FORM 10-Q 
 
                               UNITED STATES 
                     SECURITIES AND EXCHANGE COMMISSION 
                          Washington, DC 20549 
(Mark One) 
       [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE    
                    SECURITIES EXCHANGE ACT OF 1934    
          For the quarterly period ended: September 30, 1996    
    
                                    OR    
    
       [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE    
                   SECURITIES EXCHANGE ACT OF 1934    
     For the transition period from:              to ____________    
                     Commission file number: 1-13754    
    
                       ALLMERICA FINANCIAL CORPORATION    
            (Exact name of registrant as specified in its charter)    
    
            Delaware                               04-3263626    
(State or other jurisdiction of                 (I.R.S. Employer    
incorporation or organization)               Identification Number)    
    
             440 Lincoln Street, Worcester, Massachusetts  01653    
                   (Address of principal executive offices)    
                               (Zip Code)    
    
                             (508) 855-1000    
            (Registrant's telephone number, including area code)    
    
    _________________________________________________________________   
(Former name, former address and former fiscal year, if changed since last 
report)    
    
Indicate by check mark whether the registrant (1) has filed all reports     
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months (or for such shorter period that the     
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [  X  ]     No [     ]    
    
            APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY    
              PROCEEDINGS DURING THE PRECEDING FIVE YEARS:    
    
Indicate by check mark whether the registrant has filed all documents and     
reports required to be filed by Section 12, 13 or 15(d) of the Securities     
Exchange Act of 1934 subsequent to the distribution of securities under a plan 
confirmed by a court.  Yes [      ]     No [     ]    
    
                  APPLICABLE ONLY TO CORPORATE ISSUERS:    
    
Indicate the number of shares outstanding of each of the registrant's classes
of common stock as of the latest practicable date:  50,134,651 shares of common
stock outstanding, as of September 30, 1996.    
    
                                   33
           Total Number of Pages Included in This Document



TABLE OF CONTENTS    
    
PART I. FINANCIAL INFORMATION    
    
Item 1.    Financial Statements (Unaudited)    
           Consolidated Statements of Income                         3    
           Consolidated Statements of Shareholders' Equity           4    
           Consolidated Balance Sheets                               5    
           Consolidated Statements of Cash Flows                     6    
           Notes to Interim Consolidated Financial Statements    7 - 9    
    
Item 2.    Management's Discussion and Analysis of Financial
             Condition and Results of Operations               10 - 31    
    
PART II. OTHER INFORMATION    
    
Item 6.    Exhibits and Reports on Form 8-K                         32    
    
SIGNATURES                                                          33 
    


                     PART I - FINANCIAL INFORMATION    
                      ITEM I - FINANCIAL STATEMENTS    
    
                     ALLMERICA FINANCIAL CORPORATION    
                    CONSOLIDATED STATEMENTS OF INCOME

    
    
                                     (Unaudited)            (Unaudited)    
                                    Quarter Ended        Nine Months Ended    
                                     September 30,          September 30,    
(In millions, except    
 per share data)                   1996        1995        1996      1995    
                                                             
    
REVENUES    
  Premiums                         $557.1      $562.4      $1,658.4  $1,675.3  
  Universal life and     
    investment product policy     
    fees                             49.9        43.1         144.9     128.0  
  Net investment income             173.9       181.6         501.8     542.8  
  Net realized investment     
    (losses) gains                   (0.6)       18.4          53.3      24.1  
  Realized gain on sale of     
    mutual fund processing    
    business                          0.0         0.0           0.0      20.7  
  Other income                       26.0        17.3          76.6      65.2  
                                   --------    --------     --------  -------- 
    Total revenues                  806.3       822.8       2,435.0   2,456.1  
                                   --------    --------     --------  -------- 
  
BENEFITS, LOSSES AND EXPENSES    
  Policy benefits, claims,losses  
    and loss adjustment expenses    475.6       498.5       1,461.0   1,514.3 
  Policy acquisition expenses       117.3       119.8         358.1     355.2 
  Other operating expenses          124.3       114.7         361.7     349.5 
                                   --------    --------     --------  -------- 
    Total benefits, losses and  
      expenses                      717.2       733.0       2,180.8   2,219.0 
                                   --------    --------     --------  -------- 
  Income before federal income  
    taxes                            89.1        89.8         254.2     237.1 
                                   --------    --------     --------  -------- 
  Federal income tax expense     
    (benefit)    
      Current                        32.7        23.8          77.0      75.3  
      Deferred                      (11.5)        9.0         (19.0)     (0.1)  
                                   --------    --------     --------  -------- 
        Total federal income
          tax expense                21.2        32.8          58.0      75.2   
                                   --------    --------     --------  -------- 

  Income before minority interest  
    and extraordinary item           67.9        57.0         196.2     161.9  
  Minority interest                 (21.2)      (22.2)        (59.6)    (58.0)
                                   --------    --------     --------  -------- 
  Income before extraordinary item   46.7        34.8         136.6     103.9 
  Extraordinary item- 
    demutualization expenses          0.0        (4.7)          0.0     (10.7)
                                   --------    --------     --------  -------- 
  Net income                       $ 46.7      $ 30.1      $  136.6  $   93.2 
                                   ========    ========     ========  ======== 
 
PER SHARE DATA    
 
Net income                         $ 0.93                  $   2.72    
                                   ========                 ======== 
Dividends declared to     
  shareholders                     $ 0.05                  $   0.15    
                                   ========                 ======== 
 
Weighted average shares     
  outstanding                        50.1                      50.1    
                                   ========                 ======== 
    
       The accompanying notes are an integral part of these consolidated     
                        financial statements.    
 
Page 3

   
                           ALLMERICA FINANCIAL CORPORATION    
                   CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY    


                                                 (Unaudited)    
                                              Nine Months Ended    
                                                 September 30,    
    
(In millions)                                 1996              1995    
                                                           
COMMON STOCK    
Balance at beginning and end of period      $    0.5        $   0.0        
                                             --------        -------- 
    
ADDITIONAL PAID-IN-CAPITAL    
Balance at beginning and end of period       1,382.5            0.0       
                                             --------        -------- 
RETAINED EARNINGS    
Balance at beginning of period                  38.2          1,071.4      
Net income                                     136.6             93.2     
Dividends to shareholders                       (7.5)             0.0        
Balance at end of period                     --------        -------- 
                                               167.3          1,164.6      
                                             --------        -------- 
 
NET UNREALIZED APPRECIATION ON INVESTMENTS    
Balance at beginning of period                 153.0            (79.0)    
Net (depreciation) appreciation on  
available-for-sale securities                 (139.2)           360.5     
     
Benefit (provision) for deferred federal     
income taxes                                    48.7           (126.2)    
Minority interest                               20.2            (64.4)    
                                            ----------       --------- 
Balance at end of period                        82.7             90.9     
 
Total shareholders' equity                  $1,633.0         $1,255.5      
                                            ==========       =========

            The accompanying notes are an integral part of these consolidated
                               financial statements.    
Page 4


   


                         ALLMERICA FINANCIAL CORPORATION    
                           CONSOLIDATED BALANCE SHEETS    
    
                                         (Unaudited)    
                                        September 30,    December 31,    
(In millions, except per share data)    1996             1995   
                                                   
ASSETS    
  Investments:    
    Fixed maturities-at fair value 
    (amortized cost of $7,635.3 and     
     $7,467.9)                             $7,731.4          $7,739.3      
    Equity securities-at fair value 
    (cost of $326.6 and $410.6)               438.0             517.2     
Mortgage loans                                690.4             799.5     
     Real estate                              145.4             179.6     
     Policy loans                             130.6             123.2     
     Other long-term investments              111.4              71.9     
                                          ----------        ----------
       Total investments                    9,247.2           9,430.7      
                                          ----------        ----------
Cash and cash equivalents                     164.2             289.5     
Accrued investment income                     158.2             163.2     
Deferred policy acquisition costs             816.3             735.7     
Reinsurance receivables:    
    Future policy benefits                    104.2              97.1     
    Outstanding claims, losses and loss 
      adjustment expenses                     763.9             799.6     
    Unearned premiums                          45.2              43.8     
    Other                                      56.0              58.9     
                                          ----------        ----------
      Total reinsurance receivables           969.3             999.4     
                                          ----------        ----------
Deferred federal income taxes                 113.0              81.2     
Premiums, accounts and notes receivable       557.1             526.7     
Other assets                                  309.3             363.6     
Closed Block assets                           807.5             818.9     
Separate account assets                     5,586.8           4,348.8      
                                          ----------        ----------
  Total assets                            $18,728.9         $17,757.7      
                                          ==========        ==========
LIABILITIES    
Policy liabilities and accruals:    
  Future policy benefits                   $2,628.3          $2,639.3      
  Outstanding claims, losses and 
    loss adjustment expenses                3,057.7           3,081.3      
  Unearned premiums                           848.0             800.9     
  Contractholder deposit funds and other 
    policy liabilities                      2,142.0           2,737.4      
                                           --------          --------
    Total policy liabilities and accruals   8,676.0           9,258.9      
Expenses and taxes payable                    601.9             603.0     
Reinsurance premiums payable                   51.6              42.0     
Short-term debt                               326.1              31.2     
Deferred federal income taxes                  14.8              47.8     
Long-term debt                                202.2             202.3     
Closed Block liabilities                      890.4             902.0     
Separate account liabilities                5,581.5           4,337.8      
                                          ----------        ----------
  Total liabilities                        16,344.5          15,425.0      
                                          ----------        ----------
Minority interest                             751.4             758.5     
                                          ----------        ----------
Commitments and contingencies      

SHAREHOLDERS' EQUITY    
Preferred stock, $0.01 par value, 20.0     
million shares authorized, none issued          0.0               0.0 
Common stock, $0.01 par value, 300.0     
  million shares authorized, 50.1 million     
  shares issued and outstanding                 0.5               0.5      
Additional paid-in-capital                  1,382.5           1,382.5      
Unrealized appreciation on investments, net    82.7             153.0     
Retained earnings                             167.3              38.2     
                                           --------          --------
  Total shareholders' equity                1,633.0           1,574.2      
                                          ----------        ---------- 
    Total liabilities and shareholders'
      equity                              $18,728.9         $17,757.7      
                                          ==========        ==========

    
        The accompanying notes are an integral part of these consolidated     
        financial statements.
Page 5

    


                         ALLMERICA FINANCIAL CORPORATION    
                      CONSOLIDATED STATEMENTS OF CASH FLOWS    

                                                (Unaudited)     
                                              Nine Months Ended     
                                                September 30,     
(In millions)    
                                       1996                      1995    
                                                                 
CASH FLOWS FROM OPERATING ACTIVITIES    
 Net income                              $136.6                    $93.2     
 Adjustments to reconcile net income     
  to net cash provided by operating 
  activities:    
   Minority interest                       59.6                     58.0     
   Net realized gains                     (53.5)                   (44.8)    
   Deferred federal income taxes          (18.9)                    (0.1)    
   Changes in assets and liabilities:    
     Deferred policy acquisition costs    (55.7)                   (31.4)    
     Premiums and notes receivable, net 
     of reinsurance payable               (20.4)                   (64.5)    
     Accrued investment income              6.3                      2.3      
     Policy liabilities and accruals, 
      net                                 (31.3)                    85.1     
     Reinsurance receivable                30.2                    (22.2)    
     Expenses and taxes payable             8.3                     59.2     
     Separate account activity, net         5.6                      0.4      
     Other, net                            78.4                     44.5     
                                        ----------              ---------
Net cash provided by operating     
  activities                              145.2                    179.7     
                                        ----------              --------- 
CASH FLOWS FROM INVESTING ACTIVITIES    
  Proceeds from sales of available-
   for-sale fixed maturities            2,025.2                  1,147.1      
  Proceeds from maturities and calls 
   of available-for-sale fixed 
   maturities                           1,058.3                    804.5     
  Proceeds from maturities of     
   held-to-maturity fixed maturities        0.0                    238.0     
  Proceeds from disposals of equity     
   securities                             218.3                     77.3     
  Proceeds from disposals of other     
   investments                             60.3                      9.7      
  Proceeds from mortgages matured or     
   collected                              122.9                    157.2     
  Purchase of available-for-sale 
   fixed maturities                    (3,282.8)                (2,212.6)    
  Purchase of held-to-maturity fixed
   maturities                               0.0                    (49.2)    
  Purchase of equity securities           (81.1)                  (172.6)    
  Purchase of other investments           (91.1)                   (10.2)    
  Proceeds from sale of mutual fund     
   processing business                      0.0                     32.8     
  Capital expenditures                     (8.0)                   (10.1)    
  Other activities, net                     2.6                      0.0       
                                        ----------              ---------
Net cash provided by investing     
activities                                 24.6                     11.9     
                                        ----------              ---------
CASH FLOWS FROM FINANCING ACTIVITIES    
Deposits and interest credited to     
 contractholder deposit funds             241.6                    357.7     
Withdrawals from contractholder     
 deposit funds                           (790.4)                  (765.4)    
Change in short-term debt                 294.9                     (6.4)    
Dividends paid to shareholders            (10.4)                    (3.1)    
Subsidiary treasury stock purchased, 
 at cost                                  (42.0)                   (13.1)     
                                        ----------              --------- 
Net cash used in financing     
activities                               (306.3)                  (430.3)    
                                        ----------              ---------
Net decrease in cash and cash     
equivalents                              (136.5)                  (238.7)    
Net change in cash held in the Closed     
Block                                      11.2                      0.0
Cash and cash equivalents, beginning     
 of period                                289.5                    539.7     
                                        ----------              ---------
Cash and cash equivalents, end of
period                                   $164.2                   $301.0     
                                        ==========              =========

            The accompanying notes are an integral part of these consolidated
                            financial statements.    
Page 6


                          ALLMERICA FINANCIAL CORPORATION    
                 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS    

1. Basis of Presentation    
    
First Allmerica Financial Life Insurance Company ("FAFLIC", formerly     
State Mutual Life Assurance Company of America ["State Mutual"]) was     
organized as a mutual life insurance company until October 16, 1995.      
FAFLIC converted to a stock life insurance company pursuant to a plan     
of reorganization effective October 16, 1995 and became a wholly owned     
subsidiary of Allmerica Financial Corporation ("AFC" or the     
"Company").  The consolidated financial statements have been prepared     
as if FAFLIC were organized as a stock life insurance company for all     
periods presented.  Thus, generally accepted accounting principles for     
stock life insurance companies have been applied for all periods     
presented.    
    
The interim consolidated financial statements of AFC include the     
accounts of AFC, FAFLIC, its wholly owned life insurance subsidiary,     
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC",     
formerly SMA Life Assurance Company), non-insurance subsidiaries     
(principally brokerage and investment advisory subsidiaries), and     
Allmerica Property & Casualty Companies, Inc. ("Allmerica P&C", a     
59.5%-owned non-insurance holding company).  The Closed Block assets     
and liabilities at September 30, 1996 and December 31, 1995 are     
presented in the consolidated financial statements as single line     
items. Results of operations for the Closed Block for the nine month     
and three month periods ended September 30, 1996 are included in other     
income in the consolidated financial statements.  Prior to     
demutualization such amounts are presented line by line in the     
consolidated financial statements.  All significant intercompany     
accounts and transactions have been eliminated.    
    
Minority interest relates to the Company's investment in Allmerica P&C     
and its subsidiary, The Hanover Insurance Company ("Hanover").      
Hanover's 82.5%-owned subsidiary is Citizens Corporation, the holding     
company for Citizens Insurance Company of America ("Citizens").      
Minority interest also includes an amount related to the minority     
interest in Citizens Corporation.    
    
The accompanying interim consolidated financial statements reflect, in     
the opinion of the Company's management,  all adjustments, consisting     
of only normal and recurring adjustments, necessary for a fair     
presentation of the financial position and results of operations.     
Certain reclassifications have been made to the 1995 consolidated     
statements of income in order to conform to the 1996 presentation.      
The results of operations for the nine months and quarter ended     
September 30, 1996 are not necessarily indicative of the results to be     
expected for the full year. These financial statements should be read     
in conjunction with the Company's 1995 Annual Report to Shareholders,     
as filed on Form 10-K to the Securities and Exchange Commission.    
    
2. Federal Income Taxes    
    
Federal income tax expense for the periods ended September 30, 1996     
and 1995, has been computed using estimated effective tax rates for     
the AFC and Allmerica P&C tax-paying groups.  These rates are     
revised, if necessary, at the end of each successive interim period     
to reflect the current estimates of the annual effective tax rates.    

Page 7


3. Closed Block    
    
Included in other income in the Consolidated Statements of Income in     
the third quarter and first nine months of 1996 is a net pre-tax     
contribution from the Closed Block of $1.9 million and $7.9 million,     
respectively.  Summarized financial information of the Closed Block is     
as follows:    



                                      (Unaudited)    
                                      September 30,           December 31, 
                                      1996                    1995    
(In millions)                                              
    
ASSETS    
Fixed maturities, at fair value     
(amortized cost of $450.0 and $447.4) $450.2                  $458.0     
Mortgage loans                          77.9                    57.1      
Policy loans                           233.6                   242.4     
Cash and cash equivalents                6.4                    17.6      
Accrued investment income               15.2                    16.6      
Deferred policy acquisition costs       21.8                    24.5      
Other assets                             2.4                     2.7      
                                     --------                --------
Total assets                          $807.5                  $818.9     
                                     ========                ========
LIABILITIES    
Policy liabilities and accruals       $880.5                  $899.2    
Other liabilities                        9.9                     2.8      
                                     --------                --------
Total liabilities                     $890.4                  $902.0     
                                     ========                ========
                                    
                                    (Unaudited)              (Unaudited)    
                                    Quarter Ended            Nine Months Ended
                                    September 30,            September 30, 
                                    1996                     1996
                                                          
REVENUES    
Premiums                               $10.4                   $50.9    
Net investment income                   13.3                    39.4    
Net realized investment (losses)
gains                                   (0.2)                    0.2    
                                      --------              --------
Total revenues                          23.5                    90.5    
                                      --------              --------
BENEFITS AND EXPENSES    
Policy benefits                         20.7                    79.8    
Policy acquisition expenses              0.7                     2.3    
Other operating expenses                 0.2                     0.5    
                                      --------              --------
Total benefits and expenses             21.6                    82.6    
                                      --------              --------
Contribution from the Closed Block     $ 1.9                  $  7.9    
                                       ========             ========
    

Many expenses related to Closed Block operations are charged to     
operations outside the Closed Block; accordingly, the contribution     
from the Closed Block does not represent the actual profitability of     
the Closed Block operations.  Operating costs and expenses outside of     
the Closed Block are, therefore, disproportionate to the business     
outside the Closed Block.    
    
4. Segment Information    
    
The Company offers financial products and services in two major areas:     
Risk Management and Retirement and Asset Management.  Within these     
broad areas, the Company operates principally in five segments.    
    
The Risk Management group includes two segments: Regional Property and     
Casualty and Corporate Risk Management Services.  The Regional     
Property and Casualty segment includes property and casualty insurance     
products, such as automobile insurance, homeowners' insurance,     
commercial multiple peril insurance, and workers' compensation     
insurance.  These products are offered by Allmerica P&C through its     
operating subsidiaries, Hanover and Citizens.  Substantially all of     
the Regional Property and Casualty segment's earnings are generated in     
Michigan and the Northeast (Connecticut, Massachusetts, New York, New     
Jersey, New Hampshire, Rhode Island, Vermont and Maine).  The     
Corporate Risk Management Services segment includes group life and     
health insurance products and services which assist employers in     
administering employee benefit programs and in managing the related     
risks.    

Page 8


The Retirement and Asset Management group includes three segments:     
Retail Financial Services, Institutional Services and Allmerica Asset     
Management.  The Retail Financial Services segment includes variable     
annuities, variable universal life, traditional and health insurance     
products distributed via retail channels to individuals across the     
country.  The Institutional Services segment includes primarily group     
retirement products such as 401(k) plans, tax-sheltered annuities and     
GIC contracts which are distributed to institutions across the country     
via worksite marketing and other arrangements.  Allmerica Asset     
Management is a Registered Investment Advisor which provides     
investment advisory services to other institutions, such as insurance     
companies and pension plans.    
    
In addition to the five operating segments, the Company also has a     
Corporate segment, which consists primarily of Senior Debentures and a     
portion of the net proceeds from the Company's initial public     
offering.    
    
Summarized below is financial information with respect to business     
segments for the periods indicated.    
    

    
    
                                     (Unaudited)            (Unaudited)    
                                    Quarter Ended        Nine Months Ended    
                                     September 30,          September 30,    
(In millions, except    
 per share data)                   1996        1995        1996      1995    
                                                             
    
Revenues: 
  Risk Management    
    Regional Property and
      Casualty                    $   539.3    $   540.3  $ 1,634.9 $ 1,569.9
    Corporate Risk Management
      Services                         90.7         82.0      267.1     235.8
                                  ---------    ---------  --------- ---------
        Subtotal                      630.0        622.3    1,902.0   1,805.7
                                  ---------    ---------  --------- ---------

  Retirement and Asset Management 
    Retail Financial Services         112.2        123.0      332.7     383.3
    Institutional Services             63.8         76.3      198.6     263.8
    Allmerica Asset Management          1.7          1.2        6.2       3.3
                                  ---------    ---------  --------- ---------
      Subtotal                        177.7        200.5      537.5     650.4
                                  ---------    ---------  --------- ---------
    Corporate                           0.5          0.0        1.8       0.0
    Eliminations                       (1.9)         0.0       (6.3)      0.0
                                  ---------    ---------  --------- ---------
      Total                       $   806.3    $   822.8  $ 2,435.0 $ 2,456.1
                                  =========    =========  ========= =========
Income (loss) from continuing     
  operations before income taxes:    
    Risk Management    
      Regional Property and 
        Casualty                  $    57.8    $    63.2  $   162.4 $   157.8
      Corporate Risk Management     
        Services                        3.7          5.1       11.2       9.9
                                  ---------    ---------  --------- ---------
        Subtotal                       61.5         68.3      173.6     167.7
                                  ---------    ---------  --------- ---------
    Retirement and Asset Management           
      Retail Financial Services        18.9         11.9       54.0      27.7
      Institutional Services           12.7          9.0       38.3      40.0
      Allmerica Asset Management        0.0          0.6        0.5       1.7
                                  ---------    ---------  --------- ---------
        Subtotal                       31.6         21.5       92.8      69.4
                                  ---------    ---------  --------- ---------
      Corporate                        (4.0)         0.0      (12.2)      0.0
                                  ---------    ---------  --------- ---------
        Total                     $    89.1    $    89.8  $   254.2 $   237.1
                                  =========    =========  ========= =========




                                 (Unaudited)
                                    As of               As of 
                                  September           December 31,
                                  30, 1996               1995
                                                
Identifiable assets:    
  Risk Management    
    Regional Property and 
      Casualty                    $ 5,773.6           $ 5,741.8      
    Corporate Risk Management 
      Services                        519.7               458.9     
                                  ---------           ---------
        Subtotal                    6,293.3             6,200.7      
                                  ---------           ---------
  Retirement and Asset Management           
    Retail Financial Services       8,490.5             7,218.6      
    Institutional Services          3,898.6             4,280.9      
    Allmerica Asset Management          2.9                 2.1      
                                  ---------           ---------
      Subtotal                     12,392.0            11,501.6      
      Corporate                        43.6                55.4     
                                  ---------           ---------
        Total                     $18,728.9           $17,757.7      
                                  =========           =========   

 
Page 9
   
                                     PART I    
                                     ITEM 2    
    
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF    
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS    
    
    
The following analysis of the interim consolidated results of     
operations and financial condition of the Company should be read in     
conjunction with the interim Consolidated Financial Statements and     
related footnotes included elsewhere herein.    
    
INTRODUCTION    
    
The results of operations for Allmerica Financial Corporation and     
subsidiaries ("AFC" or "the Company") include the accounts of AFC,     
First Allmerica Financial Life Insurance Company ("FAFLIC", formerly     
State Mutual Life Assurance Company of America ["State Mutual"]), its     
wholly owned life insurance subsidiary, Allmerica Financial Life     
Insurance and Annuity Company ("AFLIAC", formerly SMA Life), Allmerica     
Property & Casualty Companies, Inc. ("Allmerica P&C", a 59.5%-owned     
non-insurance holding company), The Hanover Insurance Company     
("Hanover", a wholly owned subsidiary of Allmerica P&C), Citizens     
Corporation ("Citizens", an 82.5%-owned subsidiary of Hanover),     
Citizens Insurance Company of America (a wholly owned subsidiary of     
Citizens) and certain other insurance and non-insurance subsidiaries.    
    
CLOSED BLOCK    
    
On completion of its demutualization, FAFLIC established a Closed     
Block for the payment of future benefits, policyholders' dividends and     
certain expenses and taxes relating to certain classes of policies.      
FAFLIC allocated to the Closed Block an amount of assets expected to     
produce cash flows which, together with anticipated revenues from the     
Closed Block business, are reasonably expected to be sufficient to     
support the Closed Block business.  The Closed Block includes only     
those revenues, benefit payments, dividends and premium taxes     
considered in funding the Closed Block and excludes many costs and     
expenses associated with operating the Closed Block and administering     
the policies included therein.  Since many expenses related to the     
Closed Block were excluded from the calculation of the Closed Block     
contribution, the contribution from the Closed Block does not     
represent the actual profitability of the Closed Block.  As a result     
of such exclusion, operating costs and expenses outside the Closed     
Block are disproportionate to the business outside the Closed Block.    
    
The contribution from the Closed Block is included in 'Other income'     
in the interim Consolidated Financial Statements.  The pre-tax     
contribution from the Closed Block was $1.9 million for the quarter     
ended and $7.9 million for the nine months ended September 30,  1996.    

Page 10
   
    
FAFLIC's conversion to a stock life insurance company, which was     
completed October 16, 1995, and the establishment of the Closed Block     
have affected the presentation of the Company's interim Consolidated     
Financial Statements.  For comparability with the prior period, the     
following table presents the results of operations of the Closed Block     
combined with the results of operations outside the Closed Block for     
the quarter ended and the nine months ended September 30, 1996.      
Management's discussion and analysis addresses the results of     
operations as combined unless otherwise noted.


                     (Unaudited)                      (Unaudited)
                             Quarter Ended                  Nine Months Ended 
                             September 30,                     September 30,       
 (In millions)           1996           1995               1996          1995
                                                             
REVENUES    
  Premiums                $567.6          $562.4          $1,709.3     $1,675.3 
  Universal life and     
   investment product 
   policy fees              49.9            43.1             144.9        128.0 
  Net investment income    187.2           181.6             541.2        542.8 
  Net realized investment 
  (losses) gains            (0.8)           18.4              53.5         24.1
  Realized gain on sale of     
   mutual fund processing    
   business                  0.0             0.0               0.0         20.7
  Other income              24.1            17.3              68.7         65.2 
                          --------        --------         --------    --------
    Total revenues         828.0           822.8           2,517.6      2,456.1 
                          --------        --------         --------    --------
BENEFITS, LOSSES AND 
EXPENSES    
Policy benefits, claims, 
losses and loss adjustment    
expenses                   496.3           498.5            1,540.8     1,514.3
Policy acquisition     
expenses                   118.1           119.8              360.4       355.2
Other operating     
expenses                   124.5           114.7              362.2       349.5
                          --------        --------         --------    --------
Total benefits, losses     
and expenses               738.9           733.0            2,263.4     2,219.0
                          --------        --------         --------    --------
Income before federal 
income taxes                89.1            89.8              254.2       237.1
                          --------        --------         --------    --------
Federal income tax expense     
(benefit)    
  Current                   32.7            23.8               77.0       75.3
  Deferred                 (11.5)            9.0              (19.0)      (0.1)
                          --------        --------         --------    --------
Total federal income tax     
expense                     21.2            32.8               58.0       75.2
                          --------        --------         --------    --------
Income before minority     
 interest and extraordinary     
 item                       67.9            57.0              196.2      161.9
Minority interest          (21.2)          (22.2)             (59.6)     (58.0)
                          --------        --------         --------    --------
Income before extraordinary     
item                        46.7            34.8              136.6      103.9
Extraordinary item -     
demutualization expenses     0.0            (4.7)               0.0      (10.7)
                          --------        --------         --------    --------
Net Income                 $46.7           $30.1             $136.6      $93.2 
                          ========        ========         ========    ========


Page 11


Results of Operations    
    
Consolidated Overview    
    
Quarter Ended September 30, 1996 Compared to Quarter Ended September     
30 ,1995    
    
The Company's consolidated net income for the third quarter increased 
$16.6 million, or 55.1%, to $46.7 million, compared to the same period 
in 1995.  Net income includes certain items which management believes 
are not indicative of overall operating trends.

The following table reflects consolidated net income adjusted for 
these items, all net of taxes and minority interest.
    


                                                     (Unaudited)    
                                                    Quarter Ended    
                                                     September 30,    
 (In millions)                                    1996              1995 
                                                            
Net income                                      $  46.7           $  30.1 
Adjustments:    
  Net realized investment gains                    (1.6)             (9.3) 
  Extraordinary item - demutualization expenses     0.0               4.7  
  Differential earnings tax adjustment             (2.4)              6.4
                                                --------          --------  
  Adjusted net income                           $  42.7           $  31.9 
                                                ========          ========  

    
The Company's adjusted net income increased $10.8 million, or 33.9%, to $42.7 
million in the third quarter of 1996, compared to the same period in 1995.  
This increase is primarily attributable to a pre-tax increase of $12.5 million 
in the Retail Financial Services segment and an after-tax and minority interest 
increase of $3.7 million in the Regional Property and Casualty segment. These 
increases were partially offset by pre-tax adjusted net losses in the Corporate 
segment of $3.8 million in the quarter ended September 30, 1996 primarily due 
to the interest expense on the Company's 7 5/8% Senior Debentures issued in 
October 1995.  The increase in the Retail Financial Services segment relates 
primarily to increased variable products' fee revenue and income earned on 
proceeds from the Company's October, 1995 inital public offering.  The increase 
in the Regional Property and Casualty segment was due primarily to a $5.7 
million arbitrated settlement from a voluntary pool, a $4.0 million 
reapportionment of an involuntary pool and a change in estimated equity in 
earnings from a limited partnership of $6.7 million.  These items were mostly 
offset by a decrease in favorable claims experience on the prior accident years 
at Hanover, where favorable development decreased from $25.6 million in the 
third quarter of 1995 to $13.0 million in the third quarter of 1996.  The 
Company expects reduced favorable reserve development at Hanover to continue to 
impact future earnings.

Premium revenue remained relatively stable, increasing $5.2 million, or 0.9%, 
to $567.6 million in the third quarter of 1996.  Premiums in the Corporate Risk 
Management Services segment increased $5.3 million, or 7.5%, to $75.7 million 
due to increases in group dental, group life and reinsurance coverages totaling 
$6.6 million.  Premium revenue in the Regional Property and Casualty segment 
was relatively flat, decreasing $1.7 million, or 0.4%, to $472.7 million.  

Universal life and investment-type product policy fees increased $6.8 million, 
or 15.8%, to $49.9 million during the third quarter of 1996.  This reflected 
additional deposits and appreciation on variable products account balances.

Net realized losses on investments were $0.8 million in the third quarter of 
1996, compared to net realized gains of $18.4 million in 1995.  This change is 
primarily attributable to increased losses on sales of fixed maturities and 
equity securities of $20.5 million and $3.1 million, respectively, due to less 
favorable market conditions in the third quarter of 1996, partially offset by 
additional gains on sales of real estate of $7.1 million.

Net investment income increased $5.6 million, or 3.1%, to $187.2 million during 
the third quarter of 1996 compared to the same period in 1995.  Income on 
investments financed with repurchase agreements ("pre-invested assets") in 1996 
totaled approximately $9.5 million during the third quarter and income on the 
proceeds of the initial public offering and from the issuance of Senior 
Debentures in October 1995 was approximately $6.8 million.  Additionally, there 
was a $6.7 million change in estimated equity in earnings from a limited 
partnership in 1996.  These increases were partially offset by a decrease of 
$13.8 million resulting from a reduction in invested assets due to declining 
GIC deposits.  Since March 1995, when S&P lowered the claims-paying ratings of 
FAFLIC to A+ (Good), sales of traditional GICs have substantially ceased. 
Additionally, income on mortgage loans and real estate decreased due to 
reductions in these portfolios.

Page 12


Other income increased $6.8 million to $24.1 million for the quarter ended 
September 30, 1996.  This increase was primarily attributable to an arbitrated 
settlement on a reinsurance contract of $2.9 million in the Regional Property 
and Casualty segment, a $2.2 million increase in investment management income 
in the Retail Financial Services segment and a $2.5 million increase in 
administrative fees in the Corporate Risk Management Services segment.

Policy benefits, claims, losses and loss adjustment expenses remained 
relatively stable, decreasing $2.2 million, or 0.4% to $496.3 million during 
the third quarter of 1996. This decrease is primarily attributable to decreased 
policy benefits of $15.2 million, or 28.6%, in the Institutional Services 
segment primarily attributable to the continuing decline of Guaranteed 
Investment Contracts ("GICs") during 1996, as well as a $4.0 million, or 5.4% 
decrease in Retail Financial Services due primarily to reserve strengthening in 
the disability insurance line in 1995 and improved morbidity experience in this 
line during 1996. These increases were partially offset by an $11.5 million, or 
3.5%, increase in losses and loss adjustment expenses ("LAE") in the Company's 
Regional Property and Casualty segment primarily as a result of a decrease in 
favorable claims experience on prior accident years at Hanover.  Additionally, 
Corporate Risk Management Services benefits increased $5.5 million, or 11.7% in 
the third quarter of 1996, principally due to premium growth and less favorable 
loss experience.

Policy acquisition expenses consist primarily of commissions, premium taxes and 
other policy issuance costs.  Policy acquisition expenses decreased $1.7 
million, or 1.4%, to $118.1 million during the quarter ended September 30, 1996 
compared to the same period in 1995.  This was primarily due to a decrease of 
$3.2 million, or 3.0%, to $102.8 million in the Regional Property and Casualty 
segment due primarily to the reapportionment of a involuntary pool and an 
increase in deferrable costs attributable to premiums  assumed  in a 
reinsurance contract.  This decrease was partially offset by an increase in the 
Retail Financial Services segment of $1.3 million, or 10.5%, to $13.7 million, 
primarily due to growth in variable products.

Other operating expenses increased $9.8 million, or 7.9%, to $124.5 million in 
the third quarter of 1996 compared to the same period in 1995.  This change was 
primarily due to short-term borrowing costs of $6.2 million incurred in 1996, 
$3.8 million of interest paid on the Company's Senior Debentures and increased 
commissions and claims processing expenses of $4.1 million in the Corporate 
Risk Management segment.  These increases were partially offset by a $4.0 
million decrease in the Regional Property and Casualty segment primarily 
attributable to reduced employee related expenses and commissions.

Federal income tax expense decreased $11.6 million in the third quarter of 
1996, while the effective tax rate decreased from 36.6% to 23.8% in the same 
period.  For the life insurance subsidiaries, a decrease in the effective rate 
from 63.4% to 28.4% resulted primarily from a differential earnings charge of 
$6.4 million during the third quarter of 1995 compared to a differential 
earnings benefit of $2.4 million for the same period in 1996.  For the Regional 
Property and Casualty subsidiaries, a slight decrease in the effective rate 
from 25.3% to 21.3% reflects a higher underwriting loss and a greater 
proportion of pre-tax income from tax-exempt bonds in 1996, and to reserves 
provided for revisions in estimated prior year tax liabilities in the third 
quarter of 1995.

Nine Months Ended September 30, 1996 Compared to Nine  Months Ended September 
30, 1995

The Company's consolidated net income for the nine months ended September 30, 
1996 increased $43.4 million, or 46.6%, to $136.6 million, compared to the same 
period in 1995.  Net income includes certain items which management believes 
are not indicative of overall operating trends.

The following table reflects consolidated net income adjusted for these items, 
all net of taxes and minority interest.
    


                                                     (Unaudited)    
                                                  Nine Months Ended    
                                                     September 30,    
(In millions)                                     1996              1995 
                                                            
Net income                                      $  136.6          $  93.2 
Adjustments:    
  Net realized investment gains                    (23.9)           (11.7) 
  Realized gain on sale of mutual fund
    processing business                              0.0             13.4 
  Contingency payment from sale of mutual
    fund processing business                        (3.1)             0.0
  Extraordinary item - demututaliztion expenses      0.0             10.7
Differential earnings tax adjustment                (8.3)             7.7
                                                ---------          -------- 
  Adjusted net income                           $  101.3           $  86.5 
                                                =========          ========  


Page 13

    
The increase in adjusted net income of $14.8 million is primarily attributable 
to pre-tax increases of $29.3 million and $8.9 million in the Retail Financial 
Services and Institutional Services segments, respectively, partially offset by 
a pre-tax loss of $11.8 million and an after-tax decrease of $5.6 million in 
the Corporate and Regional Property and Casualty segments, respectively.  The 
increase in the Retail Financial Services segment resulted primarily from 
increased fees from strong variable product growth and income earned on 
proceeds from the Company's October, 1995 inital public offering.  The increase 
in the Institutional Services segment related principally to exiting certain 
unprofitable businesses in 1995.  These increases were partially offset by 
losses in the Corporate segment primarily due to the interest expense on the 
Company's 7 5/8% Senior Debentures issued in October 1995.  Additionally, the 
Regional Property and Casualty segment's adjusted net income decreased 
primarily due to severe weather-related claims during the first six months of 
1996, partially offset by a $5.7 million arbitrated settlement from a voluntary 
pool, a $4.0 million reapportionment of an involuntary pool and a change in 
estimated equity in earnings from a limited partnership of $6.7 million.

Premium revenue increased $34.0 million, or 2.0%, to $1,709.3 million during 
the first nine months of 1996. Premiums in the Corporate Risk Management 
Services segment increased $22.2 million, or 11.0%, to $224.6 million due to 
increases in group dental, group life, and reinsurance coverages totaling $18.4 
million as well as increases of $3.6 million in stop loss products.  Property 
and casualty premiums earned increased $16.5 million, or 1.2%, to $1,407.5 
million.  This increase is primarily attributable to price increases in the 
homeowners' line at Hanover and price increases in the personal automobile and 
homeowners' lines at Citizens.  A 1.6 % increase in policies in force in the 
homeowners' line at Hanover and modest increases in policies in force in the 
personal automobile line at Hanover partially offset by rate decreases in this 
line, also contributed to the increase in net premiums earned.  Premiums in the 
Retail Financial Services segment decreased $4.5 million, or 5.5%, to $77.2 
million, primarily reflecting the Company's shift in focus from traditional 
life insurance products to variable life insurance and annuity products.

Universal life and investment product policy fees increased $16.9 million, or 
13.2%, to $144.9 million during the first nine months of 1996.  This resulted 
from additional deposits and appreciation on variable products account 
balances.

Net investment income before taxes decreased $1.6 million, or 0.3%, to $541.2 
million during the first nine months of 1996.  This decrease primarily reflects 
a reduction in invested assets due to declining GIC deposits resulting in a 
decline in investment income of $42.5 million.  This decrease was offset by 
approximately $17.3 million of income on proceeds from the Company's initial 
public offering and from the issuance of Senior Debentures in October 1995, as 
well as approximately $14.3 million in income from pre-invested assets and a 
$6.7 million adjustment in 1996 related to a change in estimated equity in 
earnings from a limited partnership.    The average gross yield of the fixed 
maturity investment portfolio decreased from 7.3% in the first nine months of 
1995 to 7.2% for the same period in 1996. 

Net realized gains on investments were $53.5 million and $24.1 million, before 
taxes, and $34.8 million and $15.7 million, after taxes, in the first nine 
months of 1996 and 1995, respectively.  In 1996, the Regional Property and 
Casualty segment revised its investment strategy, resulting in the sale of a 
substantial portion of its equity portfolio and the purchase of tax-exempt 
securities.  Consequently, Regional Property and Casualty segment realized 
gains increased $20.1 million, to $29.8 million on an after-tax basis for the 
nine months ended September 30, 1996.  These sales are consistent with the 
segment's strategy to maximize after-tax net investment income.

Results in the first nine months of 1995 included a $20.7 million pre-tax gain 
from the March 1995 sale of the Company's mutual fund processing business.

Other income increased $3.5 million, or 5.4%, to $68.7 million in the first 
nine months of 1996.  Other income attributable to the Corporate Risk 
Management Services segment increased $6.2 million, primarily from growth in 
Administrative Services Only ("ASO") and contract fees. Other income from the 
Retail Financial Services segment increased $5.9 million, primarily 
attributable to increased investment management income.  Additionally, other 
income in the Allmerica Asset Management and Regional Property and Casualty 
segments increased $2.9 million and $2.6 million, respectively.  These 
increases were partially offset by decreases in the Institutional Services 
segment resulting primarily from the sale of the mutual fund processing 
business in March of 1995 which had contributed revenues of approximately $13.6 
million in that year.  Other income in 1996 also included a non-recurring $4.8 
million pre-tax contingent payment related to the sale.

Policy benefits, claims, losses and loss adjustment expenses increased $26.5 
million, or 1.7%, to $1,540.8 million during the first nine months of 1996.  
This increase is primarily attributable to a $59.8 million, or 6.2%, increase 
in losses and LAE in the Company's Regional Property and Casualty segment as a 
result of catastrophe losses and severe weather during the first six months of 
1996.  Additionally, a $14.9 million, or 10.4%, increase in the Corporate Risk 
Management Services segment resulted primarily from product growth.  These 
increases were partially offset by decreased policy benefits of $44.9 million, 
or 26.7%, in the Institutional Services segment primarily resulting from the 
continuing decline of GICs during 1996.

Page 14


Policy acquisition expenses consist primarily of commissions, premium taxes and 
other policy issuance costs.  Policy acquisition expenses increased $5.2 
million, or 1.5%, to $360.4 million during the first nine months of 1996.  This 
was primarily due to an increase of $5.8 million, or 1.9%, to $313.3 million in 
the Regional Property and Casualty segment reflecting growth in net premiums 
earned.

Other operating expenses increased $12.7 million, or 3.6%, to $362.2 million in 
the first nine months of 1996 compared to the same period in 1995 primarily due 
to increased expenses in the Corporate Risk Management Services, Corporate and 
Retail Financial Services segments.  Other operating expenses in the Corporate 
Risk Management Services segment increased $14.8 million, or 18.3%, to $95.6 
million in 1996 as a result of increased commissions, claims processing 
expenses and field office expenses, resulting from the increased volume of both 
premiums and claims.  Other operating expenses in the Retail Financial Services 
segment increased $9.7 million, or 12.3%, to $88.5 million in 1996, primarily 
from an increase in short-term borrowing costs of $9.0 million.  Additionally, 
 the Company incurred $14.0 million of other operating expenses in the 
Corporate segment in the first nine months of 1996, principally related to 
interest paid on the Company's Senior Debentures.  These increases were 
partially offset by a decrease of $18.6 million in the Institutional services 
segment related to the sale of the mutual fund processing business in March 
1995, and by a decrease of $5.3 million in the Regional Property and Casualty 
segment resulting from lower employee related expenses.

Federal income tax expense decreased $17.2 million in the first nine months of 
1996, while the effective tax rate decreased from 31.8% to 22.8% in the same 
period. For the life insurance subsidiaries, a decrease in the effective rate 
from 50.8% to 27.9% resulted primarily from a differential earnings benefit of 
$8.3 million in the first nine months of 1996 versus a differential earnings 
charge $7.7 million in the same period of 1995.  For the property and casualty 
subsidiaries, a slight decrease in the effective rate from 22.2% to 20.0% 
resulted from a higher underwriting loss and a greater proportion of pre-tax 
income from tax-exempt bonds in 1996, and to reserves provided for revisions of 
estimated prior tax liabilities in the first nine months of 1995.

Segment Results

The following is management's discussion and analysis of the Company's results 
of operations by business segment.  The Company offers financial products and 
services in two major areas: Risk Management and Retirement and Asset 
Management. Within these broad areas, the Company conducts business principally 
in five operating segments.   These segments are Regional Property and 
Casualty; Corporate Risk Management Services; Retail Financial Services; 
Institutional Services; and Allmerica Asset Management.  The Regional Property 
and Casualty segment consists of the Company's 59.5% ownership of Allmerica 
P&C; however, all property and casualty results presented include 100% of 
Allmerica P&C's pre-tax results of operations, consistent with the presentation 
in the Company's consolidated financial statements.  The other segments are all 
owned and operated by FAFLIC and its wholly owned subsidiaries.  

In addition to the five operating segments, the Company also has a Corporate 
segment, which consists primarily of Senior Debentures and a portion of the net 
proceeds from the Company's initial public offering.  These proceeds are 
invested in fixed maturities at September 30, 1996.

Risk Management

Regional Property and Casualty

The following table summarizes the results of operations for the Regional 
Property and Casualty segment for the periods indicated.
    



                                   (Unaudited)            (Unaudited)
                                  Quarter Ended        Nine Months Ended 
                                  September 30,          September 30,
(In millions)                   1996        1995        1996        1995
                                                                
Revenues
  Net premiums earned          $472.7      $474.4      $1,407.5    $1,391.0
  Net investment income          63.0        53.7         171.6       157.7
  Net realized gains             (1.6)       10.4          45.9        13.9
  Other income                    5.2         1.8           9.9         7.3
                               -------     -------     ---------   ---------
Total revenues                  539.3       540.3       1,634.9     1,569.9

Losses and LAE <fn1>            336.4       324.9       1,029.3       969.5
Policy acquisition and other
operating expenses              145.1       152.2         443.2       442.6
                               -------     -------     ---------    --------
Income before taxes            $ 57.8      $ 63.2      $  162.4    $  157.8
                               =======     =======     =========   =========
<FN>
<fn1>
Includes policyholders' dividends of $8.7 million and $7.0 million for the 
nine months ended September 30, 1996 and 1995, respectively, and $3.7 million 
and $2.6 million for the quarters ended September 30, 1996 and 1995, 
respectively.
</FN>


Page 15

    
Quarter Ended September 30, 1996 Compared to Quarter Ended September 30, 1995

INCOME BEFORE TAXES

Income before taxes decreased $5.4 million, to $57.8 million in the third 
quarter of 1996, compared to the same period in 1995. Excluding realized gains 
and losses, income before taxes increased $6.6 million, to $59.4 million in the 
third quarter of 1996. The increase in income before taxes is primarily 
attributable to a $5.7 million arbitrated settlement from a voluntary pool and 
$4.0 million reapportionment of an involuntary pool. Net investment income 
increased $9.3 million, or 17.3% to $63.0 million, reflecting a change in 
estimated equity in earnings from a limited partnership of $6.7 million. This 
was offset by a $10.4 million increase in losses and loss adjustment expenses 
("LAE") to $332.7 million in the third quarter of 1996, resulting from a $12.6 
million decrease from $25.6 million in favorable claims experience on the prior 
accident years at Hanover. The Company expects reduced favorable development at 
Hanover to continue to impact future earnings.

LINES OF BUSINESS RESULTS

Personal Lines of Business

The personal lines of business represented 61.4% and 60.1% of total net 
premiums earned in the third quarter of 1996 and 1995, respectively.
    



                              Hanover           Citizens        Consolidated
For the Quarters
Ended September 30,         1996    1995      1996    1995      1996    1995
(In millions)
                                                        
Net premiums earned        $149.4  $148.9    $141.0  $136.1    $290.4  $285.0
Losses and loss 
  adjustment expenses       107.6    94.5      96.5   105.6     204.1   200.1
Policy acquisition and 
other underwriting 
expenses                     46.8    48.7      37.6    36.0      84.4    84.7
                           ------- -------   ------- -------   ------- -------
Underwriting (loss) 
profit                     $ (5.0) $  5.7    $  6.9  $ (5.5)   $  1.9  $  0.2
                           ======= =======   ======= =======   ======= =======


				    
Revenues

Personal lines of business net premiums earned increased  $5.4 million, to 
$290.4 million during the third quarter of 1996, compared to $285.0 million in 
the third quarter of 1995.  Hanover's personal lines of business net premiums 
earned remained relatively flat at $149.4 million during the third quarter of 
1996.  Increases in earned premium resulting from rate increases and increases 
in policies in force in the homeowners line were offset by rate decreases in 
the personal automobile line and a lower participation in an involuntary pool. 
 Hanover's premium growth in the personal automobile line has been impacted by 
a combined 16% rate decrease in Massachusetts during the past two years.  
Massachusetts currently accounts for approximately 36% of Hanover's personal 
automobile writings. Citizens' personal lines of business net premiums earned 
increased $4.9 million, or 3.6%, to $141.0 million in the third quarter of 
1996.  This increase is primarily attributable to price increases in the 
personal automobile and homeowners lines. This increase is partially offset by 
a 2.5% decrease in policies in force in the personal automobile line since 
December 31, 1995, attributable to continued strong competition in Michigan. 

Underwriting results

The personal lines of business underwriting profit increased $1.7 million, to a 
profit of $1.9 million in the third quarter of 1996.  Hanover's underwriting 
profit decreased $10.7 million to a loss of $5.0 million, while Citizens' 
underwriting loss increased $12.4 million to a profit of $6.9 million.

Page 16



The decrease in Hanover's underwriting profit resulted primarily from a $13.1 
million or 13.9% increase in losses and loss adjustment expenses to $107.6 
million in the third quarter of 1996. This increase is primarily attributable 
to a $7.3 million increase in the personal automobile line due to an increase 
in claims severity. Homeowners' losses and LAE increased $4.9 million, 
primarily attributable to increased loss frequency and severity and a $2.2 
million increase in catastrophe losses to $3.8 million. 
 
Citizens' underwriting results improved by $12.4 million, primarily 
attributable to a decrease in catastrophe losses. Catastrophe losses provided a 
$2.3 million benefit during the third quarter of 1996, resulting from a 
favorable re-estimation of catastrophe losses which occurred in the first half 
of 1996.  Citizens incurred catastrophe losses of $6.9 million in the third 
quarter of 1995.
 
Policy acquisition and other underwriting expenses at Hanover decreased $1.9 
million, to $46.8 million, primarily due to decreased commission and 
assessment expenses reflecting the reapportionment of a involuntary pool and an 
increase in deferrable costs attributable to premiums assumed in a 
reinsurance contract. The reapportionment resulted in a decrease in Hanover's 
participation in an involuntary pool that currently has operating losses. 
Citizens' policy acquisition and other underwriting expenses increased $1.6 
million, to $37.6 million in the third quarter of 1996. The increase is  
primarily attributable to the increase in net earned premium and expenses 
associated with an ongoing policy administration technology project, partially 
offset by decreases in employee related expenses and commissions.

Commercial Lines of Business

The commercial lines of business represented 38.6% and 39.9% of total net 
premiums earned in the third quarter of 1996 and 1995, respectively.
    



                              Hanover           Citizens        Consolidated
For the Quarters
Ended September 30,         1996    1995      1996    1995      1996    1995
(In millions)
                                                        
Net premiums earned        $112.5  $116.0    $ 69.8  $ 73.4    $182.3  $189.4
Losses and loss 
  adjustment expenses        83.5    82.5      45.1    39.7     128.6   122.2
Policy acquisition and 
other underwriting 
expenses                     40.3    46.1      18.5    21.4      58.8    67.5
Policyholders' dividends      1.7     1.1       2.0     1.5       3.7     2.6
                           ------- -------   ------- -------   ------- -------
Underwriting (loss) 
profit                     $(13.0) $(13.7)    $ 4.2  $ 10.8    $ (8.8) $ (2.9)
                           ======= =======   ======= =======   ======= =======


    
Revenues

Commercial lines of business net premiums earned decreased $7.1 million, to 
$182.3 million in the third quarter of 1996.  Hanover's commercial lines of 
business net premiums earned decreased $3.5 million, to $112.5 million. This 
decrease is primarily attributable to a $4.3 million, or 15.7% decrease in 
earned premium in the workers' compensation line primarily resulting from rate 
decreases of  15.8% since January 1, 1995, in this line.  Hanover's withdrawal 
from a large voluntary pool on December 1, 1995 also contributed to the 
decrease in net premiums earned. This was partially offset by a $2.1 million, 
or 8.4%, increase in earned premium, to $27.2 million in the commercial 
automobile line due to a 2.9% increase in policies in force.  Citizens' 
commercial lines of business net premiums earned decreased $3.6 million, or 
4.9%, to $69.8 million in the third quarter of 1996.  This decrease was 
primarily attributable to rate decreases in the workers' compensation line at 
Citizens as a result of continuing competition in this line in Michigan.  Rates 
in the workers' compensation line at Citizens were decreased  8.5%, 7.0% and 
6.4% effective May 1, 1995, December 1, 1995, and June 1, 1996, respectively.

Continued competitive conditions in the workers' compensation line at both 
Hanover and Citizens may result in future price decreases that will impact 
growth in this line. In addition, Hanover's premium growth in the commercial 
lines of business may be impacted by continued competitive pricing as a result 
of soft market conditions combined with Hanover's effort to maintain its 
current underwriting standards.

Page 17


Underwriting results

The commercial lines of business underwriting loss increased $5.9 million, to a 
loss of $8.8 million in the third quarter of 1996.  Hanover's underwriting loss 
improved $0.7 million, or 5.1%, to a loss of $13.0 million, while Citizens' 
underwriting profit decreased $6.6 million, to $4.2 million in the third 
quarter of 1996.

Hanover's commercial lines of business losses and LAE increased $1.0 million, 
or 1.2%, to $83.5 million in the third quarter of 1996. This increase is 
primarily attributable to a $7.5 million increase, to $16.9 million, in losses 
and LAE in the workers' compensation line, reflecting a decrease in favorable 
claims experience on prior accident years.  A $3.4 million increase in the 
commercial automobile line resulting from increased severity also contributed 
to the increase in losses and LAE.  This was offset by decreased losses in the 
voluntary pools resulting from Hanover's withdrawal from a large voluntary pool 
on December 1, 1995.

Citizens' underwriting profit decreased $6.6 million, to  $4.2 million as a 
result of increased loss frequency in the commercial multiple peril and workers 
compensation lines. Catastrophe losses decreased $2.3 million to a benefit of 
$1.5 million.  This benefit resulted from a favorable re-estimation of 
catastrophe losses which occurred in the first half of 1996.  Losses and LAE in 
the commercial multiple peril line increased  $2.9 million, or 31.5%, to $12.1 
million and  losses and LAE in the workers' compensation line increased  $1.5 
million, or 10.2%, to $16.2 million.

Policy acquisition and other underwriting expenses in the commercial lines of 
business decreased  $8.7 million, or 12.9%, to $58.8 million in the third 
quarter of 1996. Hanover's policy acquisition and other underwriting expenses 
decreased $5.8 million, or 12.6%, to $40.3 million, primarily attributable to a 
decrease in commissions and assessment expenses resulting from a 
reapportionment of an involuntary pool and the decrease in net earned premium. 
Citizens' policy acquisition and other underwriting expenses decreased $2.9 
million, or 13.6%, to $18.5 million, resulting from decreases in net earned 
premium and decreases in employee related expenses and commissions.

Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 
30, 1995

INCOME BEFORE TAXES

Income before taxes for the nine months ended September 30, 1996 increased $4.6 
million, or 2.9%, to $162.4 million, compared to the same period in 1995. The 
increase in income before taxes is primarily attributable to a $32.0 million 
increase in realized gains, primarily related to the sale of equity securities. 
This increase reflects the Company's decision during the first quarter of 1996 
to increase the proportion of debt securities in the Regional Property and 
Casualty segment's portfolio.  Excluding net realized gains, income before 
taxes decreased  $27.4 million, to $116.5 million for the nine months ended 
September 30, 1996. Net income in the nine month period of 1996 was 
significantly impacted by catastrophes and other severe weather related losses. 
 This resulted in a $58.1 million increase in losses and loss adjustment 
expenses  to $1,020.6 million in the nine months ended September 30, 1996. 
Catastrophe losses in the nine months ended September 30, 1996 were $58.5 
million, compared to $29.1 million in the comparable 1995 period. The increase 
in losses and LAE were partially offset by an increase in net investment income 
of $13.9 million, or 8.8%, to $171.6 million. This increase was partially a 
result of a change in estimated equity in earnings from a limited partnership 
of $6.7 million. Net investment income in the nine month period ended September 
30, 1995 was unfavorably impacted by a $2.4 million charge related to the pre-
refunding of municipal bonds. Net income during the nine month period ended 
September 30, 1996 was also favorably impacted by a $5.7 million arbitrated 
settlement from a voluntary pool during the third quarter of 1996.

Page 18


LINES OF BUSINESS RESULTS

Personal Lines of Business

The personal lines of business represented 60.8% and 59.6% of total net 
premiums earned in the nine months ended September 30, 1996 and 1995, 
respectively.
    



                              Hanover           Citizens        Consolidated
For the Nine Months
Ended September 30,         1996    1995      1996    1995      1996    1995
(In millions)
                                                        
Net premiums earned        $442.2  $429.7    $413.3  $399.1    $855.5  $828.8 
Losses and loss 
  adjustment expenses       321.2   279.1     308.1   304.4     629.3   583.5
Policy acquisition and 
other underwriting 
expenses                    146.1   136.8     110.2   108.8     256.3   245.6
                           ------- -------   ------- -------   ------- -------
Underwriting (loss) 
profit                     $(25.1) $ 13.8    $ (5.0) $(14.1)   $(30.1) $ (0.3)
                           ======= =======   ======= =======   ======= =======

				    
Revenues

Personal lines of business net premiums earned for the nine months ended 
September 30, 1996 increased  $26.7 million, or 3.2%, to $855.5 million, 
compared to $828.8 million in the same period of 1995.  Hanover's personal 
lines of business net premiums earned increased $12.5 million, or 2.9%, to 
$442.2 million during the nine months ended September 30, 1996. This increase 
is primarily attributable to price increases in the homeowners line and a 1.6% 
increase in policies in force in the homeowners line along with a modest 
increase in policies in force in the personal automobile line. Citizens' 
personal lines of business net premiums earned increased $14.2 million, or 
3.6%, to $413.3 million in the nine months ended September 30, 1996.  This 
increase is primarily attributable to price increases in the personal 
automobile and homeowners lines.  Citizens' increase is partially offset by a 
2.5% decrease in policies in force in the personal automobile line since 
December 31, 1995, attributable to continued strong competition in Michigan.

Underwriting results

The personal lines of business underwriting loss for the nine months ended 
September 30, 1996 increased $29.8 million, to a loss of $30.1 million.  
Hanover's underwriting results deteriorated  $38.9 million to a loss of $25.1 
million, while Citizens' underwriting loss improved $9.1 million to a loss of 
$5.0 million.  

Hanover's personal lines of business losses and LAE increased $42.1 million, or 
15.1%, to $321.2 million in the nine months ended September 30, 1996. This 
increase is primarily attributable to a $23.9 million increase in losses and 
LAE in the homeowners line, resulting from increased catastrophes and severe 
weather. Losses and LAE in the personal automobile line increased  $14.3 
million, or 6.8%, to $223.2 million reflecting primarily increased loss 
frequency.  Catastrophe losses in the personal lines of business increased 
$15.6 million, to $25.9 million in the nine months ended September 30, 1996 
from $10.3 million during the comparable 1995 period. 
 
Citizens' underwriting loss decreased primarily as a result of the increase in 
net premiums earned in the personal automobile line and homeowners line of $8.6 
million and $4.5 million, respectively.  Favorable claims experience on current 
and prior years resulted in a $17.7 million decrease in losses and LAE in the 
personal automobile line. This decrease was offset by a $20.9 million increase 
in losses and LAE  in the homeowners line as a result of increases in 
catastrophes of $8.5 million in this line.

Policy acquisition and other underwriting expenses in the personal lines of 
business increased $10.7 million, or 4.4%, to $256.3 million in the nine months 
ended September 30, 1996.  This increase is primarily attributable to an 
increase of  $9.3 million, or 6.8%, to $146.1 million at Hanover for the nine 
months ended September 30, 1996. This increase is due to increases in net 
earned premium, a $3.3 million increase in group business expenses and a $2.2 
million increase in expenses

Page 19


associated with the policy administration technology project.  Policy
acquisition and other underwriting expenses in the personal lines of business
at Citizens increased $1.4 million, to $110.2 million for the nine months ended
September 30, 1996. This increase is primarily attributable to increases in net
earned premium and expenses associated with an ongoing policy administration
technology project, partially offset by decreases in employee related expenses.

Commercial Lines of Business

The commercial lines of business represented 39.2% and 40.4% of total net 
premiums earned in the nine months ended September 30, 1996 and 1995, 
respectively.
    



                              Hanover           Citizens        Consolidated
For the Nine Months
Ended September 30,         1996    1995      1996    1995      1996    1995
(In millions)
                                                        
Net premiums earned        $338.9  $353.6    $213.1  $208.6    $552.0  $562.2 
Losses and loss 
  adjustment expenses       238.3   252.0     153.0   127.0     391.3   379.0 
Policy acquisition and 
  other underwriting 
  expenses                  128.4   140.8      52.1    56.2     180.5   197.0 
Policyholders' dividends      3.1     2.8       5.6     4.2       8.7     7.0
                           ------- -------   ------- -------   ------- -------
Underwriting (loss) 
profit                     $(30.9) $(42.0)   $  2.4  $ 21.2    $(28.5) $(20.8)
                           ======= =======   ======= =======   ======= =======


    
Revenues

Commercial lines of business net premiums earned for the nine months ended 
September 30, 1996 decreased $10.2 million, or 1.8%, to $552.0 million.  
Hanover's commercial lines of business net premiums earned decreased $14.7 
million, or 4.2%, to $338.9 million. This decrease is primarily attributable to 
Hanover's withdrawal from a large voluntary pool on December 1, 1995, and to 
rate decreases of 15.8% since January 1, 1995, in the workers compensation 
line.  Citizens' commercial lines of business net premiums earned increased 
$4.5 million, or 2.2%, to $213.1 million in the nine months ended September 30, 
1996. The increase is primarily attributable to a 9.5% increase in policies in 
force in the commercial multiple peril line since December 31, 1995.  This 
growth continues to be offset by rate reductions in the workers compensation 
line as a result of continuing competition in this line.  Rates  in the 
workers' compensation line at Citizens were decreased  8.5%, 7.0% and 6.4% 
effective May 1, 1995, December 1, 1995, and June 1, 1996, respectively.


Underwriting results

The commercial lines of business underwriting loss for the nine months ended 
September 30, 1996 increased $7.7 million, or 37.0% to a loss of $28.5 million. 
 Hanover's underwriting loss improved $11.1 million, or 26.4%, to a loss of 
$30.9 million and Citizens' underwriting profit decreased $18.8 million, to a 
profit of $2.4 million in the nine months ended September 30, 1996.

Hanover's commercial lines of business losses and LAE decreased $13.7 million, 
or 5.4%, to $238.3 million in the nine months ended September 30, 1996.  This 
improvement is primarily attributable to a decrease of $8.7 million in the 
commercial automobile line as a result of favorable claims experience on the 
current and prior years and an $23.1 million decrease in losses in LAE 
resulting from the withdrawal of a large voluntary pool. However, losses and 
LAE in the workers' compensation line increased $7.9 million, to $40.7 million, 
primarily due to an increase in claims severity and a decrease in favorable 
claims experience on prior accident years.  Commercial multiple peril losses 
and LAE increased $4.3 million, to $114.9 million due to unfavorable claims 
experience on prior accident years and an increase in catastrophes from $5.8 
million in 1995 to $11.3 million in 1996.

Citizens' underwriting profit decreased primarily due to increased claims 
activity in the commercial multiple peril line, resulting from severe weather 
and catastrophe losses which adversely impacted this line. Commercial multiple 
peril losses

Page 20


and LAE increased $15.4 million, or 53.1%, to $44.4 million in the nine months
ended September 30, 1996. Catastrophe losses were $1.5 million in this lines of
business during the nine months ended September 30, 1996 compared to $0.8
million in the comparable period of 1995.

Policy acquisition and other underwriting expenses in the commercial lines of 
business decreased  $16.5 million, or 8.4%, to $180.5 million in the nine 
months ended September 30, 1996. Hanover's policy acquisition expenses and 
other underwriting expenses decreased $12.4 million, or 8.8%, to $128.4 
million, primarily attributable to the decrease in net earned premium and a 
decrease in commissions and assessment expenses resulting from the 
reapportionment of an involuntary pool. This was partially offset by a $1.4 
million increase associated with the policy administration technology project. 
Citizens' policy acquisition and other underwriting expenses in the commercial 
lines of business decreased  $4.1 million, or 7.3%, to $52.1 million, primarily 
attributable to decreases in employee related expenses, partially offset by the 
effect of increases in net earned premium.


INVESTMENT RESULTS

Net investment income before taxes increased $13.9 million, or 8.8%, to $171.6 
million during the first nine months of 1996 compared to $157.7 million in the 
comparable period of 1995. This increase was partially as a result of a change 
in estimated equity in earnings from a limited partnership of $6.7 million.  
Net investment income in 1995 was adversely impacted by a $2.4 million charge 
related to the pre-refunding of municipal bond securities. Average yields on 
debt securities remained constant at 6.3% for both nine month periods. Net 
investment income after taxes increased $11.6 million, to $138.9 million, 
primarily attributable to the increase in tax-exempt debt securities. During 
the first quarter of 1996, the Regional Property and Casualty segment revised 
its investment strategy, resulting in the sale of a substantial portion of its 
equity portfolio and the purchase of tax-exempt securities. This is consistent 
with this segment's strategy of maximizing after-tax net investment income. As 
a result of the sale of equity securities, the Regional Property and Casualty 
segment had realized gains of $45.9 million during the nine months ended 
September 30, 1996, compared to realized gains of $13.9 million in 1995.

RESERVE FOR  LOSSES AND LOSS ADJUSTMENT EXPENSES

The Regional Property and Casualty segment maintains reserves to provide for
its estimated ultimate liability for losses and loss adjustment expenses with
respect to reported and unreported claims incurred as of the end of each
accounting period. These reserves are estimates, involving actuarial
projections at a given point in time, of what management expects the ultimate
settlement and administration of claims will cost based on facts and
circumstances then known, predictions of future events, estimates of future
trends in claim severity and judicial theories of liability and other factors.
The inherent uncertainty of estimating insurance reserves is greater for
certain types of property and casualty insurance lines, particularly workers'
compensation and other liability lines, where a longer period of time may
elapse before a definitive determination of ultimate liability may be 
made, where the technological, judicial and political climates involving these
types of claims are changing.

Page 21


The Regional Property and Casualty segment regularly updates its reserve 
estimates as new information becomes available and further events occur which 
may impact the resolution of unsettled claims. Changes in prior reserve 
estimates are reflected in results of operations in the year such changes are 
determined to be needed and recorded.  The table below provides a 
reconciliation of the beginning and ending reserve for unpaid losses and LAE as 
follows:
    


For the nine months ended September 30, (In millions)     1996        1995
                                                                
Reserve for losses and LAE, beginning of period           $2,896.0    $2,821.7
Incurred losses and LAE, net of 
  reinsurance recoverable:
    Provision for insured events of the current year       1,100.9     1,042.8
    Decrease in provision for insured 
      events of prior years                                  (80.3)      (80.4)
                                                          ---------   ---------
Total incurred losses and LAE                              1,020.6       962.4
                                                          ---------   ---------
Payments, net of reinsurance recoverable:
  Losses and LAE attributable to 
    insured events of current year                           516.0       428.0
  Losses and LAE attributable to 
  insured events of prior years                              504.7       491.0
                                                          ---------   ---------
Total payments                                             1,020.7       919.0
                                                          ---------   ---------
Change in reinsurance recoverable on unpaid losses           (35.6)        7.9
                                                          ---------   ---------
Reserve for losses and LAE, end of period                 $2,860.3    $2,873.0
                                                          =========   =========

    
As part of an ongoing process, the reserves have been re-estimated for all 
prior accident years and were decreased by $80.3 million and $80.4 million for 
the nine month periods ended September 30, 1996 and 1995, respectively. 
Citizens' favorable development increased $9.6 million, to $26.0 million, 
primarily attributable to reduced medical costs in the personal automobile 
line. Favorable development at Hanover during the nine month period decreased 
$9.7 million, to $54.3 million, primarily attributable to unfavorable 
development in the commercial multiple peril lines.  During the third quarter 
of 1996, Hanover's favorable development decreased $12.6 million, to $13.0 
million, primarily attributable to decreased favorable development in the 
workers compensation and commercial multiple peril lines.  Although Hanover is 
experiencing decreases in favorable development in the workers compensation and 
commercial multiple peril lines, Hanover continues to experience increased 
favorable development in the personal automobile and commercial automobile 
lines.  The Company expects reduced favorable development at Hanover to 
continue to impact future earnings.

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 enactment, 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 Company and the industry, (iv) the 
relatively short-term nature of most policies, and (v) periodic estimates of 
required reserves by an independent actuarial consulting firm, 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. 
    
Page 22


Corporate Risk Management Services    
    
The following table summarizes the results of operations for the     
Corporate Risk Management Services ("CRMS") lines of business for the     
periods indicated.

    
    
    
                           (Unaudited)                      (Unaudited)
                          Quarter Ended                  Nine Months Ended 
                          September 30,                     September 30,   
(In millions)            1996          1995              1996            1995    
                                                                
Premiums and premium 
equivalents    
  Premiums             $ 75.7        $ 70.4             $224.6          $202.4
  Premium equivalents   145.9         130.2              432.4           379.3 
                      --------      --------           --------        --------
Total premiums and 
premium equivalents    $221.6        $200.6             $657.0          $581.7 
                      ========      ========           ========        ========

Revenues
  Premiums             $ 75.7        $ 70.4             $224.6          $202.4 
  Net investment income   5.8           4.9               16.0            12.8 
  Net realized gains      0.1           0.2                0.2             0.5 
  Other income            9.1           6.5               26.3            20.1 
                      --------      --------           --------        --------
Total revenues           90.7          82.0              267.1           235.8 

Policy benefits, 
claims and losses        52.5          47.0              158.0           143.1 
Policy acquisition 
expenses                  0.8           0.7                2.3             2.0 
Other operating
 expenses                33.7          29.2               95.6            80.8 
                      --------      --------           --------        --------
Income before taxes   $   3.7         $ 5.1              $11.2           $ 9.9 
                      ========      ========           ========        ========
    
Quarter Ended September 30, 1996 Compared to Quarter Ended September 30, 1995
        
Income before taxes decreased $1.4 million, or 27.5%, to $3.7 million in the 
third quarter of 1996 compared to the third quarter of 1995, primarily due to
increases in other operating expenses, partially offset by growth in ASO fees. 
Premium growth in the Company's fully insured group dental, reinsurance and 
group life product lines was offset by unfavorable claims experience during  
the quarter.    
    
Premiums increased $5.3 million, or 7.5%, to $75.7 million in the third quarter 
of 1996, primarily due to increases in fully insured group dental, reinsurance 
and group life product lines totaling $6.6 million.  These increases were 
partially offset by decreases of $1.2 million in full indemnity medical 
products.    
    
Net investment income increased $0.9 million, or 18.4% in the third quarter of 
1996, primarily due to income earned on proceeds from the Company's October,
1995 initial public offering.    
    
Other income increased $2.6 million, or 40%, to $9.1 million in the third
quarter of 1996, due primarily to growth in ASO contract fees.     
    
Policy benefits, claims and losses increased $5.5 million, or 11.7%, to $52.5 
million in the third quarter of 1996 compared to the same period in 1995.  This 
increase is principally attributable to premium growth, as noted above, and to 
unfavorable loss experience in the fully insured group dental, group life, full 
indemnity medical and accidental death and dismemberment products, 
partially offset by favorable loss experience in the risk sharing product
lines.
    
Other operating expenses increased $4.5 million, or 15.4%, to $33.7 million in
the third quarter of 1996, primarily due to increases in commissions and claims 
processing expenses to cover growth in premiums and claims volume.    
    
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 
30, 1995    
    
Income before taxes increased $1.3 million, or 13.1%, to $11.2 million in the 
first nine months of 1996 compared to the same period in 1995.  This increase 
is primarily attributable to premium growth in the Company's fully insured 
group dental, group life and reinsurance product lines, partially offset by
increases in policy benefits and operating expenses.    
    
Premiums increased $22.2 million, or 11.0%, to $224.6 million in the     
first nine months of 1996, primarily due to increases in fully insured group 
dental, group life, reinsurance and stop loss product lines totaling $21.8     
million.  These increases were partially offset by a decrease of $1.7 million 
in fully insured medical premiums.     

Page 23

    
Net investment income increased $3.2 million, or 25.0%, to $16.0 million in the 
first nine months of 1996, due to growth in invested assets, and to income 
earned on proceeds from the Company's October, 1995 initial public offering.    
    
Other income increased $6.2 million, or 30.8%, to $26.3 million in the first 
nine months of 1996, due primarily to growth in fees from ASO contracts.    
    
Policy benefits, claims and losses increased $14.9 million, or 10.4%, to $158.0 
million in the first nine months of 1996 compared to the same period in 1995. 
This increase is principally related to increased premium growth. Unfavorable 
loss experience in the fully insured group dental, reinsurance, fully 
insured medical and accidental death and dismemberment product lines was offset 
by favorable experience in the group life, stop loss and risk sharing product 
lines.    
    
Other operating expenses increased $14.8 million, or 18.3%, to $95.6 million 
for the nine months ended September 30, 1996, due primarily to increases in
commissions, claims processing expenses and field office expenses, resulting 
from the increased volume of both premiums and claims.    
    
Retirement and Asset Management    
    
Retail Financial Services    
    
The following table summarizes the results of operations for the     
Retail Financial Services lines of business for the periods indicated.    
    


                                   (Unaudited)            (Unaudited)
                                  Quarter Ended        Nine Months Ended 
                                  September 30,          September 30,
(In millions)                   1996        1995        1996        1995
                                                                
Revenues
  Premiums                     $ 19.2      $ 17.5      $ 77.2      $81.7
  Fees                           45.9        39.5       132.8      116.5
  Net investment income          65.6        57.5       188.8      168.4 
  Net realized gains (losses)    (4.5)        3.3        (4.7)       1.4
  Other income                    7.6         5.2        21.2       15.3
                               -------     -------     -------    -------
Total revenues                  133.8       123.0       415.3      383.3

Policy benefits, claims and 
losses                           69.5        73.5       230.1      233.4
Policy acquisition expenses      13.7        12.4        42.7       43.4
Other operating expenses         31.7        25.2        88.5       78.8
                               -------     -------     -------    -------
Income before taxes            $ 18.9      $ 11.9      $ 54.0     $ 27.7
                               =======     =======     =======    =======

    
Quarter Ended September 30, 1996 Compared to Quarter Ended September 30, 1995

Income before taxes increased $7.0 million, or 58.8%, to $18.9 million in the 
third quarter of 1996 compared to the third quarter of 1995. This increase was 
primarily attributable to growth in variable products' fee revenue, income 
earned on the proceeds from the October, 1995 initial public offerings and a 
decrease in policy benefits.  These increases were partially offset by realized 
losses on sales of investments and increased short-term borrowing costs.

Premiums increased $1.7 million, or 9.7%, to $19.2 million, during the third 
quarter of 1996.  This increase was primarily due to a $1.3 million increase in 
the disability income product line resulting from the timing of reinsurance 
contracts in 1995.

The increase in fee revenue of $6.4 million, or 16.2%, to $45.9 million in the 
third quarter of 1996 is due to additional deposits and appreciation on 
variable products' account balances.  Fees from annuities increased $4.1 
million, or 40.2%, to $14.3 million in the third quarter of 1996.  Fees from 
variable universal life policies increased $2.5 million, or 28.1%, to $11.4 
million for the third quarter of 1996

Net investment income increased $8.1 million, or 14.1%, to $65.6 million in the 
third quarter of 1996 compared to the third quarter of 1995 resulting primarily 
from $5.2 million in income earned on proceeds from the Company's October, 1995 
initial public offerings.  Additionally, increases in repurchase agreements 
used to finance additions to the investment portfolio have resulted in 
increased investment income.

Net realized gains of $3.3 million for the quarter ended September 30, 1995 
decreased $7.8 million to net realized losses of $4.5 million for the quarter 
ended September 30, 1996.  This change is principally related to $3.5 million 
of losses on

Page 24


disposals of fixed maturities during the third quarter of 1996 versus $3.3
million of gains on disposals of fixed maturities for the third quarter of
1995, due to less favorable market interest rate conditions in the third
quarter of 1996.

Policy benefits, claims, and losses decreased $4.0 million, or 5.4%, to $69.5 
million in the third quarter of 1996 compared to the same period in 1995. This 
resulted primarily from $2.8 million of reserve strengthening in the disability 
insurance line in 1995 and improved morbidity experience in this line during 
1996.  

Other operating expenses increased $6.5 million, or 25.8%, to $31.7 million for 
the quarter ended September 30, 1996.  This increase was primarily attributable 
to $4.7 million of additional interest expense in 1996 relating to short-term 
debt.

Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 
30, 1995

Income before taxes increased $26.3 million, or 94.9%, to $54.0 million in the 
first nine months of 1996 compared to the same period in 1995.  This increase 
was primarily attributable to growth in variable products' fee revenue, income 
earned on the proceeds from the October, 1995 initial public offerings and 
income on pre-invested assets, partially offset by increased short-term 
borrowing costs.

The decrease in premiums of $4.5 million, or 5.5%, to $77.2 million in the 
first nine months of 1996 is primarily due to the Company's shift in focus from 
traditional life insurance products to variable life insurance and annuity 
products.  Premiums from traditional life products decreased $3.9 million, or 
7.0%, to $51.6 million in the first nine months of 1996.  Premiums from 
individual health products decreased $0.8 million, or 3.1%, to $25.4 million in 
1996.

The increase in fee revenue of $16.3 million, or 14.0%, to $132.8 million in 
the first nine months of 1996 is due to additional deposits and appreciation on 
variable products account balances.  Fees from annuities increased $14.2 
million, or 55.3%, to $39.9 million in 1996.  Fees from variable universal life 
policies increased $5.9 million, or 22.8%, to $31.8 million in the first nine 
months of 1996.  These increases were partially offset by a continued decline 
in fees from non-variable universal life of $3.8 million.  The Company expects 
fees on this product to decrease as policies in force and related contract 
values decline.

Net investment income increased $20.4 million, or 12.1%, to $188.8 million in 
the first nine months of 1996 primarily from $13.6 million in income earned on 
proceeds from the Company's October, 1995 initial public offerings.  
Additionally, increases in repurchase agreements used to finance additions to 
the investment portfolio have resulted in a significant increase in investment 
income.

Policy benefits, claims, and losses decreased $3.3 million, or 1.4%, to $230.1 
million in the first nine months of 1996 compared to the same period in 1995.  
Decreases in individual health and non-variable universal life of $4.5 million 
and $3.5 million, respectively, resulted from improved morbidity and mortality 
experience in 1996.  These decreases were partially offset by an increase in 
variable products' policy benefits of $3.0 million, which related primarily to 
growth in these product lines.

Other operating expenses increased $9.7 million, or 12.3%, to $88.5 million for 
the nine months ended September 30, 1996.  This increase was primarily 
attributable to $9.0 million of additional interest expense in 1996 relating to 
short-term debt.

Page 25
    
    
Institutional Services    
    
The following table summarizes the results of operations for the     
Institutional Services segment for the periods indicated.    
    
    

                               (Unaudited)               (Unaudited)    
                               Quarter Ended             Nine Months Ended  
(In millions)                 September 30,             September 30,    
                              1996         1995         1996          1995 
                                                          
Revenues                      
   Fees, premiums,     
   non-insurance and other    
   income <FN1>               $6.4         $6.3         $23.6         $31.0 
   Net investment income    
      GICs                    22.5         36.3          76.2         118.7 
      Other                   29.5         29.2          86.3          85.1 
   Net realized gains          5.4          4.5          12.5           8.3 
   Gain on sale of mutual 
   fund processing business    0.0          0.0           0.0          20.7 
                             -----        -----         -----         ----- 
Total revenues                63.8         76.3         198.6         263.8 
 
Policy benefits, claims and 
losses    
    GICs                      20.3         33.2          71.0         107.8 
    Other                     17.6         19.9          52.4          60.5 
Policy acquisition expenses    0.7          0.7           2.1           2.3 
Other operating expenses      12.5         13.5          34.8          53.2 
                             -----        -----         -----         ----- 
Income before taxes          $12.7         $9.0         $38.3         $40.0 
                             =====        =====         =====         =====
<FN>
<FN1>
Fees, premiums and non-insurance income includes fees from     
retirement services, mutual fund services, institutional 401(K)     
recordkeeping services, and other miscellaneous non-insurance related     
fees.  In March 1995, the Company sold its mutual fund processing     
business.    
</FN>
                          
Quarter Ended September 30, 1996 compared to Quarter Ended September     
30, 1995    
    
Income before taxes increased $3.7 million, or 41.1%, to $12.7 million     
for the third quarter of 1996 compared to the third quarter of 1995.      
This increase was primarily attributable to a decline in other policy     
benefits, claims and losses of $2.3 million as a result of     
cancellations of defined benefit and defined contribution plans.      
Additionally, a decrease of $1.0 million in other operating expenses     
resulted from exiting certain unprofitable businesses in 1995.  An     
increase in realized investment gains of $0.9 million was offset by a     
decline in the interest margins on GICs of $0.9 million, due to     
declining GIC deposits.    
    
Net investment income related to GICs and interest credited to GIC     
contractholders have declined as a result of declining GIC deposits     
due to the downgrading in March 1995 of FAFLIC's S&P     
Rating to A+ (Good).  As a result, sales of traditional GICs have     
substantially ceased.  Management expects GIC deposits and related     
income to continue to decline.    
    
Net realized gains increased $0.9 million, to $5.4 million in the     
third quarter of 1996 primarily due to increased gains on the sale of     
real estate investments of $7.2 million, partially offset by     
additional losses of $4.5 million on sales of fixed maturity     
investments and to increased mortgage loan impairments of $2.0     
million.    
    
Other policy benefits, claims and losses consist primarily of benefits     
provided by the Company's defined contribution and defined benefit     
plans, including annuity benefits for certain defined benefit plan     
participants electing that option.  Other policy benefits, claims and     
losses decreased $2.3 million, or 11.6%, to $17.6 million for the     
third quarter of 1996, primarily due to reductions in interest     
credited to participants resulting from the aforementioned     
cancellations.    
    
Other operating expenses decreased $1.0 million, or 7.4%, to $12.5     
million for the third quarter of 1996.  This decrease was primarily     
attributable to exiting certain unprofitable recordkeeping businesses     
in 1995.    
    
Nine Months Ended September 30, 1996 Compared to Nine Months Ended     
September 30, 1995    
    
Income before taxes decreased $1.7 million, or 4.3%, to $38.3 million     
for the nine months ended September 30, 1996 compared to the nine     
months ended September 30, 1995.  This decrease was primarily     
attributable to the sale of the Company's mutual fund processing     
business in March 1995, resulting in a pre-tax gain of $20.7 million,     
partially offset by a pre-tax operating loss from that business of     
$4.8 million for the first nine months of 1995.  Also, a non-recurring     
$4.8 million contingent payment related to the sale was received in     
1996 and included in other income.  Additionally, other policy     
benefits, claims and losses declined $8.1 million as a result of     
defined benefit and defined contribution plan cancellations and     
favorable mortality experience in the group annuity line.  A decline     
in the interest margins on GICs of $5.7 million, due to declining GIC     
deposits was partially offset by an increase in realized investment     
gains of $4.2 million.    

Page 26

    
Fees, premiums, non-insurance and other income decreased $7.4 million,     
or 23.9%, to $23.6 million in the first nine months of 1996.  This     
decrease was primarily attributable to a $13.6 million decrease in     
revenues from the mutual fund processing business, partially offset by     
the 1996 receipt of a non-recurring $4.8 million contingent payment     
related to the sale.  Additionally, fee income increased $1.3 million     
from the appreciation of separate account balances in related defined     
benefit and defined contribution plans.    
    
Net investment income related to GICs and interest credited to GIC     
contractholders have declined during the first nine months of 1996 as     
a result of the aforementioned discontinuation of sales of traditional     
GICs.  Other net investment income increased $1.2 million in the first     
nine months of 1996, primarily due to income earned on proceeds from     
the Company's October, 1995 initial public offering.    
    
Net realized gains increased $4.2 million, to $12.5 million in the     
first nine months of 1996.  This change resulted primarily from     
increased gains from sales of real estate properties of $9.8 million,     
as well as decreases in impairments of other invested assets totaling     
$0.6 million.  These increases were partially offset by losses on     
sales of bonds of $7.2 million.    
    
Other policy benefits, claims and losses consist primarily of benefits     
provided by the Company's defined contribution and defined benefit     
plans, including annuity benefits for certain defined benefit plan     
participants electing that option.  Other policy benefits, claims and     
losses for defined benefit and defined contribution plans declined     
from $60.5 million in 1995 to $52.4 million in 1996.  This was     
primarily due to reductions in the interest credited to participants     
resulting from the aforementioned cancellations, and to favorable     
mortality experience in the group annuity line.       
    
Other operating expenses decreased $18.6 million, or 35.0%, to $34.8     
million in the first nine months of 1996.  This decrease was primarily     
attributable to the sale of the mutual fund processing business, which     
incurred $18.4 million of operating expenses in the first nine months     
of 1995.    
    
Allmerica Asset Management     
    
The following table summarizes the results of operations for the     
Allmerica Asset Management segment for the periods indicated.    
    
 

                               (Unaudited)               (Unaudited) 
                               Quarter Ended             Nine Months Ended 
                               September 30,             September 30, 
(In millions)                  1996         1995         1996         1995 
                                                          
Fees and other income:    
   External                    $0.3         $0.3         $0.8         $0.7 
   Internal                     1.4          0.9          5.4          2.6 
                              -----        -----        -----        ----- 
Total revenues                  1.7          1.2          6.2          3.3 
 
Other operating expenses        1.7          0.6          5.7          1.6 
                              -----        -----        -----        ----- 
Income before taxes            $0.0         $0.6         $0.5         $1.7 
                              =====        =====        =====        =====
 
 
Since 1994, the Company has provided investment advisory and     
subadvisory services, primarily to affiliates, through its registered     
investment advisor, Allmerica Asset Management ("AAM").  In the second     
quarter of 1996, AAM finalized contracts with two related parties,     
FAFLIC and AFLIAC, to provide investment advisory services at cost.      
The internal fees and corresponding operating expenses related to     
these contracts totaled $0.7 million for the quarter ended, and $3.0     
million for the nine months ended, September 30, 1996, respectively.      
    
Page 27
    
    
Corporate    
    
The following table summarizes the results of operations for the     
Corporate segment for the periods indicated.    
    
    

                              (Unaudited)                (Unaudited) 
                              Quarter Ended              Nine Months Ended 
                              September 30,              September 30, 
(In millions)                 1996         1995          1996         1995 
                                                          
Revenues    
  Investment and other     
   income                     $0.7         $0.0          $2.2         $0.0 
Realized loss                 (0.2)         0.0          (0.4)         0.0 
                             -----        -----         -----        ----- 
Total revenues                 0.5          0.0           1.8          0.0 
 
Other operating expenses       4.5          0.0          14.0          0.0 
                             -----        -----        ------        ----- 
Loss before taxes            $(4.0)        $0.0        $(12.2)        $0.0 
                             =====        =====        ======        =====
 
    
This segment consists primarily of $43.6 million of cash, investments,     
and other assets remaining from the $52.9 million in net proceeds     
retained by the holding company in the Company's initial public     
offering.  These investments earned $2.2 million in net investment     
income in the first nine months of 1996.  The segment incurred $14.0     
million of other operating expenses in 1996 primarily including $11.4     
million in interest expense on the Company's 7 5/8% Senior Debentures     
issued in October 1995.    
    
Investment Portfolio    
    
The Company had investment assets diversified across several asset classes, as 
follows:    

    
                     September 30, 1996<FN1>        December 31, 1995<FN1>
                      Carrying     % of Total       Carrying     % of Total
                      Value         Carrying Value  Value        Carrying Value
                                                        
(Dollars in millions)


Fixed maturities<FN2>  $8,181.6       80.4%           $8,197.3     78.1%    
Equity securities<FN2>    438.0        4.3               517.2      4.9      
Mortgages                 768.3        7.5               856.5      8.2      
Policy loans              364.2        3.6               365.7      3.5      
Real estate               145.4        1.4               179.6      1.7      
Cash and cash equivalents 170.6        1.7               307.1      2.9
Other invested assets     111.4        1.1                71.9      0.7      
                      ----------     --------        ----------  --------
Total                 $10,179.5      100.0%          $10,495.3    100.0%      
                     ===========     ========        ==========  =========   
<FN>    
<FN1>   
Includes Closed Block invested assets with a carrying value of $768.1 million 
and $775.1 million at September 30, 1996 and December 31, 1995, respectively.    
<FN2>   
The Company carries the fixed maturities and equity securities in its 
investment portfolio at market value.    
</FN>
    
Total investment assets decreased $315.8 million, or 3.0%, to $10.2 billion 
during the first nine months of 1996.  This decrease is primarily attributable 
to a decline in invested assets related to GIC contracts, and to market value 
depreciation in the fixed maturities portfolio, partially offset by increased 
investments financed with repurchase agreements.  Equity securities decreased 
$79.2 million, or 15.3%, to $438.0 million, as a result of the Regional 
Property and Casualty segment's shift in portfolio holdings from equity 
securities to tax-exempt fixed maturity securities.  Despite this portfolio 
shift and an increase in fixed maturities financed with repurchase agreements 
in 1996, fixed maturities decreased $15.7 million, or 0.2%, due primarily     
to market value depreciation of $185.7 million and to financing of net GIC 
withdrawals.  Additionally, mortgage loans decreased $88.2 million, or 10.3%, 
to $768.3 million caused primarily by loan repayments.  The real estate 
portfolio decreased $34.2 million, or 19.0%, to $145.4 million during the first 
nine months of 1996 due to sales of these properties.  The increase in other 
invested assets of $39.5 million, or 54.9% to $111.4 million primarily relates 
to the third quarter purchase of limited partnerships by FAFLIC.  Cash and     
cash equivalents decreased $136.5 million, or 44.4%, to $170.6 million.    
    
The Company's fixed maturity portfolio is comprised of primarily investment 
grade corporate securities, tax-exempt issues of state and local governments, 
U.S. government and agency securities and other issues.  Investment grade 
securities comprised   85.4% and 88.7% of the Company's total fixed maturity 
portfolio at September 30, 1996 and December 31, 1995, respectively.  Although 
management expects that a substantial portion of new funds will be invested in 
investment grade fixed maturities, the Company may invest a portion of new 
funds in below investment grade fixed maturities or equity interests, which 
management anticipates will not become a significant portion of its total 
investment portfolio.      

Page 28

    
The following table illustrates asset valuation allowances and additions to or 
deductions from such allowances for the periods indicated.    


                                                          Other 
                                                          Invested
(Dollars in millions)           Mortgages    Real Estate  Assets       Total
                                                           
 Year Ended December 31, 1995      
   Beginning balance            $47.2        $22.9        $3.7         $73.8     
   Provision (benefits)           1.5         (0.6)        0.0           0.9     
   Write-offs<FN1>              (14.9)        (2.7)        0.0         (17.6)    
                               --------     --------    --------     --------
   Ending balance               $33.8        $19.6        $3.7         $57.1     
                   
Valuation allowance as a     
percentage of carrying value    
before reserves                   3.8    %     9.8    %    4.9    %      4.9  %    

Nine months ended September     
30, 1996    
    Provision (benefits)          2.4         (1.2)        0.0            1.2    
    Write-offs<FN1>              (4.9)         0.0         0.0           (4.9)    
                                --------     --------    --------     --------
    Ending balance    
                                $31.3        $18.4        $3.7          $53.4    

Valuation allowance as a     
percentage of carrying value    
before reserves                   3.9    %    11.2    %    3.2    %       5.0 %    
<FN>
<FN1>
Write-offs reflect asset sales, foreclosures and forgiveness of debt upon 
restructuring.    
</FN>
    
The decrease in write-offs of mortgages during 1996 as compared to     
1995 reflects a decrease in foreclosures, debt restructuring     
agreements and discounted payoffs, as well as the improved real estate     
market.    
    
Income Taxes    
    
AFC and its life insurance subsidiaries (including certain     
noninsurance operations) file a consolidated United States federal     
income tax return. Entities included within the consolidated group are     
segregated into either a life insurance or a nonlife insurance company     
subgroup.  The consolidation of these subgroups is subject to certain     
statutory restrictions on the percentage of eligible nonlife tax     
losses that can be applied to offset life company taxable income.      
Allmerica P&C and its subsidiaries file a separate United States     
federal income tax return.    
    
For the nine months ended September 30, 1995, FAFLIC, as a mutual     
insurance company until October 1995, was required to adjust its     
deduction for policyholder dividends by the differential earnings     
amount under Section 809 of the Internal Revenue Code.  This amount     
was computed, for each tax year, by multiplying the average equity     
base of the FAFLIC/AFLIAC consolidated group, as determined for tax     
purposes, by the estimate of an excess of an imputed earnings rate     
over the average mutual life insurance companies' earnings rate.  The     
differential earnings amount for each tax year was subsequently     
recomputed when actual earnings rates were published by the IRS.  As a     
stock company, AFC, including its life insurance subsidiaries, is no     
longer required to reduce its policyholder dividend deduction by the     
differential earnings amount.  The differential earnings amount in the     
current period related to an adjustment for the 1994 tax year based on     
the actual average mutual life insurance companies' earnings estimated     
rate issued by the IRS in 1996.    
    
Provision for federal income taxes before minority interest was $21.2     
million during the third quarter of 1996 compared to $32.8 million     
during the same period in 1995.  These provisions resulted in     
consolidated effective federal tax rates of  23.8% and 36.6%,     
respectively.  The effective tax rates for AFLIAC and FAFLIC and its     
non-insurance subsidiaries were 28.4% and 63.4% during the third     
quarter of 1996 and 1995, respectively.  The effective tax rates for     
the Regional Property and Casualty subsidiaries were 21.3% and 25.3%     
during the third quarter of 1996 and 1995, respectively.  The     
reduction in the rate for FAFLIC resulted primarily from a     
differential earnings benefit of $2.4 million during the third quarter     
of 1996 compared to a differential earnings charge of $6.4 million for     
the same period in 1995.  The slight decrease in the rate for the     
Regional Property and Casualty subsidiaries reflects a higher     
underwriting loss and a greater proportion of pre-tax income from     
tax-exempt bonds in 1996, and to reserves provided for revisions in     
estimated prior tax liabilities in the third quarter of 1995.    
    
Provision for federal income taxes before minority interest was $58.0     
million during the first nine months of 1996 compared to $75.2 million     
during the same period in 1995.  These provisions resulted in     
consolidated effective federal tax rates of 22.8% and 31.8%,     
respectively.  The effective tax rates for AFLIAC and FAFLIC and its     
non-insurance subsidiaries were 27.9% and 50.8% during the first nine     
months of 1996 and 1995, respectively.  The effective tax rates for     
the Regional Property and Casualty subsidiaries were 20.0% and 22.2%     
during the first nine months of 1996 and 1995, respectively.  The     
reduction in the rate for FAFLIC resulted primarily from a     
differential earnings benefit of $8.3 million in the first nine months     
of 1996

Page 29


compared to a differential earnings charge of $7.7 million in the first nine
months of 1995. The slight decrease in the rate for the Regional Property and
Casualty subsidiaries reflects a higher underwriting loss and a greater
proportion of pre-tax income from tax-exempt bonds in 1996, and to reserves
provided for revision in estimated prior tax liabilities in the first nine
months of 1995.    
    
Liquidity and Capital Resources    
    
Liquidity describes the ability of a company to generate sufficient     
cash flows to meet the cash requirements of business operations.  As a     
holding company, AFC's primary source of cash is dividends from its     
insurance subsidiaries.  However, dividend payments to AFC by its     
insurance subsidiaries are subject to limitations imposed by state     
regulators, such as the requirement that cash dividends be paid out of     
unreserved and unrestricted earned surplus and restrictions on the     
payment of "extraordinary" dividends, as defined.     
    
Sources of cash for the Company's insurance subsidiaries are from     
premiums and fees collected, investment income and maturing investments.      
Primary cash outflows are paid benefits, claims losses and loss     
adjustment expenses, policy acquisition expenses, other underwriting     
expenses and investment purchases.  Cash outflows related to benefits,     
claim losses and loss adjustment expenses can be variable because of     
uncertainties surrounding settlement dates for liabilities for unpaid     
losses and because of the potential for large losses either     
individually or in the aggregate.  The Company periodically adjusts its 
investment policy to respond to changes in short-term and long-term cash 
requirements. 
 
 
    
Net cash provided by operating activities was $145.2 million and     
$179.7 million for the first nine months of 1996 and 1995,     
respectively.  This decrease is primarily attributable to the increase     
in underwriting losses in the Regional Property and Casualty lines of     
business during the first nine months of 1996 which resulted in an     
increase in claims payments.    
    
Net cash provided by investing activities was $24.6 million and $11.9     
million during the first nine months of 1996 and 1995, respectively.     
The increase is primarily attributable to increased sales of     
investments used to finance net withdrawals from GICs and increased     
investments from maintaining a smaller balance of cash and cash     
equivalents.  These changes were offset by delayed sales of investments     
financed instead with repurchase agreements and a decline in investable cash  
generated by operations.    
    
Net cash used for financing activities was $306.3 million during the     
nine months ended September 30, 1996 compared to $430.3 used during     
the comparable prior year period.  This change is due to increases in     
short-term debt partially offset by the continued negative financing     
cash flows from GIC withdrawals.  During 1996, the Company increased     
its short-term debt in order to finance additions to the investment     
portfolio and maximize investment earnings.  These inflows were     
partially offset by cash payments on withdrawals from GICs that     
exceeded cash received from deposits on these contracts by $548.8     
million and $407.7 million in the first nine months of 1996 and 1995,     
respectively.  Although the Company expects this trend in negative     
financing cash flows from GIC withdrawals to continue, particularly in     
1996, the Company does not expect GIC withdrawals to have a material     
impact on liquidity. Also, cash used to purchase subsidiary common stock     
increased $28.9 million, to $42.0 million during the first nine months     
of 1996.    
    
On October 16, 1995, FAFLIC converted from a policyholder owned to     
stockholder owned insurance company and AFC became the holding company     
for FAFLIC.  AFC also raised net proceeds of $248.0 million from the     
sale of Common Stock and issued $200.0 million principal amount 7 5/8%     
 Senior Debentures due 2025 with net proceeds to the Company of $197.2     
million.  The Company will also pay approximately $15.3 million per     
year in interest payments on the Senior Debentures.  AFC has     
sufficient funds at the holding company or available through dividends     
from FAFLIC to meet its obligations to pay interest on the Senior     
Debentures and dividends, when and if declared by the Board of     
Directors, on the common stock.  Whether the Company will pay     
dividends in the future depends upon the costs of administering a     
dividend program as compared to the benefits conferred, and upon the     
earnings and financial condition of AFC.      
    
Based on current trends, the Company expects to continue to generate     
sufficient positive operating cash to meet all short-term and     
long-term cash requirements.  The Company maintains a high degree of     
liquidity within the investment portfolio in fixed maturity     
investments, common stock and short-term investments.  FAFLIC and     
Allmerica P&C have $100.0 million and $40.0 million available,     
respectively, under various committed short-term lines of credit, with     
no amounts outstanding at September 30, 1996.  FAFLIC and Allmerica     
P&C had $55.0 million and $21.7 million, respectively, of commercial     
paper borrowings outstanding at September 30, 1996.  In addition,     
FAFLIC and AFLIAC had $186.2 million and $63.2 million, respectively,     
of repurchase agreements outstanding at September 30, 1996 down from     
$235.6 million and $171.4 million, respectively, at June 30, 1996.      
The repurchase agreements were used to finance the purchase of investments and 
are expected to be substantially repaid by the end of the year.  The     
Company, at its option, could liquidate these investments at any time     
and settle the repurchase agreements.    

Page 30


Forward-Looking Statements

The Company wishes to caution readers that the following important factors, 
among others, in some cases have affected and in the future could affect, the 
Company's actual results and could cause the Company's actual results for 1996 
and beyond to differ materially from those expressed in any forward-looking 
statements made by, or on behalf of, the Company.  When used in the MD&A 
discussion, the words "believes," "anticipated," "expects" and similar 
expressions are intended to identify forward looking statements.  See 
"Important Factors Regarding Forward-Looking Statements" filed herewith as 
Exhibit 99-1 and incorporated herein by reference.

Factors that may cause actual results to differ materially from those 
contemplated or projected, forecast, estimated or budgeted in such forward 
looking statements include among others, the following possibilities: (i) 
adverse catastrophe experience and severe weather; (ii) adverse loss 
development for events the Company insured in prior years or adverse trends in 
mortality and morbidity; (iii) heightened competition, including the 
intensification of price competition, the entry of new competitors, and the 
introduction of new products by new and existing competitors; (iv) adverse 
state and federal legislation, including decreases in rates, limitations on 
premium levels, increases in minimum capital and reserve requirements, benefit 
mandates, and limitations on the ability to manage care and utilization; (v)  
changes in interest rates causing a reduction of investment income and in the 
market value of interest rate sensitive investments; (vi) failure to obtain new 
customers, retain existing customers or reductions in policies in force by 
existing customers; (vii) higher service, administrative, or general expense 
due to the need for additional advertising, marketing, administrative  or 
management information systems expenditures; (viii) loss or retirement of key 
executives; (ix) increases in medical costs, including increases in 
utilization, costs of medical services, pharmaceuticals, durable medical 
equipment and other covered items; (x) termination of provider contracts or 
renegotiation at less cost-effective rates or terms of payment; (xi) changes in 
the Company's liquidity due to changes in asset and liability matching; (xii) 
adverse changes in the ratings obtained by independent rating agencies, such as 
Moody's, Standard and Poors and A.M. Best; (xiii) lower appreciation on managed 
investments, resulting in reduced variable products' and investment management 
fees.
    
Page 31


    
                          PART II - OTHER INFORMATION    
    
                   ITEM 6  - EXHIBITS AND REPORTS ON FORM 8K    
    
(a)     Exhibits    
    
          EX-11          Statement regarding computation of per share earnings
          EX-27          Financial Data Schedule
          EX-99-1        Important Factors Regarding Forward-Looking Statements

(b)     Reports on Form 8K    
    
          None.    
    
Page 32

    
    
    
                                     SIGNATURES    
    
Pursuant to the requirements of the Securities Exchange Act of 1934,     
the registrant has duly caused this report to be signed on its behalf     
by the undersigned thereunto duly authorized.    
    
    
Allmerica Financial Corporation    
Registrant    
    
    
    
Dated    November 13, 1996    
                                         /s/ John F. O'Brien               
                                         John F. O'Brien    
                                         President and Chief Executive Officer
    
Dated    November 13, 1996    
                                         /s/ Edward J. Parry III              
                                      
                                         Edward J. Parry III     
                                         Vice President, Treasurer and
                                         Principal Accounting Officer    
    
Page 33