmerica Finan-
cial Services... 788.0 2,193.8 2.2 104.8 24.0 183.5 195.2 5.7 182.3 --
Institutional
Services........ 7.4 283.1 -- 1,727.9 1.0 180.9 125.1 2.9 53.0 --
Allmerica Asset
Management...... -- -- -- -- -- 0.2 -- -- 7.3 --
Corporate........ -- -- -- -- -- 11.5 -- -- 22.6 --
Eliminations..... -- -- -- -- -- (1.1) -- -- (9.9) --
------ -------- ------ -------- -------- ------ -------- ------ ------ --------
Total........... $965.5 $5,423.7 $846.8 $1,852.7 $2,311.1 $653.4 $2,004.7 $425.1 $600.3 $1,991.8
====== ======== ====== ======== ======== ====== ======== ====== ====== ========
44
SCHEDULE III (CONTINUED)
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 $409.2 $206.3 $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
ACCUMULATION
Allmerica Finan-
cial 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 $470.1 $518.8 $1,914.4
====== ======== ====== ======== ======== ====== ======== ====== ====== ========
45
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 $409.7 $192.7 $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
ACCUMULATION
Allmerica Finan-
cial 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 $470.9 $471.8 $1,885.3
====== ======== ====== ======== ======== ====== ======== ====== ====== ========
46
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)
1997
Life insurance in force $44,902.9 $7,237.1 $308.9 $37,974.7 0.81%
========= ======== ====== ========= =====
Premiums:
Life insurance............ $ 70.0 $ 15.6 $ 8.7 $ 63.1 13.79%
Accident and health insur-
ance..................... 347.4 154.5 102.0 294.9 34.59%
Property and casualty in-
surance.................. 2,046.2 195.1 102.0 1,953.1 5.22%
--------- -------- ------ ---------
Total premiums.............. $2,463.6 $ 365.2 $212.7 $ 2,311.1 9.20%
========= ======== ====== ========= =====
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 9.87%
Accident and health insur-
ance..................... 317.1 120.8 81.9 278.2 29.44%
Property and casualty in-
surance.................. 2,018.5 232.6 112.4 1,898.3 5.92%
--------- -------- ------ ---------
Total premiums.............. $ 2,407.6 $ 371.5 $200.2 $ 2,236.3 8.95%
========= ======== ====== ========= =====
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 insur-
ance..................... 307.5 116.5 69.2 260.2 26.59%
Property and casualty in-
surance.................. 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%
========= ======== ====== ========= =====
47
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)
1997
Mortgage loans.......... $19.6 $ 2.5 $-- $ 1.4 $20.7
Real estate............. 14.9 6.0 -- 20.9 --
Allowance for doubtful
accounts............... 4.5 5.7 -- 4.1 6.1
----- ----- ---- ----- -----
$39.0 $14.2 $-- $26.4 $26.8
===== ===== ==== ===== =====
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
===== ===== ==== ===== =====
48
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
1997................... $167.2 $2,615.4 $-- $838.3 $1,953.1 $255.7
====== ======== ==== ====== ======== ======
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
====== ======== ==== ====== ======== ======
LOSSES AND LOSS
ADJUSTMENT EXPENSES
------------------------
AMORTIZATION
OF DEFERRED PAID LOSSES
POLICY AND LOSS
ACQUISITION ADJUSTMENT NET PREMIUMS
CURRENT YEAR PRIOR YEARS EXPENSES EXPENSES WRITTEN
------------ ----------- ------------ ----------- ------------
1997......... $1,564.1 $(127.9) $413.2 $1,507.2 $1,991.8
======== ======= ====== ======== ========
1996......... $1,513.3 $(141.4) $409.2 $1,387.2 $1,914.4
======== ======= ====== ======== ========
1995......... $1,427.3 $(137.6) $409.7 $1,266.5 $1,885.3
======== ======= ====== ======== ========
- --------
(1) The Company does not employ any discounting techniques.
(2) Reserves for losses and loss adjustment expenses are shown gross of $576.7
million, $626.9 million and $763.5 million of reinsurance recoverable on
unpaid losses in 1997, 1996 and 1995, respectively. Unearned premiums are
shown gross of prepaid premiums of $30.0 million, $45.5 million and $43.8
million in 1997, 1996 and 1995, respectively.
49
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AFC9610K