ITEM 2
PROPERTIES
The Company's headquarters are located at 440 Lincoln Street, Worcester, Massachusetts and consist primarily of approximately 727,000 square feet of office and conference space owned in fee and include the headquarters of Hanover.
Citizens Insurance owns its home office, located at 645 W. Grand River, Howell, Michigan, which is approximately 119,000 square feet. Citizens also owns a three-building complex located at 808 North Highlander Way, Howell, Michigan, with 155,000 square feet, where various business operations are conducted.
The Company leases office space for its sales force throughout the United States. The leased property houses agency offices and group insurance sales offices. Hanover also leases offices throughout the country for its field employees.
The Company believes that its facilities are adequate for its present needs in all material respects.
ITEM 3
ITEM 3
LEGAL PROCEEDINGS
Reference is made to Note 20 on page 75 of the Notes to Consolidated Financial Statements of the 1996 Annual Report to Shareholders, the applicable portions of which are incorporated herein by reference.
MAINE WORKERS COMPENSATION RESIDUAL MARKET POOL
On June 23, 1995, the governor of Maine approved a legislative settlement for the Maine Workers' Compensation Residual Market Pool deficit for the Years 1988 through 1992. The settlement provides for an initial funding of $220.0 million toward the deficit. The insurance carriers were liable for $65.0 million and employers would contribute $110.0 million payable through surcharges on premiums over the course of the next ten years. The major insurers are responsible for 90% of the $65.0 million. Hanover's allocated share of the settlement is approximately $4.2 million, which was paid in December 1995. The remainder of the deficit of $45.0 million will be paid by the Maine Guaranty Fund, payable in quarterly contributions over ten years. A group of smaller carriers filed litigation to appeal the settlement. The Company believes that adequate reserves have been established for any additional liability.
ALLMERICA P&C AND AFC MERGER
Shortly after AFC publicly disclosed its proposal regarding the Merger, three separate stockholders of Allmerica P&C, Leslie Susser, Harbor Finance Partners and William A. Kass, IRA-Simplified Employee Pension, filed lawsuits in the Delaware Chancery Court against AFC, Allmerica P&C and the directors of Allmerica P&C and the directors of AFC who are also on the board of directors of Allmerica P&C (the "Delaware Actions"). An additional lawsuit challenging the Merger was filed by another stockholder of Allmerica P&C, Daniel Bruno, in the Worcester County (Massachusetts) Superior Court (the "Massachusetts Action" and , together with the Delaware Actions, the "Actions"). The named plaintiff in each of the Actions purports to maintain each individual action as a class action on behalf of the public stockholders of Allmerica P&C (excluding AFC, Allmerica P&C and the other defendants and any person, firm, trust, corporation or any other entity related to or affiliated with any of the defendants) (the "Public Stockholders"). In each of the Actions, the plaintiff alleged that under the terms of the proposed Merger AFC would acquire the Allmerica P&C Common Stock at a price that is substantially below the fair price of such stock and that certain officers and/or directors of AFC and/or Allmerica P&C breached fiduciary duties owed to Allmerica P&C and the Public Stockholders in connection with the proposed Merger. The plaintiffs sought injunctive relief prohibiting AFC from completing the Merger or, in the alternative, compensatory damages. On February 19, 1997, the parties to the Delaware Actions executed a Memorandum of Understanding (the "MOU") memorializing an agreement-in-principle to settle the Delaware Actions. Under the terms of the MOU, the parties to the Delaware Action have agreed to use their best efforts to execute and present to the Delaware Chancery Court on or before April 30, 1997, a formal Stipulation of Settlement. In the event that the Delaware Chancery Court approves the proposed settlement, it is anticipated that the Delaware Actions will be dismissed with prejudice as to the individual plaintiffs and the class of Public Stockholders. In connection with the MOU, AFC and Allmerica P&C have agreed that they will not oppose an application to the court by plaintiffs' counsel for an aggregate award of attorneys' fees and expenses in an amount not to exceed $995,000.00.
SALES PRACTICES
A number of civil jury verdicts have been returned against life and health insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Some of the lawsuits have resulted in the award of substantial judgments against the insurer, including material amounts of punitive damages. In some states, juries have substantial discretion in awarding punitive damages in these circumstances. The Company and its subsidiaries, like other life and health insurers, from time to time are involved in such litigation. Although the outcome of any litigation cannot be predicted with certainty, to date, no such lawsuit has resulted in the award of any material amount of damages against the Company.
In December 1996, the Company received notice from the Securities and Exchange Commission (the "Commission") that it would be conducting a limited inspection concerning the Company's marketing and sales practices associated with variable insurance products. The Commission requested that certain information be provided to it by the Company, which the Company promptly complied with. No litigation has been instituted, nor has the Commission initiated any further action with respect to this matter.
OTHER
The Company has been named a defendant in various other legal proceedings arising in the normal course of business. In the opinion of management, based on the advice of legal counsel, the ultimate resolution of these proceedings will not have a material effect on the Company's consolidated financial statements.
ITEM 4
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.
PART II
ITEM 5
ITEM 5
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Reference is made to the "Shareholder Information" on page 78 of the 1996 Annual Report to Shareholders, the applicable portions of which are incorporated herein by reference, which displays (i) the principal market for the common stock of AFC, (ii) the frequency and amount of dividends paid thereon during such period, and (iii) the approximate number of holders of common shares as of February 28, 1997.
Dividends by the Company are funded from dividends paid to the Company from FAFLIC, which are subject to restrictions imposed by state insurance laws and regulations with respect to dividends paid to the Company. Reference is made to "Liquidity and Capital Resources" on pages 48-49 of Management's Discussion and Analysis of Financial Condition and Results of Operations and to Note 13 on page 70 of the Notes to Consolidated Financial Statements of the 1996 Annual Report to Shareholders, the applicable portions of which are incorporated herein by reference.
The payment of future dividends, if any, on the Company's Common Stock will be a business decision made by the Board of Directors from time to time based upon the results of operations and financial condition of the Company and such other factors as the Board of Directors considers relevant.
ITEM 6
ITEM 6
SELECTED FINANCIAL DATA
Reference is made to the "Five Year Summary of Selected Financial Highlights" on page 31 of the 1996 Annual Report to Shareholders, which is incorporated herein by reference.
ITEM 7
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 32-49 of the 1996 Annual Report to Shareholders, which is incorporated herein by reference.
ITEM 8
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements on pages 51-54 and the accompanying Notes to Consolidated Financial Statements on pages 55-76 of the 1996 Annual Report to Shareholders which meet the requirements of Regulation S-X, and which include a summary of quarterly results of consolidated operations (see Note 22 of Notes to Consolidated Financial Statements--page 76), which is incorporated herein by reference.
ITEM 9
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
Set forth below is biographical information concerning the directors of the Company.
MICHAEL P. ANGELINI, 54 Director since February 1995 Chairman, Audit Committee
Mr. Angelini has been a Director of AFC since February 1995, of FAFLIC from August 1984 to April 1996, and of Allmerica P&C since August 1992. He served as a Director of Hanover from December 1991 through December 1992. Mr. Angelini is a partner at the law firm of Bowditch & Dewey, with which he has been associated since 1968, and is a Director of Flagship Bank & Trust Company.
DAVID A. BARRETT, 69 Director since February 1995 Audit Committee
Mr. Barrett has been a Director of AFC since February 1995, of FAFLIC from March 1976 to April 1996, of Allmerica P&C since August 1992 and of Hanover from December 1991 to December 1992. Mr. Barrett was executive director of Worcester Memorial Hospital, Inc. from 1968 until January 1983, and served as President and Chief Executive Officer of that organization until October 1988. Mr. Barrett served as President and Chief Executive Officer of Medical Center of Central Mass., Inc. from October 1988 to April 1992, and currently is a consultant to that organization, now known as Memorial Health Care.
GAIL L. HARRISON, 49 Director since February 1995
Ms. Harrison has been a Director of AFC since February 1995, of FAFLIC from March 1986 to April 1996, of Allmerica P&C since August 1992, and of Hanover from December 1991 to December 1992. Since February 1981, Ms. Harrison has been affiliated with The Wexler Group (formerly Wexler, Reynolds, Harrison & Shule, Inc.), a government relations consulting firm.
ROBERT P. HENDERSON, 65 Director since September 1996
Mr. Henderson has been a Director of AFC since September 1996. Mr. Henderson has been the Chairman of Greylock Management Corporation, a venture capital firm, since 1983. Mr. Henderson is also a Director of Cabot Corporation and Filenes Basement, a Trustee of the Museum of Fine Arts in Boston, Massachusetts, and a Member of Corporation of the New England Deaconess Hospital. Mr. Henderson is a former Chairman of the Federal Reserve Bank of Boston.
J. TERRENCE MURRAY, 57 Director since February 1995
Mr. Murray has been a Director of AFC since February 1995 and of FAFLIC from January 1992 to April 1996. Mr. Murray is the Chairman, President and Chief Executive Officer of Fleet Financial Group, Inc., a bank holding company, where he has been employed since July 1962. Mr. Murray is also a Director of A.T. Cross Co., a writing instrument company, and CVS Corporation, a drugstore chain.
ROBERT J. MURRAY, 55 Director since May 1996
Mr. Murray has been a Director of AFC since May 1996. He has been Chairman, President and Chief Executive Officer of New England Business Service, Inc. ("NEBS"), a supplier of business forms, since December 1995 and has served on the Board of Directors of NEBS since 1991. Prior to joining NEBS, Mr. Murray was employed by The Gillette Company, Inc. ("Gillette"), a manufacturing company, beginning in 1961. He served as a Corporate Vice President of Gillette beginning in 1987 and as the Executive Vice President of Gillette's North Atlantic Group from January 1991 to December 1995. Mr. Murray is also a Director of North American Mortgage Company, LoJack Corporation and Fleet National Bank, as well as a Trustee of Boston College.
JOHN F. O'BRIEN, 53 Director, Chief Executive Officer and President of the Company since February
Mr. O'Brien has been a Director, Chief Executive Officer and President of AFC since February 1995. He has also served as a Director, Chief Executive Officer and President of FAFLIC since August 1989. In addition to his positions with AFC and FAFLIC, Mr. O'Brien has served as a Director, President and Chief Executive Officer of Allmerica P&C since August 1992, and has been a Director of Hanover since September 1989, Citizens Insurance since March 1992 and Citizens, for which he also serves as Chief Executive Officer, since December 1992. Mr. O'Brien is also a trustee or director and executive officer of Allmerica Investment Trust, Allmerica Securities Trust, and Allmerica Funds. Additionally, Mr. O'Brien is a director and/or holds offices at various other non-public FAFLIC affiliates including SMA Financial Corp. and AFLIAC. Mr. O'Brien also currently serves as a Director of The TJX Companies, Inc., an off-price family apparel retailer, ABIOMED, Inc., a medical device company, Cabot Corporation, a diversified specialty chemicals and materials and energy company, The Life Insurance Association of Massachusetts, and The American Council of Life Insurance. He also currently serves as a member of the executive committee of the Mass Capital Resource Company, a Massachusetts investment partnership. Prior to joining FAFLIC, Mr. O'Brien served as an officer of FMR Corp., the parent company of various financial services companies in the Fidelity Group and a director and/or an executive officer at various other of FMR Corp.'s affiliates.
JOHN L. SPRAGUE, 66 Director since February 1995 Audit Committee
Mr. Sprague has been a Director of AFC since February 1995 and of FAFLIC from September 1972 to April 1996. Mr. Sprague has been President of John L. Sprague Associates, Inc., a consulting company for technology companies, since January 1988. He served as President and Chief Executive Officer of Sprague Electric Company, a semiconductor company, from December 1980 to January 1988. Mr. Sprague is also a Director of Aerovox Corp., a manufacturing company, Sipex Corporation and California MicroDevices Corporation, an electronic components manufacturer.
ROBERT G. STACHLER, 67 Director since February 1995 Compensation Committee
Mr. Stachler has been a Director of AFC since February 1995, of FAFLIC from March 1978 to April 1996, of Allmerica P&C since August 1992, and of Hanover from April 1990 to December 1992. Mr. Stachler has been a partner at the law firm of Taft, Stettinius & Hollister since 1964.
HERBERT M. VARNUM, 59 Director since February 1995 Compensation Committee
Mr. Varnum has been a Director of AFC since February 1995, of FAFLIC from March 1979 to April 1996, of Allmerica P&C since August 1992, and of Hanover from December 1991 through December 1992. Mr. Varnum was employed by Quabaug Corporation, a manufacturing company, beginning in 1960 and served as President and Chief Executive Officer from 1982 to 1989, and as Chairman and Chief Executive Officer from January 1990 until his retirement in June 1995.
RICHARD M. WALL, 68 Director since February 1995 Compensation Committee
Mr. Wall has been a Director of AFC since February 1995, of FAFLIC from March 1986 to April 1996, of Allmerica P&C since August 1992, and of Hanover from December 1991 through December 1992. Mr. Wall has been General Counsel and assistant to the Chairman and Chief Executive Officer of FLEXcon Company, Inc., a plastics manufacturing company, since November 1985.
EXECUTIVE OFFICERS OF THE REGISTRANT
JOHN F. O'BRIEN, 53 Director, Chief Executive Officer and President of the Company since February
See biography under "Directors of the Registrant" above.
BRUCE C. ANDERSON, 53 Vice President of the Company since February 1995
Mr. Anderson has been Vice President of AFC since February 1995 and Vice President of Allmerica P&C and Citizens since March 1997. Mr. Anderson has been employed by FAFLIC since 1967 and has been Vice President of FAFLIC since October 1984.
RICHARD J. BAKER, 65 Vice President and Secretary of the Company since February 1995
Mr. Baker has been Vice President and Secretary of AFC since February 1995, Vice President and Assistant Secretary of FAFLIC since 1973 and April 1996, respectively, and has been employed by FAFLIC since 1959. He has served as Assistant Secretary of Allmerica P&C since October 1992, Vice President and Secretary of Allmerica P&C since May 1995, and as Vice President and Secretary of Citizens since September 1993 and January 1993, respectively. Mr. Baker has also served as Vice President of AFLIAC since January 1982 and as Director from June 1993 to April 1996. In addition, Mr. Baker is a director and/or executive officer at various other non-public affiliates.
JOHN P. KAVANAUGH, 42 Vice President and Chief Investment Officer of the Company since 1996
Mr. Kavanaugh has been Vice President and Chief Investment Officer of AFC since September 1996, has been employed by FAFLIC since 1983, and has been Vice President of FAFLIC since December 1991 and Vice President of AFLIAC since January 1992. Mr. Kavanaugh has also served as Director and Chief Investment Officer of FAFLIC, Hanover, Citizens Insurance and AFLIAC since August 1996, and Vice President and Chief Investment Officer of Allmerica P&C and Citizens since September 1996. Mr. Kavanaugh is also a director and/or executive officer at various other non-public affiliates.
JOHN F. KELLY, 58 Vice President and General Counsel of the Company since February 1995
Mr. Kelly has been Vice President, General Counsel and Assistant Secretary of AFC since February 1995, has been employed by FAFLIC since July 1968, and has been Senior Vice President and General Counsel of FAFLIC since February 1986. In addition to his positions with AFC and FAFLIC, Mr. Kelly has been Vice President and General Counsel of Allmerica P&C since August 1992, Assistant Secretary of Allmerica P&C since May 1995, Assistant Secretary of Citizens since December 1992, and Vice President, General Counsel and Assistant Secretary of Citizens since September 1993. Mr. Kelly was Secretary of Allmerica P&C from August 1992 to May 1995. Mr. Kelly has been a Director of AFLIAC since October 1982 and is a director and/or executive officer at various other non-public affiliates.
J. BARRY MAY, 49 Vice President of the Company since February 1997
Mr. May has been Vice President of AFC since February 1997, Vice President of Allmerica P&C and President of Hanover since September 1996 and Vice President of Citizens since March 1997. He has been a Director of Hanover and Citizens Insurance since September 1996. Mr. May served as Vice President of Hanover from May 1995 to September 1996, as Regional Vice President from February 1993 to May 1995 and as a General Manager of Hanover from June 1989 to May 1995. Mr. May has been employed by Hanover since 1985.
JAMES R. MCAULIFFE, 52 Vice President of the Company since February 1995
Mr. McAuliffe has been Vice President of AFC from February 1995 through December 1995 and since February 1997, Vice President of Allmerica P&C since August 1992, a Director of Allmerica P&C from August 1992 through December 1994, a Director and Vice President of Citizens since December 1992, and a Director of AFLIAC from April 1987 through May 1995 and since May 1996. Mr. McAuliffe has been President of Citizens Insurance since December 1994. Mr. McAuliffe has been employed by FAFLIC since 1968, and served as Vice President and Chief Investment Officer of FAFLIC from November 1986 through December 1994. Mr. McAuliffe also served as Vice President and Chief Investment Officer of Allmerica P&C from August 1992 through December 1994, and Vice President and Chief Investment Officer of AFLIAC from December 1986 through May 1995. Additionally, Mr. McAuliffe is a director and/or executive officer at various other non-public affiliates.
EDWARD J. PARRY, III, 37 Vice President and Treasurer of the Company since February 1995 Chief Financial Officer of the Company since December 1996
Mr. Parry has been Chief Financial Officer of AFC since December 1996. He has also been Vice President and Treasurer of AFC since February 1995. He has served as Chief Financial Officer of FAFLIC, AFLIAC, Allmerica P&C, Hanover, Citizens and Citizens Insurance since December 1996 and as Vice President and Treasurer of FAFLIC, AFLIAC, Allmerica P&C and Hanover since February 1993 and of Citizens since September 1993 and December 1992, respectively. Mr. Parry is also a director and/or executive officer at various other non-public affiliates. Prior to joining FAFLIC in July 1992, Mr. Parry was employed by the accounting firm of Price Waterhouse from July 1987 through July 1992.
RICHARD M. REILLY, 58 Vice President of the Company since February 1997
Mr. Reilly has been Vice President of AFC and FAFLIC since February 1997 and November 1990, respectively, and Vice President of Allmerica P&C and Citizens since March 1997. He has also been a Director and Vice President of AFLIAC since November 1990 and President and Chief Executive Officer of AFLIAC since August 1995. Mr. Reilly was Vice President of AFC from February 1995 through December 1995.
Additionally, Mr. Reilly has been the President of Allmerica Investment Trust, Allmerica Funds, and Allmerica Securities Trust, each a registered investment company, since February 1991, April 1991 and February 1991, respectively. Mr. Reilly is also a director and/or holds an executive office at various other non-public affiliates. Prior to his affiliation with FAFLIC, he was executive officer of Fidelity Management and Research Company from 1969 to 1987 and Oppenheimer Capital from 1987 to 1990.
LARRY C. RENFRO, 46 Vice President of the Company since February 1997
Mr. Renfro has been a Vice President of AFC and FAFLIC since February 1997 and April 1990, respectively, and Vice President of Allmerica P&C and Citizens since March 1997. He has served as Director, President and Chief Executive Officer of 440 Financial Group of Worcester, Inc. (a former subsidiary of FAFLIC) from May 1990 to March 1995. Mr. Renfro has also served as Vice President of Allmerica P&C from October 1992 through December 1995 and as Vice President of AFC from February 1995 through December 1995. From August 1989 through March 1990, Mr. Renfro was an Executive Vice President at State Street Bank & Trust Company. From March 1988 through July 1989, Mr. Renfro served as President and Chief Executive Officer of Boston Financial Data Services, Incorporated, a subsidiary of State Street Bank & Trust Company. From April 1981 through March 1988, Mr. Renfro held various executive offices at Fidelity Investments, including Managing Director of Fidelity Management & Research Company. Mr. Renfro is currently a Director of LoJack Corporation, a manufacturer of anti-theft systems.
ERIC A. SIMONSEN, 51 Vice President of the Company since February 1995
Mr. Simonsen has been Vice President of AFC since February 1995. He has been a Director and Vice President of APY since August 1992, of Citizens since December 1992 and of AFLIAC since September 1990. He has served as Vice President and as a Director of FAFLIC since September 1990 and April 1996, respectively. Mr. Simonsen has been President of Allmerica Service Company, Inc. since December 1996. Mr. Simonsen was Chief Financial Officer of AFC from February 1995 to December 1996, of FAFLIC and AFLIAC from September 1990 to December 1996, of Allmerica P&C from August 1992 to December 1996 and of Citizens from December 1992 to December 1996. Mr. Simonsen is also a director and/or executive officer at various other non-public affiliates. From April 1987 to September 1990, Mr. Simonsen served as a Principal and Chief Financial Officer of The Lincoln Group, Inc., a privately owned group of manufacturing companies.
PHILLIP E. SOULE, 47 Vice President of the Company since February 1997
Mr. Soule has been Vice President of AFC, Citizens, and FAFLIC since February 1997, March 1997 and February 1987, respectively, and of Allmerica P&C since September 1996. He was Vice President of AFC from February 1995 through December 1995. Mr. Soule has been employed by FAFLIC since 1972 in various capacities.
ITEM 11
ITEM 11
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all plan and non-plan compensation awarded to, earned by, or paid to the Chief Executive Officer of AFC, and the four other most highly compensated executive officers of AFC (collectively, the "Named Executive Officers"). Because AFC is a holding company, it does not pay any compensation to its executive officers. The Named Executive Officers, unless otherwise indicated, receive compensation in their capacities as executive officers of FAFLIC, which is then reimbursed, in accordance with AFC's policy and intercompany service agreements, by its various subsidiaries for services rendered to such subsidiaries.
- -------- (1) Amounts shown for 1996 include the following special bonus payments, discussed in more detail in the Compensation Committee Report, which payments are intended by the Company to facilitate the purchase of AFC common stock by the executive officers in 1997: $1,000,000 for Mr. O'Brien, $150,000 for Mr. Renfro, $250,000 for Mr. Simonsen, $150,000 for Mr. Soule and $150,000 for Mr. Reilly. All other amounts shown are bonuses earned pursuant to FAFLIC's Incentive Compensation Plan, except with respect to the amounts reported for Mr. Renfro in 1996 and 1995, which also include payments of $335,384 and $255,000, respectively, in connection with the sale of FAFLIC's mutual fund servicing business, discussed below. (2) The amounts shown reflect the payment of taxes in the amount of $109,422 in 1996, $109,422 in 1995 and $109,850 in 1994 in connection with the payment by FAFLIC of a life insurance premium on behalf of Mr. O'Brien. All other amounts shown include interest earned on long-term incentive compensation paid, or deferred at the election of the Named Executive Officer, in the respective year. No Named Executive Officer received any perquisites or other personal benefits from any source for his services to FAFLIC or any subsidiary with an aggregate value exceeding the lesser of $50,000 or 10% of cash compensation. (3) Amounts shown include installment payments vesting and received by the Named Executive Officers in the respective year pursuant to awards which were earned in 1992, 1993, 1995 and 1996 under FAFLIC's Long-Term Performance Unit Plan (the "Long-Term Performance Plan"). No such cash amounts were earned in 1994 by the Named Executive Officers in respect of units granted under the Long-Term Performance Plan with values determinable based on FAFLIC's surplus level at the end of 1994.
(4) Amounts shown include $4,500 paid to each of the Named Executive Officers by FAFLIC during 1996 in the form of employer contributions to each Named Executive Officer's 401(k) and related post-retirement accounts pursuant to FAFLIC's 401(k) Matched Savings Plan ("Matched Savings Plan") (in effect beginning in 1995) (except amounts contributed on behalf of Messrs. O'Brien and Reilly in 1996, which are attributable to the Executive Non- Qualified Retirement Plan) as well as pursuant to FAFLIC's Excess Benefit Retirement Plan ("Excess Benefit Plan") as described more fully below. The amount shown for Mr. O'Brien in 1996 also reflects the payment by FAFLIC of a life insurance premium of $115,727.
OPTION GRANTS
The Company maintains a long-term stock incentive plan pursuant to which stock options covering shares of the Company's Common Stock may be granted to key employees.
In 1996, the Company did not grant any options to the Named Executive Officers.
LONG-TERM INCENTIVE AWARDS
Neither the Company nor FAFLIC made any awards to Named Executive Officers under the Long-Term Performance Plan in 1996.
EMPLOYMENT AGREEMENTS AND NON-SOLICITATION AGREEMENTS
In connection with the sale of FAFLIC's mutual fund servicing business to The Shareholder Services Group, Inc. ("TSSG") and related transactions in March 1995, and in consideration of the agreement by Mr. Renfro not to engage in this business for four years, AFC agreed to pay Mr. Renfro (i) a one-time bonus payment of $350,000 in 1995 ($95,000 of which represents a payment under FAFLIC's Incentive Compensation Plan in respect of his 1994 performance), and (ii) annual contingent payments based upon the prospective performance of the businesses sold or assigned in the TSSG transactions for four years with certain guaranteed minimum payments up to a maximum aggregate amount for four years of $3.7 million. The agreement also provides that, in the event Mr. Renfro is terminated without cause, he will receive $25,000 per month until March 31, 1998 plus $600,000 (less any contingent payments made under (ii) above). In the event of any such termination without cause, the agreement provides that Mr. Renfro would be subject to confidentiality and non- competition restrictions during the payment period.
As of December 31, 1996, substantially all of the Company's executive officers had entered into non-solicitation agreements ("Non-Solicitation Agreements") with the Company. The Non-Solicitation Agreements provide that, during employment and for a period of two years after termination, the executive officer will not recruit or solicit, attempt to induce, or assist or encourage others to recruit or solicit, any employee, agent or broker of the Company to terminate employment with the Company. The Non-Solicitation Agreements prohibit the executive officers from soliciting the business or patronage of any policyholders or existing or prospective clients, customers or accounts of the Company that were contacted, solicited or served while the executive officer was employed by the Company. Finally, the Non-Solicitation Agreements provide that all proprietary information relating to the Company's business and all software, works of authorship and other developments created during employment by the Company are the sole property of the Company.
EMPLOYMENT CONTINUITY PLAN
In December 1996 the AFC Board of Directors voted to adopt the Allmerica Financial Corporation Employment Continuity Plan (the "Employment Continuity Plan"). The purposes of the Employment Continuity Plan are (i) to secure senior management's objectivity and ensure focus on behalf of shareholder interest in the event of actions or occurrences that could lead to a Change of Control, and (ii) to ensure, in the event of a Change in Control resulting in payment under the Employment Continuity Plan, that senior management does not
compete in the business of the Company, solicit Company employees or disclose any confidential or propriety information of the Company. The Employment Continuity Plan is administered by the AFC Board of Directors. All of the Named Executive Officers were named as participants in the Employment Continuity Plan at its adoption.
In the event of a Change in Control (defined below) of the Company and subsequent involuntary termination of a participant within a two year period after the Change in Control, or voluntary termination of the participant in the 13th month after a Change in Control, the Employment Continuity Plan authorizes the payment of specified benefits to eligible participants. These include a lump-sum cash payment equal to a Multiplier (defined below) times a participant's base salary, average bonus for the preceding three years, and the amount that would be credited under a cash balance pension plan sponsored by the Company or its affiliates. The Multiplier is three (3) for the Chief Executive Office and two (2) for all other participants. Additionally, the Employment Continuity Plan provides for continued coverage under the health and welfare benefit plans sponsored by the Company and its affiliates, the lump-sum actuarial equivalent for grandfathered benefits earned under the retirement plan for "transition group" employees for the number of years commensurate with the Multiplier, 75% of a participant's maximum bonus potential pro-rated for service performed in the year of termination, and outplacement services. The Chief Executive Officer is also entitled to a gross-up payment when the Change in Control payment or other benefit under the plan is subject to the excise tax imposed by section 4999 of the Internal Revenue Code.
For purposes of the Employment Continuity Plan, a Change in Control is defined as follows: (i) a change in the composition of the Board of Directors such that the Incumbent Directors (as defined in the Employment Continuity Plan) at the beginning of any consecutive twenty-four month period cease to constitute a majority of the Board; (ii) any person or group is or becomes the beneficial owner of 35% or more of the Company's voting stock outstanding; (iii) a merger or consolidation of the Company or any affiliate that requires shareholder approval, unless the shareholders immediately prior to the merger or consolidation own more than 50% of the total voting stock of the successor corporation or a majority of the board of directors of the successor corporation were Incumbent Directors immediately prior to the merger or consolidation; or (iv) the approval by shareholders of a plan of liquidation or dissolution of the Company or the sale of all or substantially all of the Company's assets.
In the event of a Change of Control, for all stock awards and stock options granted to a participant pursuant to the Company's Long-Term Stock Incentive Plan that do not otherwise vest immediately after the Change of Control, the participant will be paid a lump sum amount equal to (i) the fair market value of all stock awards as of the date of the Change of Control (excluding stock options) and (ii) with respect to stock options, the excess of the fair market value of the Company's common stock as of the date of the Change of Control over the stock option exercise price.
The payment of benefits under the Employment Continuity Plan is contingent upon the Company's receipt of a signed waiver and release from the participant that release certain claims the participant may have and precludes the participant from competing with the Company for a period of two years.
PENSION BENEFITS
FAFLIC, Hanover and Citizens each maintain a tax-qualified, non-contributory defined benefit retirement plan ("Pension Plan") for the benefit of eligible employees.
Until December 31, 1994, annual benefits under the Pension Plan were based primarily upon each employee's years of service and compensation during the highest five consecutive plan years of employment or the last 60 months if greater. Such benefits under the Pension Plan were frozen as of December 31, 1994 for most participants, with the exception of certain grandfathered employees, including Mr. Soule. These benefits will be paid to participants as a monthly annuity at age 65 unless a participant terminates with 15 or more years of service in which case monthly benefits may commence anytime after the participant's 55th birthday. Effective as of January 1, 1995, the Pension Plan was converted into a cash balance plan, such that benefits are no longer determined primarily by final average compensation and years of service. Instead, annually each employee
accrues a benefit that is equal to a percentage of the employee's salary, similar to a defined contribution plan arrangement. Amounts contributed by the employer to an employee are allocated to a memorandum account as to which the employee is permitted to make investment elections from among choices provided by the employer. Upon termination of employment of a participant, the amount in the participant's memorandum account as of such date is eligible for distribution. If the amount in the participant's memorandum account plus the present value of the benefit frozen under the Pension Plan as of December 31, 1994 is less than $3,500, all benefits are distributed immediately in a lump sum.
The estimated annual benefits payable under the Pension Plan upon retirement at normal retirement age for each of the Named Executive Officers is as follows: Mr. O'Brien: $428,138; Mr. Renfro: $258,033; Mr. Simonsen: $151,262; Mr. Soule: $491,745; Mr. Reilly: $53,640. Such figures include amounts that have accrued under the Pension Plan as in effect on December 31, 1994, including, $355,841 for Mr. Soule. With respect to benefits attributable to the cash balance component of the Pension Plan, it was assumed that each individual's salary and bonus for the years until retirement were as shown in the Summary Compensation Table; that employer allocations were made to the Pension Plan at a rate of 7% of eligible compensation (7% is the actual amount accrued in 1996, although the plan only guarantees an accrual rate of 0.5%); and that investment earnings accrued to each participant's memorandum account under the Pension Plan at a rate of 6% per year.
The estimated annual benefits under the Pension Plan shown for each of the Named Executive Officers are not reduced to reflect the limitations imposed by Federal tax laws, which place upper limits on the benefits which may be provided to any individual by tax-qualified pension plans. FAFLIC, Hanover and Citizens Insurance each have adopted an Excess Benefit Plan, an unfunded, non- qualified plan, which provides that it will pay directly the difference between the retirement benefit normally calculated under the Pension Plan and the maximum amount which may be paid from the Pension Plan consistent with Federal tax law. In addition, certain employees of FAFLIC and its subsidiaries may participate, in the discretion of the Board of Directors, in either an unfunded, Non-Qualified Executive Retirement Plan or an unfunded, Non- Qualified Executive Deferred Compensation Plan. Under the Non-Qualified Executive Retirement Plan, participating employees may (i) elect to defer compensation in an amount not to exceed the annual dollar limitation set forth in the Internal Revenue Code in respect of defined contribution plans, (ii) elect to defer additional compensation in an amount not to exceed 12.5% of the participant's annual salary, (iii) receive and defer the amount, if any, that the participant would have received as a matching employer's contribution under his employer's 401(k) Matched Savings Plan, and (iv) receive and defer the amount, if any, that the participant would have been credited under his employer's Cash Balance and Excess Benefit Plans had the participant participated in such plan during the year. Under the Non-Qualified Executive Deferred Compensation Plan, certain other employees may elect to defer up to 12.5% of their annual salaries. In both cases, AFC shall from time to time designate one or more investments in which each participant's accounts shall be deemed to be invested for the purpose of determining the participant's gains and income on such account. Participation in the Non-Qualified Executive Retirement Plan is in lieu of participation in the corresponding qualified retirement and/or pension plans of FAFLIC, Hanover or Citizens.
COMPENSATION COMMITTEE REPORT
General. The Compensation Committee ("Committee") of the Board of Directors is comprised of the Directors whose names appear at the end of this report, none of whom is an employee of AFC or of any affiliate or subsidiary of AFC. Among other duties, the Committee has oversight responsibility with respect to compensation matters involving Directors and executive officers of AFC. As a holding company, AFC has no employees of its own and does not pay any compensation to its officers. Officers who are employees of FAFLIC, Hanover or Citizens Insurance are compensated directly by their respective employers. In addition, a portion of the salaries and other compensation paid by FAFLIC to its employees, who provide services to Hanover or Citizens Insurance, is allocated to such companies. This report reflects the compensation philosophy of AFC, FAFLIC, Hanover and Citizens Insurance as endorsed by the Committee.
Compensation Philosophy. The Executive Compensation Program is designed to support the following objectives:
.to attract and retain individuals key to the future success of AFC and its subsidiaries;
.to align the interests of executives with those of shareholders;
.to motivate and reward the profitable growth of AFC;
.to ensure that AFC has competitive opportunities for key personnel.
The key elements of the Executive Compensation Program consist of base salary, annual incentive compensation and long-term incentive compensation. A general description of each element and the review taken by the Committee for the 1996 fiscal period is presented in the following material.
Base Salary. The chief goals of AFC and its subsidiaries are to improve market focus in order to identify profitable opportunities that capitalize on competitive strengths; to provide quality, value-added services that are flexible and responsive to customer needs; to capitalize on growth opportunities in targeted markets with innovative, market-driven products and services that can be distributed broadly and cost-effectively; and to build financial strength with effective business strategies that generate superior financial performance and deliver solid returns on capital. In furtherance of these goals, annual base salaries of the Named Executive Officers and other key executives are set at levels considered to be competitive with amounts paid to executive officers with comparable qualifications, experience and responsibilities at competing companies, based on published surveys and proxy information, which include base salary, total cash compensation data, and other SEC required salary disclosures.
Annual Incentive Compensation. Annual incentive compensation for employees of FAFLIC, Hanover and Citizens Insurance is tied to the achievement of significant financial performance goals.
FAFLIC, Hanover and Citizens Insurance maintain a consolidated incentive plan which provides supplementary cash compensation as an incentive to key employees who, through exceptional performance, contribute materially to the success of the companies. For 1996, the incentive plan had two components: (a) the corporate and business unit return on equity; and (b) the successful completion of individual performance goals. Awards under the incentive plan may range from 0% to 100% of a participant's base salary.
Long-Term Compensation. FAFLIC maintains a Long-Term Performance Unit Plan ("Long-Term Performance Plan"). The Boards of both Hanover and Citizens Insurance have ratified the participation of certain of their officers in the Long-Term Performance Plan.
The objectives of the Long-Term Performance Plan include providing incentives to attract and retain top executives and achieving significant long-term financial results for FAFLIC and its subsidiaries. Criteria considered in determining participation in the Long-Term Performance Plan include the direct and measurable impact the executive has on longer-term financial results, the influence the individual has on strategic direction and the degree of risk inherent in the individual's business decisions. Previously awarded units are payable dependent upon specific increases in capital, surplus and equity position determined at of the end of a three-year plan cycle and payments are made subject to a subsequent three-year vesting cycle. The last three-year plan cycle under the Long-Term Performance Plan began in 1995. Therefore, no Named Executive Officers were awarded Long-Term Performance Plan units in 1996, although certain awards made in 1995 will continue to vest through 1999. Commencing in 1997, long-term incentive compensation awards will be made to the Named Executive Officers pursuant to AFC's Long-Term Stock Incentive Plan.
AFC, Allmerica P&C and Citizens Corporation each have in place Long Term Stock Incentive Plans (the "Stock Plans"). The objectives of each of the Stock Plans include providing incentives for participants to make substantial contributions to the company's long-term business growth, enhancing the company's ability to attract and retain executive officers and other key employees, rewarding participants for their contributions to the success of the company, and aligning the interests of executive officers and other key employees with those of
the company's stockholders. Up to 2,350,000 shares are available for awards under the AFC plan, up to 1,000,000 shares are available for awards under Allmerica P&C's plan and up to 200,000 shares are available for awards under Citizens Corporation's plan. In connection with its conversion from a mutual life insurance company to a stock life insurance company in October 1995, State Mutual Life Assurance Company of America, FAFLIC's predecessor, agreed with the Commissioner of Insurance of the Commonwealth of Massachusetts, in the Plan of Reorganization dated February 28, 1995 (the "Plan of Reorganization"), that certain executive officers of FAFLIC and AFC would not be permitted to acquire AFC stock, and would not be eligible to participate in any stock-based compensation plan, until one year after the demutualization was completed. As a result, during 1996 no stock-based awards were made to the ineligible executive officers, which included the Named Executive Officers. Factors to be considered in determining the grant of options under the respective stock plans include the contribution of each executive to the long- term performance of AFC, Allmerica P&C or Citizens Corporation, respectively, and the importance of such executive's responsibilities within the organization.
Special Cash Bonus. In evaluating the total compensation of the Named Executive Officers and certain other executive officers of FAFLIC and Hanover, the Compensation Committee also considered the importance of individual stock ownership of executive officers to the future performance of the Company. Due to the restrictions imposed by the Plan of Reorganization prohibiting the Named Executive Officers and certain other executive officers of AFC and FAFLIC from acquiring AFC stock or participating in AFC's Stock Plan until October 1996, the Compensation Committee approved a special cash bonus payment to these executives with the intent that the bonus be used to purchase an equal amount of AFC Common Stock. As an incentive to encourage such purchases, for each share of AFC Common Stock purchased with such bonus funds, certain of the Named Executive Officers will be awarded one share of restricted stock pursuant to the AFC Stock Plan.
Compensation of the Chief Executive Officer. John F. O'Brien, President and Chief Executive Officer of AFC, serves as President and Chief Executive Officer of FAFLIC, and as Chairman of the Board of Hanover and of Citizens Insurance.
In approving the 1996 compensation package for Mr. O'Brien, the Compensation Committee compared Mr. O'Brien's compensation against the comparative base salaries, annual and long-term incentives and other compensation of chief executives of a peer group of companies. The peer goup companies included (i) insurance companies identified as having distribution systems, products/product mix and/or markets similar to FAFLIC and its subsidiaries; (ii) a subset of insurance companies that were identified by scope of financial activity (such as assets, revenue, and net written premium); and (iii) a subset of financial service companies that provide for a stratification of salary data based on similarity in the nature and scope of business activities. The Compensation Committee assumes (a) that such independent variables are meaningful in determining CEO compensation, and (b) that a correlation exists between pay and such variables. However, the approach does not consider variances in the business strategies and goals of each company, the relative competitive positions of the companies, and the personal characteristics and accomplishments of the individual executives. Therefore, the review of Mr. O'Brien's compensation by the Compensation Committee also included an assessment of the performance of FAFLIC and its subsidiaries in terms of profitability and growth in the various business lines, as well as an evaluation of the capital positions of the companies, the implementation of significant cost controls and other strategic initiatives. In comparison to the peer group of companies, Mr. O'Brien's base salary was near the median, while the potential for incentive compensation, as a percentage of base salary, was below the median.
Mr. O'Brien's 1996 incentive compensation performance measures included a corporate goal based upon GAAP Consolidated Net Income Return on Equity of AFC, business unit Return on Equity, focus goals relating to earnings per share, revenue, AFC's stock price and individual performance goals. Individual performance goals included significant improvement in earnings and capital; development of alternate distribution systems; initiatives to improve technology; and continued development and implementation of a strategic plan for the Company. Achievement of individual performance goals and other initiatives undertaken by Mr. O'Brien in 1996 resulted in performance that exceeded expectations.
The Compensation Committee carefully reviewed Mr. O'Brien's personal achievements against his 1996 goals and based on its evaluation, the Committee approved Mr. O'Brien's annual incentive compensation award of 96% of his base salary, out of a maximum potential of 100% of base salary. In addition, the Committee approved a special bonus award to Mr. O'Brien in the amount of $1,000,000, based on the reasons discussed in the paragraph entitled "Special Cash Bonus" above.
The Committee believes that the executive compensation policies of AFC and its subsidiaries are appropriate both to attract and retain corporate officers and other key employees of outstanding abilities and to motivate them to perform to the full extent of their abilities.
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the Internal Revenue Code, enacted in 1993, generally disallows a tax deduction to public companies for compensation over $1 million paid to the corporation's Chief Executive Officer and its four other most highly compensated executive officers. Qualifying performance-based compensation will not be subject to the deduction limit if certain requirements are met. In 1996, the compensation paid to the Chief Executive Officer exceeded the limit imposed by Section 162(m). The Committee monitors the impact of Section 162(m) in order to balance the benefits of favorable tax treatment with a need to apply prudent judgment in carrying out AFC's compensation philosophy, recognizing that under certain circumstances it may be appropriate to exceed the deduction limit.
Members of the Compensation Committee:
Herbert M. Varnum, Chair Robert G. Stachler Richard M. Wall
DIRECTOR COMPENSATION
Non-employee Directors of AFC who are not also directors of APY receive an annual retainer of $20,000. Non-employee Directors of AFC who are also directors of APY receive an aggregate retainer of $30,000. In addition, non- employee Directors of AFC receive $1,500 per meeting of the Board of Directors and $1,000 for each meeting of a committee thereof that they attend. Mr. O'Brien, the only Employee Director, is not paid any fees or additional compensation for service as a member of the Board of Directors or any of its committees. All Directors are reimbursed for reasonable travel and other expenses of attending meetings of the Board of Directors and committees of the Board of Directors.
As of the date of the annual meeting in 1997, Non-employee Directors of AFC will receive an annual retainer of 1,400 shares of AFC stock payable on the first business day following the annual meeting. Chairpersons of committees will receive a $4,000 annual retainer. In addition, Non-employee Directors of AFC will receive $1,500 per meeting of the Board of Directors and $1,000 for each meeting of a committee thereof that they attend.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires executive officers and Directors, and persons who beneficially own more than ten percent (10%) of the Common Stock, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission (the "SEC") and the New York Stock Exchange (the "NYSE"). Such persons are required by SEC regulations to provide to AFC copies of all their Section 16(a) filings. Based solely on a review of the forms furnished to AFC and written representations from AFC's executive officers and Directors, AFC believes that during 1996 there was full compliance with all Section 16(a) filing requirements.
CERTAIN BUSINESS RELATIONSHIPS
The Company's subsidiaries or affiliates have, from time to time, retained the services of Bowditch & Dewey, LLP, a law firm in which Mr. Angelini, a Director of the Company, is a partner.
COMMON STOCK PERFORMANCE CHART
The following graph compares the performance of the Company's Common Stock since its initial public offering on October 11, 1995 with the performance of the S&P 500 Index and with the performance of an industry peer group comprised of a composite of two published indices--the S&P Property-Casualty Insurance Index and the S&P Life Insurance Index. Returns of the latter two indices have been weighted according to their respective aggregate market capitalization at the beginning of each period shown on the graph. The graph plots the changes in the value of an initial $100 investment over the indicated time periods, assuming reinvestment of all dividends.
COMPARISON OF 14 MONTH CUMULATIVE TOTAL RETURN * AMONG ALLMERICA FINANCIAL CORPORATION, THE S&P 500 INDEX AND A PEER GROUP
[GRAPH APPEARS HERE] - -------- * $100 invested on 10/11/95 in stock or index--including reinvestment of dividends. Fiscal year ending December 31.
The insurance composite is a market value weighted composite of the S&P Property-Casualty Insurance and the S&P Life Insurance indices. The components of the insurance composite have been weighted in accordance with the respective aggregate market capitalization of the companies in each index as of the date of Allmerica Financial Corporation's public offering and at the beginning of each period shown on the graph, as indicated below:
The Compensation Committee Report and Stock Price Performance Graph above shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that AFC specifically incorporates this information by reference, and shall not otherwise be deemed filed under such acts.
ITEM 12
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock of AFC, APY and Citizens Corporation owned as of March 17, 1997 by (i) each Director of AFC, (ii) the named executive officers in the Summary Compensation Table appearing later in this Proxy Statement, (iii) all officers and directors of AFC as a group and (iv) each person who is known by AFC to be the beneficial owner of more than five percent of the Common Stock as of such date. This information has been furnished by the persons listed in the table.
- -------- * With the exception of FMR Corp.'s holdings of AFC Common Stock, each of the amounts represents less than 1% of the outstanding shares of Common Stock as of March 22, 1996. As to shares beneficially owned, each person has sole voting and investment power, except as indicated in other footnotes to this table.
(1) Shares owned by Mr. Barrett's spouse. Mr. Barrett disclaims beneficial ownership with respect to such shares. (2) Includes 198 shares held for the benefit of Mr. O'Brien by the trustees of the First Allmerica Financial Life Insurance Company's Employees' 401(k) Matched Savings Plan (the "FAFLIC Plan"). (3) Shares held for the benefit of Mr. Reilly by the trustees of the FAFLIC Plan. (4) Shares held for the benefit of Mr. Renfro by the trustees of the FAFLIC Plan. (5) Shares held for the benefit of Mr. Simonsen by the trustees of the FAFLIC Plan. (6) Includes an aggregate of 3,000 shares of Common Stock of APY held in trusts for the benefit of Mr. Simonsen's children. Mr. Simonsen is trustee of the trusts and he disclaims beneficial ownership of the shares held in the trusts. (7) Includes an aggregate of 1,000 shares of Common Stock of Citizens held in trusts for the benefit of Mr. Simonsen's children. Mr. Simonsen is trustee of the trusts and he disclaims beneficial ownership of the shares held in the trusts.
(8) Includes 596 shares held for the benefit of Mr. Soule by the trustees of the FAFLIC Plan. (9) Includes 18,683 shares held by the trustees of the FAFLIC Plan. See notes 2-5 and 8 above. (10) Based on a Schedule 13G dated February 14, 1997 filed by FMR Corp., which has sole dispositive power overall 5,226,920 shares and sole voting power over 289,820 shares.
As of March 17, 1997, there were no persons other than FMR Corp. known to AFC to be the beneficial owners of more than 5% of the outstanding shares of Common Stock.
ITEM 13
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AFC's subsidiary, FAFLIC, currently provides various centralized administrative and management services, operating support and office space to Allmerica P&C and its subsidiaries, as well as to other FAFLIC subsidiaries. Effective in 1970, Allmerica P&C's predecessor entered into an agreement with FAFLIC pursuant to which FAFLIC agreed to provide services to Allmerica P&C in accordance with FAFLIC's cost allocation policy. FAFLIC's cost allocation policy is based on state insurance law requirements that all cost allocations be on a fair and reasonable basis between entities and product lines within FAFLIC's holding company structure and also are designed to meet regulations imposed by taxing authorities. Services provided by FAFLIC include investment services, portfolio management, and a certain amount of accounting, financial, legal and administrative services, operations relating to servicing and underwriting of policies and information and data systems. FAFLIC's cost allocation and distribution policies are subject to review by various state and federal regulatory agencies. AFC intends to continue to provide such services on the same cost allocation basis to Allmerica P&C and its subsidiaries immediately following the Merger Transactions.
Administrative charges (excluding rental charges) incurred by FAFLIC and charged to Allmerica P&C were $58.0 million, $50.8 million and $63.1 million for the years ended December 31, 1996, 1995 and 1994, respectively. Allmerica P&C leases its principal office from FAFLIC, with which it shares most of the facility. The annual rental charge was $1.3 million for each of the years ended December 31, 1996, 1995 and 1994. The rent is triple net, with rent based on cost using a fluctuating interest rate. FAFLIC believes that such terms are no less favorable to Allmerica P&C than if the property was leased to a non-affiliate.
In April 1996, Ms. Harrison and Messrs. Angelini, Barrett, J.T. Murray, Sprague, Stachler, Varnum and Wall resigned their positions as Directors of FAFLIC, the Company's operating subsidiary, in connection with the Company's restructuring following the demutualization of FAFLIC's predecessor, State Mutual Life Assurance Company of America. FAFLIC's subsequent Board of Directors, consisting of insiders, terminated a FAFLIC policy that provided FAFLIC's directors with periodic cash payments upon retirement from the FAFLIC Board based on years of service with that company. Accrued benefits under the terminated policy, which will be paid to the former FAFLIC directors in one lump sum in 1997, had the following values as of December 17, 1996: $33,074 for Mr. Angelini; $166,851 for Mr. Barrett; $23,910 for Ms. Harrison; $18,417 for Mr. J.T. Murray; $137,745 for Mr. Sprague; $126,798 for Mr. Stachler; $72,913 for Mr. Varnum; and $76,229 for Mr. Wall. Until the amounts above are disbursed, the funds are accruing interest at the rate of 7% per annum.
PART IV
ITEM 14
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The consolidated financial statements and accompanying notes thereto on pages 51 through 76 of the 1996 Annual Report to Shareholders have been incorporated herein by reference in their entirety.
(A)(2) FINANCIAL STATEMENT SCHEDULES
(A)(3) EXHIBIT INDEX
Exhibits filed as part of this Form 10-K are as follows:
- -------- + Incorporated herein by reference to the correspondingly numbered exhibit contained in the Registrant's Registration Statement on Form S-1 (No. 33-91766) originally filed with the Commission on May 1, 1995. ++ Incorporated herein by reference to the correspondingly numbered exhibit contained in the Registrant's Registration Statement on Form S-1 (No. 33-96764) originally filed with the Commission on September 11, 1995. +++ Incorporated herein by reference to the correspondingly numbered exhibit contained in the Registrant's 1995 Annual Report on Form 10-K originally filed with the Commission on March 28, 1996. ++++ Incorporated by herein by reference to Exhibit I of the Current Report of the Registrant (Commission File No. 1-13754) filed February 20, 1997. +++++ Incorporated herein by reference to Exhibits 2, 3, 4, 5 and 6, respectively, contained in the Registrant's Current Report on Form 8-K filed on February 5, 1997.
(B) REPORTS ON FORM 8-K
On December 18, 1996, a report on Form 8-K was filed reporting under item 5, Other Events, the announcement by the Registrant that AFC's Board of Directors had made a proposal to the Board of Directors of Allmerica P&C to acquire the shares of Common Stock of Allmerica P&C that AFC and its subsidiaries do not already own.
On February 5, 1997, a report on Form 8-K was filed reporting under item 5, Other Events, the announcement of the sale of $300 million of Capital Securities issued by AFC Capital Trust I.
On February 20, 1997, a report on Form 8-K was filed reporting under item 5, Other Events, the announcement that the Company and Allmerica P&C entered into an Agreement and Plan of Merger.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Allmerica Financial Corporation _____________________________________ REGISTRANT
Date: March 18, 1997 /s/ John F. O'Brien By: _________________________________ JOHN F. O'BRIEN, CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND PRESIDENT PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Date: March 18, 1997 /s/ John F. O'Brien By: _________________________________ JOHN F. O'BRIEN, CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND PRESIDENT
Date: March 18, 1997 /s/ Edward J. Parry, III By: _________________________________ EDWARD J. PARRY III, VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER
Date: March 18, 1997 * By: _________________________________ MICHAEL P. ANGELINI, DIRECTOR
Date: March 18, 1997 By: _________________________________ DAVID A. BARRETT, DIRECTOR
Date: March 18, 1997 * By: _________________________________ GAIL L. HARRISON, DIRECTOR
Date: March 18, 1997 By: _________________________________ ROBERT P. HENDERSON, DIRECTOR
Date: March 18, 1997 * By: _________________________________ J. TERRENCE MURRAY, DIRECTOR
Date: March 18, 1997 * By: _________________________________ ROBERT J. MURRAY, DIRECTOR
Date: March 18, 1997 * By: _________________________________ JOHN L. SPRAGUE, DIRECTOR
Date: March 18, 1997 * By: _________________________________ ROBERT G. STACHLER, DIRECTOR
Date: March 18, 1997 * By: _________________________________ HERBERT M. VARNUM, DIRECTOR
Date: March 18, 1997 * By: _________________________________ RICHARD M. WALL, DIRECTOR
/s/ John F. O'Brien *By: ________________________________ JOHN F. O'BRIEN, ATTORNEY-IN-FACT
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Allmerica Financial Corporation
Our audits of the consolidated financial statements referred to in our report dated February 3, 1997, except as to Notes 1 and 2, which are as of February 19, 1997, appearing in the Allmerica Financial Corporation 1996 Annual Report to Shareholders (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
As discussed in the accompanying notes to the consolidated financial statements, the Company changed its method of accounting for investments (Note 1) and postemployment benefits (Note 11) in 1994.
/s/ Price Waterhouse LLP _____________________________________ Price Waterhouse LLP Boston, Massachusetts February 3, 1997, except as to Notes 1 and 2, which are as of February 19, 1997
SCHEDULE I
ALLMERICA FINANCIAL CORPORATION SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1996
- -------- (1) Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums and accretion of discounts. (2) Includes $106.6 million of real estate acquired through foreclosure.
SCHEDULE II
ALLMERICA FINANCIAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
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.
SCHEDULE II (CONTINUED)
ALLMERICA FINANCIAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY
BALANCE SHEETS
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.
SCHEDULE II (CONTINUED)
ALLMERICA FINANCIAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY
STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
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.
SCHEDULE III
ALLMERICA FINANCIAL CORPORATION SUPPLEMENTARY INSURANCE INFORMATION DECEMBER 31, 1996
SCHEDULE III (CONTINUED)
ALLMERICA FINANCIAL CORPORATION SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 1995
SCHEDULE III (CONTINUED)
ALLMERICA FINANCIAL CORPORATION SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 1994
SCHEDULE IV
ALLMERICA FINANCIAL CORPORATION REINSURANCE
DECEMBER 31,
SCHEDULE V
ALLMERICA FINANCIAL CORPORATION VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31,
SCHEDULE VI
ALLMERICA FINANCIAL CORPORATION SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
- -------- (1) The Company does not employ any discounting techniques. (2) Reserves for losses and loss adjustment expenses are shown gross of $626.9 million, $763.5 million and $712.5 million of reinsurance recoverable on unpaid losses in 1996, 1995 and 1994, respectively. Unearned premiums are shown gross of prepaid premiums of $45.5 million, $43.8 million and $61.9 million in 1996, 1995 and 1994, respectively.
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