Second Quarter Results
WORCESTER, Mass., July 31, 1997 - Allmerica Financial Corporation (NYSE: AFC) today reported second quarter net operating income of $39.7 million, or $0.79 per share, up 20 percent from $33.1 million, or $0.66 per share reported in the second quarter of 1996. Through six months 1997, net operating income was $72.9 million, or $1.45 per share, compared to $58.6 million, or $1.17 per share in 1996. Net operating income excludes net realized investment gains and losses and other non-recurring gains and charges, net of taxes and minority interest.
Continued strong sales of variable products in the Retirement and Asset Management segment and higher net investment income in the Risk Management segment were key factors contributing to earnings growth. Retirement and Asset Management pre-tax second quarter results were $34.6 million, up $6.4 million from the prior year quarter, while Risk Management pre-tax results were up $8.6 million, to $46.9 million.
Results for the second quarter are based on Allmerica Financial's prior 59.5 percent interest in Allmerica Property & Casualty Companies, Inc. On July 16, 1997, Allmerica Financial merged with Allmerica P&C in a transaction valued at approximately $814 million. Future Allmerica Financial results will include 100 percent of Allmerica P&C earnings as of July16.
"I am pleased with the solid performance across major drive lines of our organization," said John F. O'Brien, president and chief executive officer of Allmerica Financial. "As we continue to broaden distribution and leverage resources, we are further enhancing shareholder value."
Net income for the second quarter of 1997 was $37.7 million, or $0.75 per share, which included after-tax net realized investment losses of $1.0 million, net of minority interest, and a $1.0 million restructuring charge, net of tax and minority interest. Net income during the second quarter of 1996 was $42.6 million, or $0.85 per share, and included after-tax realized investment gains of $1.5 million, net of minority interest, a $2.1 million contingency payment received in connection with the sale of a mutual fund servicing business, net of tax, and a $5.9 million differential earnings tax benefit.
Net income for the first six months of 1997 was $53.6 million, or $1.07 per share, and included after-tax net realized investment gains of $16.7 million, net of minority interest, a $1.0 million restructuring charge, net of tax and minority interest, and a $35.0 million charge, net of tax, related to the agreement to transfer the company's individual disability income block to another insurer. Net income at mid-year 1996 was $89.9 million, or $1.79 per share, and included $22.3 million of after-tax realized investment gains, net of minority interest, a $3.1 million, net of tax, receipt related to the 1995 sale of a mutual fund servicing business, and the $5.9 million differential earnings tax benefit.
Segment Results
Allmerica Financial operates in two primary businesses: Retirement and Asset Management, and Risk Management. Retirement and Asset Management markets insurance and retirement savings products and services to individual and institutional clients. Risk Management markets employee benefit management solutions, as well as property and casualty insurance products marketed on a regional basis through The Hanover Insurance Company and its 82.5 percent interest in Citizens Corporation (NYSE: CZC).
In the segment reviews that follow, results are reported on a pre-tax basis before minority interest in Allmerica P&C and Citizens.
Risk Management
Second quarter operating earnings for the Risk Management segment were $46.9 million in 1997, compared to $38.3 million in the second quarter of 1996. Through mid-year, Risk Management earnings were $82.5 million in1997, compared to $64.5 million in1996.
Property and casualty earnings in the second quarter were $42.2 million, up from $35.1 million in the prior year. Results benefited from increased net investment income and lower catastrophe losses, partially offset by higher claims expense in the personal automobile line and decreased prior year favorable development at Hanover. Six month property and casualty earnings were $76.1 million and $57.1 million in 1997 and 1996, respectively.
The combined ratio for the regional property and casualty operations was 104.5 in the second quarter of 1997, compared to 105.4 in the second quarter of 1996. The expense ratio improved to 29.6 in the period, versus 32.0 in the 1996 second quarter, primarily as a result of lower commission expenses.
In July, Hanover reached an agreement with Travelers Property Casualty to facilitate Travelers' writing of Hanover insurance policies, as they expire, in the states of Alabama, California, Kansas, Mississippi, Missouri, and Texas. These states in total generated about $90 million in premium. This agreement is consistent with Hanover's strategy to increase operating efficiency by de-emphasizing its presence in markets in which premium volume did not justify associated expense levels. The plan is subject to the appropriate regulatory approval in each state.
Also in July, Citizens reported that in the third quarter it has incurred an estimated $10 million charge in pre-tax catastrophe losses, net of reinsurance, sustained as a result of tornados that struck Michigan during the first week of July.
Corporate Risk Management Services' earnings were $4.7 million in the quarter, compared to $3.2 million in the second quarter of 1996. The increase is primarily due to higher sales of dental products and administrative service contracts. Through six months, Corporate Risk Management Services' earnings were $6.4 million in 1997, compared to $7.4 million in 1996.
Retirement and Asset Management
Second quarter earnings for the Retirement and Asset Management business were up 23 percent, to $34.6 million. Retirement and Asset Management earnings for the first six months were $64.0 million and $48.7 million in 1997 and 1996, respectively.
Retail Financial Services' earnings increased to $23.9 million for the quarter, from $20.3 million in the second quarter of 1996, reflecting continued strong growth in variable product sales. Six months' retail earnings were $45.9 million in1997, compared to $34.5 million in 1996.
Retail variable product fees increased 40 percent, to $33.5 million for the second quarter of 1997. Fee increases are related to variable product asset growth resulting from both strong sales and stock market appreciation. Variable product assets increased 32 percent to $6.3 billion at June 30 from year end 1996. Retail variable annuity deposits increased 76 percent to $587 million, from $334 million in the second quarter of 1996, primarily as a result of broadened distribution. Variable annuity deposits for the first half of 1997 were $1.1 billion, up from $607 million in 1996. Retail variable life insurance deposits in the quarter were $34.2 million, compared to $26.2 million a year ago. At mid-year, variable life insurance deposits grew to $71.5 million in 1997, versus $53.8 million in 1996.
Institutional Services earnings for the second quarter of 1997 were $10.2 million, compared to $7.7 million for the same period last year. This increase reflects increased telemarketing revenue and higher guaranteed investment contract (GIC) margins. Institutional earnings for the first half of 1997 were $17.5 million, up from $13.7 million in the same1996 period.
Corporate
Corporate segment net expenses were $6.3 million for the quarter, compared to $4.0 million in the same period last year. The charge in both periods primarily reflects interest on long-term debt, and in the current period included dividends on preferred securities issued in February 1997. The 1997 quarter also included $4.8 million of net investment income on the proceeds from the preferred securities. For the first six months of 1997, the corporate segment reported net expenses of $12.0 million, compared to net expenses of $8.0 million in 1996.
Investment Results
Net investment income was $183.8 million for the second quarter of 1997, including $13.2 million from the closed block. Second quarter 1996 net investment income was $179.8 million, including $13.0 million from the closed block. Net investment income for the first six months of 1997 was $360.7 million, including $26.7 million from the closed block. Six month 1996 net investment income was $354.0 million, including $26.1 million from the closed block.
The increase in investment income reflects income on proceeds from preferred securities, income from investment partnerships, and a portfolio shift during 1996 and 1997 from equities to higher-yielding fixed income securities in the property and casualty segment. The continued runoff of GIC deposits resulted in a $4.5 million decrease in investment income in that line.
Second quarter net realized investment losses, after taxes and minority interest, were $1.0 million, compared to net realized investment gains of $1.5 million in the second quarter of 1996. Six month net realized investment gains were $16.7 million and $22.3 million in 1997 and 1996, respectively. Realized gains in 1997 related primarily to the sale of equities in the property and casualty segment and the sale of real estate properties.
Balance Sheet
Shareholders' equity was $1.78 billion at June 30, 1997, or $35.47 per share, compared to $1.72 billion, or $34.40 per share, at year-end 1996. Excluding the impact of SFAS No. 115, book value was $32.66 per share at the end of the second quarter, compared to $31.78 per share at December 31, 1996.
Total assets were $21.0 billion at June 30, 1997, up from $19.0 billion at December 31, 1996. Separate account assets increased to $8.0 billion at June 30, 1997, from $6.2 billion at December 31, 1996.
Other
As a result of the merger on July16, in which Allmerica Financial acquired 24.2 million shares of Allmerica P&C for approximately $426 million in cash and 9.7 million shares of Allmerica Financial common stock, Allmerica P&C stock is no longer traded on the New York Stock Exchange. However, on a stand-alone basis for the second quarter of 1997, Allmerica P&C reported operating earnings of $32.7 million, or $0.55 per share, compared to $27.3 million, or $0.46 per share in the same 1996 quarter. Allmerica P&C's six month operating earnings were $62.2 million, or $1.04 per share in 1997, up from $49.1 million, or $0.82 per share in 1996.
Interim information is unaudited.
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* Results in the second quarter of 1997 include $1.0 million of after-tax net realized investment losses, net of minority interest, and a $1.0 million restructuring charge, net of tax and minority interest. Second quarter 1996 earnings included $1.5 million in net realized investment gains, net of taxes and minority interest, a $2.1 million payment received in connection with the sale of a mutual fund servicing business, net of tax, and a differential earnings tax benefit of $5.9 million.
Six month 1997 results included $16.7 million of after-tax net realized investment gains, net of minority interest, a $1.0 million restructuring charge, net of tax and minority interest, and a $35.0 million charge related to the agreement to transfer the company's individual disability income block, net of tax. Six month 1996 results included $22.3 million of after-tax realized investment gains, net of minority interest, a $3.1 million receipt related to the 1995 sale of a mutual fund servicing business, net of tax, and the $5.9 million differential earnings tax benefit.
The impact of these items is demonstrated below in the reconciliation from net operating income to net income per share:
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All figures reported are unaudited and are in accordance with generally accepted accounting principles.
Corporate Information
Common Stock
Common stock of Allmerica Financial is traded on the New York Stock Exchange under the symbol "AFC".
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| First Allmerica Financial Life Insurance Company (a) | ||||
| Allmerica Financial Life Insuarance and Annuity Company (b) | ||||
| The Hanover Insurance Company | ||||
| Citizens Insurance Company of America |
(a)Formerly State Mutual Life Assurance Company of America
(b)Formerly SMA Life Assurance Company
| Allmerica Financial Corporation |
The Hanover Insurance Group, Inc. is the holding company for a group of insurance companies headquartered in Worcester, Massachusetts.
Contact Information
| Investors: Sujata Mutalik E-mail: smutalik@hanover.com 1-508-855-3457 |
Media: Michael F. Buckley E-mail: mibuckley@hanover.com 1-508-855-3099 |