Net operating income grew to $55.5 million, or $0.92 per share, from $39.7 million, or $0.79 per share for the same period in 1997. Net operating income excludes net realized investment gains and losses and other non- recurring gains and charges, net of taxes and minority interest.
Pre-tax operating earnings in the Asset Accumulation business increased 33 percent to $49.8 million, up from $37.4 million last year, driven by continued growth in variable annuity assets.
Risk Management operating earnings were $38.2 million in the quarter, down from $51.9 million for the second quarter of 1997, primarily due to catastrophe losses incurred.
The consolidated effective tax rate on operating income for the quarter and year-to-date were 17.3 percent and 20.5 percent, respectively, versus 26.0 percent and 23.5 percent, respectively for the same periods last year. The decrease in tax rates was driven by the reduction in underwriting income resulting from the catastrophe.
Variable annuity sales grew to $958.3 million, up 63 percent from second quarter 1997 sales of $587.3 million.
Net income was $60.3 million, or $1.00 per share, compared to $37.7 million, or $0.75 per share in 1997.

"Our strong results for the quarter reflect the strength and quality of our diversified mix of business," said John F. O'Brien, president and chief executive officer of Allmerica Financial Corporation. "The continued success of our variable products business, in combination with ongoing Risk Management expense reduction initiatives, largely offset high catastrophe losses in the quarter. We anticipate continued strong consumer interest in variable products sold through our various distribution channels."

Segment Results

Allmerica Financial operates in two primary businesses: Asset Accumulation and Risk Management. Asset Accumulation markets insurance and retirement savings products and services to individual and institutional clients. Risk Management markets property and casualty insurance products on a regional basis through The Hanover Insurance Company and its 82.5 percent ownership interest in Citizens Corporation (NYSE: CZC - news). Risk Management also markets employee benefit management solutions.

In the segment reviews that follow, results are reported on a pre-tax basis, before minority interest in Citizens. Corporate overhead expenses previously included in the results of each segment are now included in the Corporate segment, as a result of FAS 131 resegmentation.

Asset Accumulation

Second quarter operating earnings for the Asset Accumulation business increased 33 percent to $49.8 million, up from $37.4 million in 1997. Allmerica Financial Services? operating earnings increased 36 percent to $43.6 million for the quarter, up from $32.0 million in the second quarter of 1997. Second quarter operating earnings for Allmerica Asset Management, the company's investment management business, were $6.2 million, compared to $5.4 million last year.

Asset Accumulation highlights

Variable annuity sales were up 63 percent to $958.3 million in 1998, from $587.3 million in the second quarter of 1997. Allmerica Select, the broker/dealer distribution channel, achieved record sales growth of 55 percent, to $188.8 million. Delaware and Pioneer sales increased by 65 percent and 113 percent, respectively, over the same period last year. Kemper increased sales by 140 percent to $271.2 million.

Product fees were $72.7 million in the quarter, a 27 percent increase over last year. Increased fees are related to variable product asset growth as a result of strong sales and a rising stock market.

Variable product assets grew to $12.3 billion at the close of the quarter, from $9.8 billion at year-end 1997.

Second quarter Allmerica Asset Management operating earnings primarily benefited from continued significant sales of floating-rate guaranteed investment contracts (GIC). Sales of floating-rate contracts were $400 million in the quarter, bringing total floating-rate GIC assets to $955.6 million. Floating-rate GICs contributed $2.7 million in product line income in the quarter, more than offsetting the decline in income from traditional GICs.

Risk Management

Risk Management operating earnings were $38.2 million in the quarter, down from $51.9 million for the second quarter of 1997, primarily due to catastrophe losses incurred in the Midwest. Property and casualty operating earnings were $36.8 million in the second quarter of 1998, down from $45.4 million in the second quarter of 1997. Corporate Risk Management Services' second quarter operating earnings were $1.4 million in 1998, compared to $6.5 million in 1997.

Risk Management highlights

Property and casualty net premiums earned increased to $498.1 million in the quarter, up from $485.9 million in 1997, despite the decrease in premiums earned in several states in which Allmerica is substantially reducing its participation in retail markets. Excluding the decrease of premiums earned in these states, as well as the sale of Allmerica Reinsurance, underlying growth in net premiums earned was $33.4 million, an 8 percent increase.

Property and casualty policy acquisition and other underwriting expenses in the quarter decreased $2.1 million over last year, due primarily to lower employee- related costs. The statutory expense ratio improved to 28.7 in the quarter, compared to 29.6 for the same quarter last year.

Losses and loss adjustment expenses increased $17.2 million in the quarter, compared to the second quarter of 1997, due primarily to catastrophe losses. Improvement in the underlying claims experience in auto and overall commercial lines partially offset these losses. Pre-tax catastrophe losses were $43.8 million in the quarter, up from $7.3 million in 1997. Catastrophe losses for the quarter primarily were sustained as a result of severe wind, rain and electrical storms that struck Michigan and the Midwest during late May and June.

The decrease in CRMS second quarter earnings was due to higher administrative expenses and higher losses due to several large risk-sharing claims.

Corporate

The Corporate segment's net expense was $14.0 million in the second quarter of 1998, compared to $8.0 million in 1997. The increase was due primarily to lower investment income and non-recurring technology and other expenses. Prior to FAS 131 resegmentation, corporate overhead expenses were allocated to operating segments. The Corporate segment now also includes results for all holding companies, along with corporate debt service costs.

Investment Results

Net investment income, including the Closed Block, was $167.6 million for the second quarter of 1998, compared to $183.8 million in the same 1997 period. The decrease primarily reflects lower interest rates on new investments and a $6.9 million decrease in partnership income. Net realized investment gains were $4.8 million, after taxes, minority interest, and amortization, compared to a $1.0 million loss last year.

Balance Sheet

Shareholders' equity was $2.54 billion, or $42.04 per share at June 30, 1998, compared to $2.38 billion, or $39.71 per share at December 31, 1997. Excluding the impact of SFAS No. 115, book value was $38.01 per share at the close of the second quarter, compared to $36.08 per share at December 31, 1997.

Total assets were $25.8 billion at the close of the second quarter, up from $22.5 billion at year-end 1997. Separate account assets increased to $12.3 billion during the second quarter, up from $9.8 billion at year-end 1997.

Adoption of SOP 98-1

Beginning in June, Allmerica Financial adopted the American Institute of Certified Public Accountants Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which provides for certain internal use software costs to be capitalized, rather than expensed as incurred. This adoption resulted in a $6.2 million decrease in pre-tax operating expenses for the quarter and year-to-date.

Interim information is unaudited.

Allmerica Financial Corporation
(In millions, except per share data)
	Quarter ended June 30,
	1998	1997
Net income (A)	$60.3	$37.7
Net income per share	$1.00	$0.75
Weighted average shares	60.5	50.3

NOTE (A): Results in the second quarter of 1998 included $4.8 millionof after-tax net realized investment gains, net of minority interest. Second quarter 1997 earnings included $2.0 million in net realized investment and other operating losses.

The impact of these items is demonstrated below in the reconciliation from net operating income to net income per share:

	Quarter ended June 30,
	1998	1997
Net operating income	$0.92	$0.79
Net realized gains on investments, net of applicable federal income taxes, minority Interest and amortization	0.08	(0.02)
Other, net of applicable federal income taxes	---	(0.02)
Net income	$ 1.00	$ 0.75

Basic and diluted earnings per share are the same for both periods presented. All figures reported are unaudited and are in accordance with generally accepted accounting principles.

The Hanover Insurance Group, Inc. is the holding company for a group of insurance companies headquartered in Worcester, Massachusetts.

Contact Information

Investors:
Sujata Mutalik
E-mail: smutalik@hanover.com
1-508-855-3457

Media:
Michael F. Buckley
E-mail: mibuckley@hanover.com
1-508-855-3099

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