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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: to
Commission file number: 1-13754
ALLMERICA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3263626
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
440 Lincoln Street, Worcester, 01653
Massachusetts (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (508) 855-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class of securities Name of Exchange on which Registered
--------------------------------- ------------------------------------
Common Stock, $.01 par value, together with
Stock Purchase Rights New York Stock Exchange
7 5/8% Senior Debentures due 2025 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on the closing sales price of March 21, 2001 the aggregate market
value of the voting and non-voting stock held by nonaffiliates of the
registrant was $2,512,119,235.
The number of shares outstanding of the registrant's common stock, $.01 par
value, was 53,157,780 shares outstanding as of March 21, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Allmerica Financial Corporation's Annual Report to Shareholders
for 2000 are incorporated by reference in Parts I, II, and IV. Portions of
Allmerica Financial Corporation's Proxy Statement of Annual Meeting of
Shareholders to be held May 15, 2001 are incorporated by reference in Part
III.
Total number of pages, including cover page: 43
Exhibit Index is on pages 27-30
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PART I
ITEM 1
BUSINESS
Organization
Allmerica Financial Corporation ("AFC" or the "Company") is a non-insurance
holding company organized as a Delaware corporation in 1995. The consolidated
financial statements of AFC include the accounts of AFC; First Allmerica
Financial Life Insurance Company ("FAFLIC"); its wholly-owned life insurance
subsidiary, Allmerica Financial Life Insurance and Annuity Company ("AFLIAC");
Allmerica Asset Management, Inc. ("AAM", a wholly-owned non-insurance
subsidiary of AFC); Allmerica Property & Casualty Companies, Inc. ("Allmerica
P&C", a wholly-owned non-insurance subsidiary of AAM through December 31,
2000); The Hanover Insurance Company ("Hanover", a wholly-owned subsidiary of
Allmerica P&C through December 31, 2000); Citizens Corporation (a wholly-owned
non-insurance subsidiary of Hanover through December 31, 2000); Citizens
Insurance Company of America ("Citizens", a wholly-owned subsidiary of
Citizens Corporation through December 31, 2000) and certain other insurance
and non-insurance subsidiaries. On December 31, 2000, the Company dissolved
Allmerica P&C and Citizens Corporation and transferred subsidiaries of
Allmerica P&C to AAM and transferred subsidiaries of Citizens Corporation to
Hanover.
Financial Information About Operating Segments
The Company offers financial products and services in two major areas: Risk
Management and Asset Accumulation. Within these broad areas, the Company
conducts business principally in three operating segments. These segments are
Risk Management, Allmerica Financial Services, and Allmerica Asset Management.
In addition to the three operating segments, the Company has a Corporate
segment, which consists primarily of cash, investments, corporate debt,
Capital Securities and corporate overhead expenses. Corporate overhead
expenses reflect costs not attributable to a particular segment, such as those
generated by certain officers and directors, technology, finance, human
resources and legal.
Information with respect to each of the Company's segments is included in
"Results of Operations" on pages 22-34 in Management's Discussion and Analysis
of Financial Condition and Results of Operations and in Note 15 on pages 73-74
of the Notes to the Consolidated Financial Statements included in the 2000
Annual Report to Shareholders, the applicable portions of which are
incorporated herein by reference.
Description of Business by Segment
Following is a discussion of each of the Company's operating segments.
Risk Management
General
The Company's Risk Management segment consists primarily of its property and
casualty operations, which are principally generated through The Hanover
Insurance Company and Citizens Insurance Company of America. For the year
ended December 31, 2000, the Risk Management segment accounted for
approximately $2,307.7 million, or 71.5%, of consolidated segment revenues and
approximately $190.0 million, or 50.7%, of consolidated segment income before
federal income taxes and minority interest. The Company underwrites personal
and commercial property and casualty insurance primarily through specialized,
regionally based, distribution channels. The majority of business is placed
through an independent agent network concentrated in the Northeast, Midwest
and Southeast United States.
The Company strives to maintain a focus on the core disciplines of
underwriting, pricing, claims adjusting, investing, marketing and sales. The
Company's overall strategy is to improve profitability through operating
efficiencies and to pursue measured growth in markets which are anticipated to
be profitable. The Company, in
2
its Risk Management segment, continues to have strong regional focus and
places heavy emphasis on underwriting profitability and loss reserve adequacy
in each major product line. The Risk Management segment of AFC was the 25th
largest property and casualty insurance group in the United States based on
1999 net premiums written, according to A.M. Best.
The industry's profitability can be affected significantly by price
competition, volatile and unpredictable developments such as extreme weather
conditions and natural disasters, legal developments affecting insurer
liability, extracontractual liability and the size of jury awards,
fluctuations in interest rates and other factors that may affect investment
returns and other general economic conditions and trends, such as inflationary
pressures, that may affect the adequacy of reserves.
Lines of Business
The Company underwrites personal and commercial property and casualty
insurance coverage. The personal lines principally include personal automobile
and homeowners coverage. The commercial lines principally include commercial
automobile, workers' compensation and commercial multiple peril coverage.
Personal automobile coverage insures individuals against losses incurred
from personal bodily injury, bodily injury to third parties, property damage
to an insured's vehicle, and property damage to other vehicles and other
property.
Homeowners coverage insures individuals for losses to their residences and
personal property, such as those caused by fire, wind, hail, water damage
(except for flooding), theft and vandalism, and against third party liability
claims.
Commercial automobile coverage insures businesses against losses incurred
from personal bodily injury, bodily injury to third parties, property damage
to an insured's vehicle, and property damage to other vehicles and other
property.
Workers' compensation coverage insures employers against employee medical
and indemnity claims resulting from injuries related to work. Workers'
compensation policies are often written in conjunction with other commercial
policies.
Commercial multiple peril coverage insures businesses against third party
liability from accidents occurring on their premises or arising out of their
operations, such as injuries sustained from products sold. It also insures
business property for damage, such as that caused by fire, wind, hail, water
damage (except for flooding), theft and vandalism.
Customers, Marketing and Distribution
AFC pursues measured growth in its existing markets through local operations
that apply extensive knowledge of markets to offer competitive products and
services and through the establishment of long-term relationships with larger,
well-established independent agencies. The Company believes that the selection
of markets in which to pursue profitable growth is dependent upon maintaining
its local market presence to enhance underwriting results and identify
favorable markets. The Company is committed to maintaining the local market
presence afforded by its eighteen branch sales and underwriting offices.
Regional business centers provide processing support and are located in
Atlanta, Georgia; Howell, Michigan; and Worcester, Massachusetts.
Administrative functions are centralized in its headquarters in Worcester,
Massachusetts.
During 1999, AFC introduced a new businessowner policy ("BOP") called
Dimension 2000+(SM). The Company expanded the distribution of this product to
additional agents in 2000. The new product is designed to replace the
traditional BOP product for certain classes of customers. This product is
targeted toward small business, providing broadened coverage and enabling ease
of conducting business. Dimension 2000+(SM) is sold
3
through agents and regional business centers utilizing an internet based
point-of-sale system which provides full quote-to-issue capabilities.
Commercial automobile policies will also be sold through this point-of-sale
system. The Company believes that these investments in technology will
significantly improve the service provided to agents and the timing of policy
issuance.
The Risk Management segment of the Company is not dependent on a single
customer or even a few customers, for which the loss of any one or more would
have an adverse effect upon the segment's insurance operations. Risk
Management focuses on three target areas: standard, or traditional markets,
sponsored program and specialty business.
Standard Markets
The Company markets property and casualty products primarily in the
Northeast, Midwest and Southeast United States through the Standard Markets
distribution channel, which at December 31, 2000 provided for more than $1,500
million of Risk Management's written premium. This channel predominantly
markets property and casualty insurance products through more than 2,500
independent insurance agencies and seeks to establish long-term relationships
with larger, well-established agencies. In selecting agencies for new
appointments, the Company considers the following criteria: a record of
profitability and financial stability, an experienced and professional staff,
a marketing plan for future growth and a succession plan for management. Once
appointed, each agency's performance is carefully monitored.
Independent agents provide specialized knowledge of property and casualty
products, local market conditions and targeted customer characteristics. Since
the Company offers property and casualty insurance products mainly through
independent agents, fostering a close, supportive relationship with each
agency is critical to the continued growth of the business. The Company, in
the Risk Management segment, compensates agents based on profitability, in
addition to regular commission. This practice is intended to motivate its
agents to write policies for customers with above-average profit
characteristics. By offering its independent agents a consistent source of
products demanded by the agents' customers, the Company believes that an
increasing number of its agents will rely on it as their principal supplier of
insurance products. The Risk Management segment sponsors an Agents Advisory
Council as a forum to enhance relationships between AFC and its agents. The
Council seeks to work together with the Company to provide products and
services that help clients better manage the risks they face and to coordinate
marketing efforts, support implementation of the Company's strategies, and
enhance local market presence. In Michigan, AFC is a principal provider with
many of its agencies, averaging more than $1 million of written premiums per
agent in 2000.
Sponsored Markets
Over the past few years, the Company has begun to focus on the benefits of
worksite marketing as a distribution channel for personal property and
casualty lines through its Sponsored Markets channel. This distribution
channel offers discounted insurance products that are individually written to
employees and members of organizations which have established a marketing
agreement with the Company, as well as franchise programs that are tailored
for members of associations and organizations, including programs for senior
citizens. For example, the Company has developed and marketed groups in both
the personal and commercial segments that are tailored for members of
associations, financial institutions and employers in Michigan, Indiana and
Ohio. The organizations may choose to make the programs available to their
members or employees based on an evaluation of rates, service and regulation,
but each risk is individually underwritten and each customer is issued a
separate policy. Associations and organizations receive no payment for making
franchise programs available to their members or employees.
Management believes that advantages of competitive pricing, effective
consumer awareness campaigns targeted at sponsoring organizations, the
convenience of payroll deducted premiums and word of mouth advertising will
contribute to the effectiveness of worksite and affinity sales through this
channel, as well as provide for lower distribution expenses. The Company,
through the Risk Management segment, is also exploring sales through banks and
electronic commerce.
4
As of December 31, 2000, written premium in the Sponsored Markets
distribution channel was more than $600 million.
Specialty Markets
The Specialty Markets distribution channel offers niche property and
casualty products in selected markets. This channel concentrates on commercial
market segments which require specialized expertise and products, and can be
marketed to on a group basis. The Company continually assesses the
profitability of each individual program and seeks to exit programs that do
not meet established Company underwriting guidelines. In 2000, Specialty
Markets produced more than $35 million of written premium.
Residual Markets and Pooling Arrangements
As a condition of its license to do business in various states, the Company
is required to participate in mandatory property and casualty shared market
mechanisms or pooling arrangements which provide various insurance coverages
to individuals or other entities that otherwise are unable to purchase such
coverage voluntarily provided by private insurers. For example, since most
states compel the purchase of a minimal level of automobile liability
insurance, states have developed shared market mechanisms to provide the
required coverages and in many cases, optional coverages, to those drivers
who, because of their driving records or other factors, cannot find insurers
who will write them voluntarily. The Company's participation in such shared
markets or pooling mechanisms is generally proportional to the Risk Management
segment's direct writings for the type of coverage written by the specific
pooling mechanism in the applicable state. The Company incurred an
underwriting loss from participation in such mechanisms, mandatory pools and
underwriting associations of $26.1 million, $24.2 million and $14.7 million in
2000, 1999 and 1998, respectively, relating primarily to coverages for
personal and commercial automobile, personal and commercial property, and
workers' compensation. The increase in the underwriting loss since 1998 is
primarily related to Hanover's participation in the Massachusetts Commonwealth
Automobile Reinsurers ("CAR") pool which is consistent with an increase in the
participation ratio and higher actual loss activity experienced in the overall
Massachusetts automobile market.
Assigned Risk Plans
Assigned risk plans are the most common type of shared market mechanism.
Many states, including Illinois, New Jersey and New York operate assigned risk
plans. The plan assigns applications from drivers who are unable to obtain
insurance in the voluntary market to insurers licensed in the applicant's
state. Each insurer is required to accept a specific percentage of
applications based on its market share of voluntary business in the state.
Once an application has been assigned to an insurer, the insurer issues a
policy under its own name and retains premiums and pays losses as if the
policy was voluntarily written.
Reinsurance Facilities and Pools
Reinsurance facilities are currently in operation in various states that
require an insurer to write all applications submitted by an agent. As a
result, an insurer could be writing policies for applicants with a higher risk
of loss than it would normally accept. The reinsurance facility allows the
insurer to cede this high risk business to the reinsurance facility, thus
sharing the underwriting experience with all other insurers in the state. If a
claim is paid on a policy issued in this market, the facility will reimburse
the insurer. Typically, reinsurance facilities operate at a deficit, which is
then recouped by levying assessments against the same insurers.
As a servicing carrier in Massachusetts, the Company cedes a significant
portion of its private passenger and commercial automobile premiums to the
Massachusetts Commonwealth Automobile Reinsurers. Net premiums earned and
losses and loss adjustment expenses ("LAE") ceded to CAR were $37.3 million
and $44.5 million in 2000, $42.8 million and $42.6 million in 1999, and $34.3
million and $38.1 million in 1998. At December 31, 2000, CAR represented 10%
or more of the Company's reinsurance business.
5
A reinsurance mechanism that exists in Michigan, the Michigan Catastrophic
Claims Association ("MCCA"), covers no-fault first party medical losses of
retentions in excess of $250,000. All automobile insurers in this state are
required to participate in this reinsurance mechanism. Insurers are reimbursed
for their covered losses in excess of the $250,000 threshold. Funding for MCCA
comes from assessments against automobile insurers based upon their
proportionate market share of the state's automobile liability insurance
market. The Company ceded to the MCCA premiums earned and losses and LAE of
$3.7 million and $31.1 million in 2000, $3.7 million and $75.3 million in
1999, and $3.7 million and $18.0 million in 1998. At December 31, 2000, the
MCCA represented 10% or more of the Company's reinsurance business.
On June 2, 1998, the Company recorded a $124.2 million one-time reduction of
direct and ceded written premiums as a result of a return of excess surplus
from the MCCA. This transaction is not reflected in the ceded premium and loss
amounts above and had no impact on the total net premiums recorded by the
Company in 1998.
At December 31, 2000 and 1999, the Company, in the Risk Management segment,
had reinsurance recoverables on paid and unpaid losses from CAR of
$56.4 million and $44.6 million, respectively, and from MCCA of $298.4 million
and $285.6 million, respectively. Management believes that in the current
regulatory climate, the Company, in the Risk Management segment, is unlikely
to incur any material loss or become unable to pay claims as a result of
nonpayment of amounts owed to it by CAR, because CAR is a mandated pool
supported by all insurance companies licensed to write automobile insurance in
the Commonwealth of Massachusetts. In addition, with respect to MCCA (i) it is
currently in a surplus position, (ii) the payment obligations of the MCCA are
extended over many years, resulting in relatively small current payment
obligations in terms of MCCA total assets, (iii) all amounts owed to the
Company by the MCCA have been paid when due, and (iv) the MCCA is supported by
assessments permitted by statute.
A type of reinsurance mechanism that exists in New Jersey, The New Jersey
Unsatisfied Claim and Judgment Fund ("NJUCJF"), covers no-fault first party
medical losses of retentions in excess of $75,000 up to $175,000. All
automobile insurers in this state are required to participate in the
reinsurance mechanism. Insurers are reimbursed for their covered losses in
excess of the threshold. Funding for this fund comes from assessments against
automobile insurers based upon their proportionate market share of the state's
automobile liability insurance market. The NJUCJF currently has an unfunded
liability for future payment years. It calculates assessments against insurers
on the basis of a two-year cash flow analysis.
Reference is made to Note 17 on pages 74 and 75 and Note 21 on page 77 of
the Notes to Consolidated Financial Statements of the 2000 Annual Report to
Shareholders, the applicable portions of which are incorporated herein by
reference.
Joint Underwriting Associations
A joint underwriting association ("JUA") is similar to a reinsurance pool.
Generally, a JUA allows an insurer to share with other insurers the
underwriting experience of drivers that reflect a higher risk of loss than the
insurer would normally accept. Under a JUA, a limited number of insurers are
designated as "servicing carriers." The servicing carrier is responsible for
collecting premiums and paying claims for the policies issued in the JUA, and
such insurers receive a fee for these administrative services. The
underwriting results of the servicing carrier are then shared with all
insurers in the state. Like reinsurance facilities, JUA's typically operate at
a deficit, and fund that deficit by levying assessments on insurers.
Other Mechanisms
The principal shared market mechanisms for property insurance are the Fair
Access to Insurance Requirements Plans ("FAIR Plans"), the formation of which
was required by the federal government as a condition to an insurer's ability
to obtain federal riot reinsurance coverage following the riots and civil
disorder that occurred during the 1960's. These plans, created as mechanisms
similar to automobile assigned risk plans,
6
were designed to increase the availability of property insurance in urban
areas. The federal government reinsures those insurers participating in FAIR
Plans against excess losses sustained from riots and civil disorders.
The individual state FAIR Plans are created pursuant to statute or regulation.
The property shared market mechanisms provide basic fire insurance and
extended coverage protection for dwellings and certain commercial properties
that could not be insured in the voluntary market. A few states also include a
basic homeowners form of coverage in their shared market mechanism.
Approximately 30 states have FAIR Plans including Massachusetts, New York and
New Jersey.
With respect to commercial automobile coverage, another pooling mechanism, a
Commercial Auto Insurance Plan ("CAIP"), uses a limited number of servicing
carriers to handle assignments from other insurers. The CAIP servicing carrier
is paid a fee by the insurer who otherwise would be assigned the
responsibility of handling the commercial automobile policy and paying claims.
Approximately 40 states have CAIP mechanisms, including Connecticut, Illinois,
New Hampshire, Maine, New Jersey and Rhode Island.
Competition
The property and casualty industry is highly competitive among national
agency companies, direct writers, and regional and local insurers on the basis
of both price and service. National agency companies sell insurance through
independent agents and usually concentrate on commercial lines of property and
casualty insurance. Direct writers, including those with exclusive agent
representation, dominate the personal lines of property and casualty insurance
and operate on a national, regional or single state basis. Regional and local
companies sell through independent agents in one or several states in the same
region and usually compete in both personal and commercial lines. The Company,
through its Standard Markets and Sponsored Markets distribution channels,
markets through independent agents and, therefore, competes with other
independent agency companies for business in each of the agencies representing
them.
The Company is licensed to sell property and casualty insurance in all fifty
states in the United States, as well as the District of Columbia. As of
December 31, 2000, approximately 36% and 18% of AFC's written premium is
generated in the states of Michigan and Massachusetts, respectively. The
Company's other primary markets include New York, New Jersey, Maine and
Indiana.
In Michigan, the Company competes in personal lines with a number of
national direct writers and regional and local companies. According to A.M.
Best, as of December 31, 1999, the Company is the largest writer of property
and casualty insurance in Michigan through independent agents based upon
direct written premiums. About half of the Company's Michigan business is in
the personal automobile line. In Michigan personal lines, AFC ranked fourth
with 9.5% of the market. AFC's principal personal lines competition is from
Auto Club of Michigan and State Farm Group. The personal lines market has seen
intense competition in recent years, with many of the Company's competitors
seeking to grow market share which has resulted in pricing competition in the
automobile line.
In Michigan, AFC's commercial lines competition is principally from national
agency companies, and regional and local companies. AFC is the largest
commercial lines writer in Michigan with approximately 7% of the market.
Premium rate levels are related to the availability of insurance coverage,
which varies according to the level of excess capacity in the industry. The
insurance industry, including the Company, initiated commercial lines rate
increases in 2000, as compared to rate decreases in prior years due primarily
to price competition.
In Massachusetts, the Company faces competition in personal lines primarily
from direct writers and regional and local companies. In its commercial lines,
the Company faces competition primarily from national agency companies and
regional and local companies. Management believes that its emphasis on
maintaining a local presence in its markets, through the use of the Standard
Markets distribution channel, coupled with investments in operating and client
technologies, will enable it to compete effectively.
7
During the past few years, the competitive environment in Massachusetts has
increased substantially. Approximately 25% of Allmerica's personal automobile
business is written in Massachusetts. The Massachusetts Division of Insurance
sets the rates for personal automobile business in the state. Effective
January 1, 2001, rates decreased 8.3%, reversing the previous trend of 0.7%
increases that occurred in both 2000 and 1999. The Massachusetts Division of
Insurance allows companies to offer discounts for sponsoring organizations and
safe drivers. The Company has modified some of these discounts concurrent with
the rate change. In 2000, the Company offered a 6% discount on automobile
insurance for its safest drivers. In 2001, the discount for safe drivers will
be 2%. In addition, the Company's Sponsored Markets unit currently offers more
than 150 group programs throughout the state, including a large group plan
with approximately 425,000 eligible members. Management believes that rate
reductions net of lower discount may unfavorably impact premiums in
Massachusetts. Additionally, lower discounts could negatively impact the
Company's ability to maintain market share in Massachusetts with safe drivers
and Sponsored Markets.
Because there is no one, dominant competitor in any of the markets in which
the Risk Management segment competes, management believes there is opportunity
for future growth.
Underwriting
Pricing
The manner in which the Company prices products takes into consideration the
expected frequency and severity of losses, the costs of providing the
necessary coverage (including the cost of administering policy benefits, sales
and other administrative and overhead costs) and a margin for profit.
The Company, in the Risk Management segment, seeks to achieve a target
combined ratio in each of its product lines regardless of market conditions.
This strategy is intended to better enable the Company to achieve measured
growth and consistent profitability. The Company concentrates on its
established major product lines, and accordingly, does not typically pursue
the development of products with relatively unpredictable risk profiles. In
addition, the Company seeks to utilize its extensive knowledge of local
markets, including knowledge of regulatory requirements, to achieve superior
underwriting results. AFC relies on information provided by its local agents
and on the knowledge of its staff in the local branch offices. Since the Risk
Management segment maintains a strong regional focus and a significant market
share in a number of states, the Company can apply its extensive knowledge and
experience in making underwriting and rate setting decisions.
Claims
The Company employs experienced claims adjusters, appraisers, medical
specialists, managers and attorneys in order to manage its claims. The Risk
Management segment has field claims adjusters strategically located throughout
its operating territories. All claims staff members work closely with the
agents and seek to settle claims rapidly and in a cost-effective manner.
Claims office adjusting staff are supported by general adjusters for large
property loss claims, by automobile and heavy equipment damage appraisers for
automobile material damage losses, and by medical specialists whose principal
concentration is on workers' compensation and no-fault automobile injury
cases. In addition, the claims offices are supported by staff attorneys who
specialize in litigation defense and claim settlements. The Risk Management
segment also maintains a special investigative unit which investigates
suspected insurance fraud and abuse.
The Company, in the Risk Management segment, utilizes claims processing
technology which allows most of the smaller and more routine personal lines
claims to be processed at centralized locations. The centralization helps to
increase efficiency and reduce operating costs.
The Risk Management segment has a program under which participating agents
have settlement authority for many property loss claims. Based upon the
program's experience, the Company believes that this program
8
contributes to lower loss adjustment expense experience and to higher customer
satisfaction ratings by permitting the early and direct settlement of these
small claims. Approximately one-third of the total number of paid claims
reported to the Midwest distribution channel were settled under this program.
Property and casualty insurers are subject to claims arising out of
catastrophes which may have a significant impact on their results of
operations and financial condition. The Risk Management segment may experience
catastrophe losses in the future which could have a material adverse impact on
the Company. Catastrophes can be caused by various events including snow, ice
storms, hurricanes, earthquakes, tornadoes, wind, hail, fires and explosions,
and the incidence and severity of catastrophes are inherently unpredictable.
Although catastrophes can cause losses in a variety of property and casualty
lines, homeowners and business property insurance have in the past generated
the vast majority of catastrophe-related claims.
Reserve for Unpaid Losses and Loss Adjustment Expenses
Reference is made to "Reserve for Losses and Loss Adjustment Expenses" on
pages 29, 30 and 31 of Management's Discussion and Analysis of Financial
Condition and Results of Operations of the 2000 Annual Report to Shareholders,
which is incorporated herein by reference.
The Company's actuaries, in the Risk Management segment, review the reserves
each quarter and certify the reserves annually as required for statutory
filings. Significant periods of time often elapse between the occurrence of an
insured loss, the reporting of the loss to the Company and the Company's
settlement and payment of that loss. To recognize liabilities for unpaid
losses, the Company establishes reserves as balance sheet liabilities
representing estimates of amounts needed to pay reported and unreported losses
and LAE.
The Risk Management segment regularly reviews its reserving techniques, its
overall reserving position and its reinsurance. Based on (i) review of
historical data, legislative enactments, judicial decisions, legal
developments in impositions of damages, changes in political attitudes and
trends in general economic conditions, (ii) review of per claim information,
(iii) historical loss experience of the Risk Management segment and the
industry, (iv) the relatively short-term nature of most policies and (v)
internal estimates of required reserves, management believes that adequate
provision has been made for loss reserves. However, establishment of
appropriate reserves is an inherently uncertain process and there can be no
certainty that current established reserves will prove adequate in light of
subsequent actual experience. A significant change to the estimated reserves
could have a material impact on the results of operations.
The Company, in the Risk Management segment, does not use discounting
techniques in establishing reserves for losses and LAE, nor has it
participated in any loss portfolio transfers or other similar transactions.
The following table reconciles reserves determined in accordance with
accounting principles and practices prescribed or permitted by insurance
statutory authorities ("Statutory Reserve") to reserves determined in
accordance with generally accepted accounting principles ("GAAP Reserve") at
December 31, as follows:
2000 1999 1998
-------- -------- --------
(In millions)
Statutory reserve for losses and LAE.............. $1,906.5 $1,926.6 $2,011.7
GAAP adjustments:
Reinsurance recoverable on unpaid losses........ 816.9 694.2 591.7
Other(*)........................................ (4.3) (2.1) (6.1)
-------- -------- --------
GAAP reserve for losses and LAE................... $2,719.1 $2,618.7 $2,597.3
======== ======== ========
- --------
(*) Primarily represents other statutory liabilities reclassified as loss
adjustment expense reserves for GAAP reporting and purchase accounting
adjustments.
9
Analysis of Losses and Loss Adjustment Expenses Reserve Development
The following table sets forth the development of net reserves for unpaid
losses and LAE from 1990 through 2000 for the Company.
Year ended December 31,
--------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(In millions)
Net reserve for
losses and
LAE(1).......... $1,902.2 $1,924.5 $2,005.5 $2,038.7 $2,117.2 $2,132.5 $2,109.3 $2,019.6 $1,936.9 $1,772.4 $1,550.6
Cumulative amount
paid as of(2):
One year later... -- 703.8 638.0 643.0 732.1 627.6 614.3 566.9 564.3 569.0 561.5
Two years later.. -- -- 996.0 967.4 1,054.3 1,008.3 940.7 884.4 862.7 888.0 874.5
Three years
later........... -- -- -- 1,180.7 1,235.0 1,217.8 1,172.8 1,078.1 1,068.4 1,077.1 1,074.3
Four years
later........... -- -- -- -- 1,365.9 1,325.9 1,300.4 1,210.9 1,184.1 1,207.1 1,186.4
Five years
later........... -- -- -- -- -- 1,408.8 1,369.9 1,289.5 1,267.5 1,279.4 1,265.4
Six years later.. -- -- -- -- -- -- 1,427.6 1,353.3 1,323.1 1,337.2 1,314.2
Seven years
later........... -- -- -- -- -- -- -- 1,377.2 1,355.8 1,377.3 1,355.3
Eight years
later........... -- -- -- -- -- -- -- -- 1,387.7 1,404.1 1,385.9
Nine years
later........... -- -- -- -- -- -- -- -- -- 1,431.6 1,409.2
Ten years later.. -- -- -- -- -- -- -- -- -- -- 1,433.8
Net reserve re-
estimated as
of(3):
End of year...... 1,902.2 1,924.5 2,005.5 2,038.7 2,117.2 2,132.5 2,109.3 2,019.6 1,936.9 1,772.4 1,550.6
One year later... -- 1,837.1 1,822.1 1,911.5 1,989.3 1,991.1 1,971.7 1,891.5 1,868.1 1,755.0 1,601.5
Two years later.. -- -- 1,781.4 1,796.8 1,902.8 1,874.3 1,859.4 1,767.4 1,762.8 1,717.7 1,601.9
Three years
later........... -- -- -- 1,734.9 1,832.5 1,826.8 1,780.3 1,691.5 1,703.3 1,670.8 1,614.3
Four years
later........... -- -- -- -- 1,783.7 1,780.7 1,766.2 1,676.3 1,658.9 1,654.1 1,597.6
Five years
later........... -- -- -- -- -- 1,740.1 1,735.6 1,653.7 1,637.3 1,634.6 1,594.3
Six years later.. -- -- -- -- -- -- 1,699.2 1,630.3 1,650.5 1,630.6 1,588.7
Seven years
later........... -- -- -- -- -- -- -- 1,603.9 1,627.2 1,644.2 1,593.1
Eight years
later........... -- -- -- -- -- -- -- -- 1,607.4 1,626.1 1,621.9
Nine years
later........... -- -- -- -- -- -- -- -- -- 1,611.8 1,593.4
Ten years later.. -- -- -- -- -- -- -- -- -- -- 1,581.6
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Deficiency) Redundancy,
net(4,5)........ $ -- $ 87.4 $ 224.1 $ 303.8 $ 333.4 $ 392.4 $ 410.0 $ 415.6 $ 329.5 $ 160.6 $ (31.0)
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
- -------
(1) Sets forth the estimated net liability for unpaid losses and LAE recorded
at the balance sheet date for each of the indicated years; represents the
estimated amount of net losses and LAE for claims arising in the current
and all prior years that are unpaid at the balance sheet date, including
incurred but not reported ("IBNR") reserves.
(2) Cumulative loss and LAE payments made in succeeding years for losses
incurred prior to the balance sheet date.
(3) Re-estimated amount of the previously recorded liability based on
experience for each succeeding year; increased or decreased as payments
are made and more information becomes known about the severity of
remaining unpaid claims.
(4) Cumulative deficiency or redundancy at December 31, 2000 of the net
reserve amounts shown on the top line of the corresponding column. A
redundancy in reserves means the reserves established in prior years
exceeded actual losses and LAE or were reevaluated at less than the
original reserved amount. A deficiency in reserves means the reserves
established in prior years were less than actual losses and LAE or were
reevaluated at more than the original reserved amount.
(5) The following table sets forth the development of gross reserve for unpaid
losses and LAE from 1992 through 2000 for the Company:
10
Year ended December 31,
--------------------------------------------------------------------------------
2000 1999 1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------- -------- --------
(In millions)
Reserve for losses and
LAE:
Gross liability........ $2,719.1 $2,618.7 $2,597.2 $2,615.4 $2,744.1 $2,896.0 $2,821.7 $2,717.3 $2,598.9
Reinsurance
recoverable........... 816.9 694.2 591.7 576.7 626.9 763.5 712.4 697.7 662.0
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net liability.......... $1,902.2 $1,924.5 $2,005.5 $2,038.7 $2,117.2 $2,132.5 $2,109.3 $2,019.6 $1,936.9
======== ======== ======== ======== ======== ======== ======== ======== ========
One year later:
Gross re-estimated
liability............. $2,553.4 $2,432.9 $2,472.6 $2,541.9 $2,587.8 $2,593.5 $2,500.5 $2,460.5
Re-estimated
recoverable........... 716.3 610.8 561.1 552.6 596.7 621.8 609.0 592.4
-------- -------- -------- -------- -------- -------- -------- --------
Net re-estimated
liability............. $1,837.1 $1,822.1 $1,911.5 $1,989.3 $1,991.1 $1,971.7 $1,891.5 $1,868.1
======== ======== ======== ======== ======== ======== ======== ========
Two years later:
Gross re-estimated
liability............. $2,379.6 $2,379.3 $2,424.5 $2,427.7 $2,339.2 $2,333.3 $2,341.9
Re-estimated
recoverable........... 598.2 582.5 521.7 553.4 479.8 565.9 579.1
-------- -------- -------- -------- -------- -------- --------
Net re-estimated
liability............. $1,781.4 $1,796.8 $1,902.8 $1,874.3 $1,859.4 $1,767.4 $1,762.8
======== ======== ======== ======== ======== ======== ========
Three years later:
Gross re-estimated
liability............. $2,305.2 $2,395.3 $2,358.6 $2,227.0 $2,145.5 $2,257.3
Re-estimated
recoverable........... 570.2 562.8 531.8 446.7 454.0 554.0
-------- -------- -------- -------- -------- --------
Net re-estimated
liability............. $1,734.9 $1,832.5 $1,826.8 $1,780.3 $1,691.5 $1,703.3
======== ======== ======== ======== ======== ========
Four years later:
Gross re-estimated
liability............. $2,336.3 $2,359.5 $2,220.9 $2,102.0 $2,168.2
Re-estimated
recoverable........... 552.6 578.8 454.7 425.7 509.3
-------- -------- -------- -------- --------
Net re-estimated
liability............. $1,783.7 $1,780.7 $1,766.2 $1,676.3 $1,658.9
======== ======== ======== ======== ========
Five years later:
Gross re-estimated
liability............. $2,299.8 $2,215.2 $2,091.7 $2,027.3
Re-estimated
recoverable........... 559.7 479.6 438.0 390.0
-------- -------- -------- --------
Net re-estimated
liability............. $1,740.1 $1,735.6 $1,653.7 $1,637.3
======== ======== ======== ========
Six years later:
Gross re-estimated
liability............. $2,158.9 $2,096.6 $2,022.6
Re-estimated
recoverable........... 459.7 466.3 372.1
-------- -------- --------
Net re-estimated
liability............. $1,699.2 $1,630.3 $1,650.5
======== ======== ========
Seven years later:
Gross re-estimated
liability............. $2,050.3 $2,050.1
Re-estimated
recoverable........... 446.4 422.9
-------- --------
Net re-estimated
liability............. $1,603.9 $1,627.2
======== ========
Eight years later:
Gross re-estimated
liability............. $2,013.6
Re-estimated
recoverable........... 406.2
--------
Net re-estimated
liability............. $1,607.4
========
Reinsurance
The Company, in the Risk Management segment, maintains a reinsurance program
designed to protect against large or unusual losses and LAE activity. This
includes both excess of loss reinsurance and catastrophe reinsurance.
Catastrophe reinsurance serves to protect the ceding insurer from significant
aggregate losses arising from a single event such as snow, ice storms,
windstorm, hail, hurricane, tornado, riot or other extraordinary events. In
addition, the Company, in the Risk Management segment, has reinsurance for
casualty business. The Company determines the appropriate amount of
reinsurance based on the Company's evaluation of the risks accepted and
analyses prepared by consultants and reinsurers and on market conditions
including the availability and pricing of reinsurance.
Under the Company's 2000 catastrophe reinsurance program, AFC retains $45.0
million of loss per hurricane occurrence and $25.0 million of loss per
occurrence for all other exposures, 10% of all loss amounts
11
in excess of $45.0 million or $25.0 million for non-hurricane losses, up to
$65.0 million, 20% of all loss amounts in excess of $65.0 million up to $230.0
million and all amounts in excess of $230.0 million. As a result of this
program, the Company ceded $16.8 million of catastrophe losses in 2000.
Effective January 1, 2001, the Company modified its catastrophe reinsurance
program. Under this new program, AFC retains $45.0 million of loss per
hurricane occurrence and $25.0 million of loss per occurrence for all other
exposures, 15% of all loss amounts in excess of $45.0 million, or $25.0
million for non-hurricane losses, up to $230.0 million, and all amounts in
excess of $230.0 million.
Effective January 1, 2000, the Company purchased a property catastrophe
aggregate treaty which provides for annual aggregate coverage totaling 80% of
catastrophe losses in excess of $60.0 million up to $110.0 million. The
Company's retention is calculated cumulatively, in the aggregate, on a
quarterly basis with the aggregate losses comprised of all catastrophe losses
that exceed $0.5 million per each loss occurrence. The maximum contribution
from the Company for any one-loss occurrence for the purposes of calculating
the aggregate retention will be $25.0 million. As a result of this agreement,
the Company ceded $18.4 million of catastrophe losses in 2000. Effective
January 1, 2001, the Company modified its property catastrophe aggregate
treaty. This new treaty provides for annual aggregate coverage totaling 90% of
catastrophe losses in excess of $65.0 million up to $115.0 million. The
Company's retention will be calculated cumulatively, in the aggregate, on a
quarterly basis with the aggregate losses comprised of all catastrophe losses
that exceed $0.5 million per each loss occurrence. The maximum contribution
from the Company for any one-loss occurrence for the purposes of calculating
the aggregate retention will be $25.0 million.
Effective July 1, 1999, the Company maintains a property reinsurance program
in which the reinsurers are responsible for 100% of each loss in excess of
$0.5 million per occurrence up to $19.5 million for inland marine and
commercial auto physical damage. All other property business is 100% covered
by reinsurers for each loss in excess of $1.5 million per occurrence up to
$18.5 million. Amounts in excess of $19.5 million for inland marine and
commercial auto physical damage are 100% retained by the Company while amounts
in excess of $18.5 million in all other property lines are retained by the
Company.
Under the 2000 casualty reinsurance program, the reinsurers are responsible
for 40% of the amount of each loss in excess of $0.5 million per occurrence up
to $1.0 million and 100% of the amount of each loss in excess of $1.0 million
per occurrence up to $30.5 million for general liability and workers'
compensation. Additionally, this reinsurance covers workers' compensation
losses in excess of $30.5 million to $60.5 million per occurrence. Amounts in
excess of $60.5 million, in the workers' compensation line, are retained 100%
by the Company, while amounts in excess of $30.5 million, in the general
liability line, are retained 100% by the Company.
The Company is subject to a whole account aggregate excess of loss
reinsurance agreement, which provides coverage for the 1999 accident year for
the Company's property and casualty business. The program covered losses and
allocated LAE, including those incurred but not yet reported, in excess of a
specified whole account loss and allocated LAE ratio. The annual coverage
limit for losses and allocated LAE is $150.0 million. The effect of this
agreement on results of operations in each reporting period is based on losses
and allocated LAE ceded, reduced by a sliding scale premium of 50-67.5%
depending on the size of the loss, and increased by a ceding commission of 20%
of ceded premium. In addition, net investment income is reduced for amounts
credited to the reinsurer. As a result of this agreement, the Company
recognized net benefits of $9.8 million and $15.9 million for the years ended
December 31, 2000 and 1999, respectively, based on estimates of losses and
allocated LAE for accident year 1999. During 2000, premiums, and losses and
LAE ceded under this treaty were $25.0 million and $34.1 million,
respectively. In addition, the Company realized an additional $4.8 million
benefit from commissions ceded under this contract, partially offset by $4.1
million of interest costs. Premiums, and losses and LAE ceded under this
treaty in 1999 were $21.9 million and $35.0 million, respectively. In 1999,
the Company realized an additional $4.3 million benefit from commissions ceded
under this contract, partially offset by $1.5 million of interest costs. The
effect of this agreement on the results of operations in future periods is not
currently determinable, as it will be based both on future losses and
allocated LAE for accident year 1999.
The Company, in the Risk Management segment, cedes to reinsurers a portion
of its risk and pays a fee based upon premiums received on all policies
subject to such reinsurance. Reinsurance contracts do not relieve
12
the Company from its obligations to policyholders. Failure of reinsurers to
honor their obligations could result in losses to the Company. The Company
believes that the terms of its reinsurance contracts are consistent with
industry practice in that they contain standard terms with respect to lines of
business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
The Company, in the Risk Management segment, is subject to concentration of
risk with respect to reinsurance ceded to various residual market mechanisms.
As a condition to the ability to conduct certain business in various states,
the Company is required to participate in various residual market mechanisms
and pooling arrangements which provide various insurance coverages to
individuals or other entities that are otherwise unable to purchase such
coverage voluntarily provided by private insurers. These market mechanisms and
pooling arrangements include CAR and MCCA.
Reference is made to "Reinsurance" in Note 17 on pages 74 and 75 of the
Notes to Consolidated Financial Statements of the 2000 Annual Report to
Shareholders, which is incorporated herein by reference.
Reference is also made to "Reinsurance Facilities and Pools" on pages 5, 6
and 7 of this Form 10-K which is incorporated herein by reference.
Asset Accumulation
Allmerica Financial Services
General
The Allmerica Financial Services segment includes the individual financial
products and the group retirement products and services businesses of FAFLIC
and its wholly-owned subsidiary, AFLIAC, as well as the Company's registered
investment advisor and broker-dealer affiliates. Through this segment, the
Company is a leading provider of investment-oriented life insurance and
annuities to upper income individuals and small businesses throughout the
United States. These products are marketed through the Company's career agency
force of 692 agents, to mutual fund providers for their variable annuity
customers, and on a wholesale basis to financial planners and broker-dealers.
For the year ended December 31, 2000, the Allmerica Financial Services segment
accounted for $772.4 million, or 23.9%, of consolidated segment operating
revenues and $222.8 million, or 59.5%, of consolidated segment income before
taxes and minority interest.
The Company offers a diverse line of products tailored to its customer
market, including variable annuities, variable universal life, and universal
life. The main components of the Company's current strategy in this segment
are to: (i) emphasize investment-oriented insurance products, particularly
variable annuities and variable universal life insurance, (ii) continue to
expand existing and develop additional distribution channels, (iii) leverage
the Company's technological resources to support marketing and client service
initiatives, (iv) improve the productivity of and expand the career agency
distribution system and (v) implement a targeted marketing approach
emphasizing value-added service.
The Company has also utilized its technological resources to support its
marketing and client service initiatives in this segment. The Company has
developed automated portfolio re-balancing capabilities and graphical
quarterly report statements, which are used to establish and monitor the
desired mix of investments by individual contract and policyholders.
According to 2000 A.M Best's Policy Reports, the Company is among the twenty
largest writers of individual variable annuity contracts and individual
variable universal life insurance policies in the United States in 1999, based
on statutory premiums and deposits. Sales of variable products represented
approximately 96.7%, 95.9% and 98.0% of this segment's statutory premiums and
deposits in 2000, 1999 and 1998, respectively. Statutory premiums and
deposits, a common industry benchmark for sales achievement, totaled $3,938.6
million, $3,609.5 million and $4,101.9 million in 2000, 1999 and 1998,
respectively.
13
Currently, under the Internal Revenue Code, holders of certain life
insurance and annuity products are entitled to tax-favored treatment on these
products. For example, income tax payable by policyholders on investment
earnings under certain life insurance and annuity products is deferred during
the product's accumulation period and is payable, if at all, only when the
insurance or annuity benefits are actually paid or to be paid. Also, for
example, interest on loans up to $50,000 secured by the cash value of certain
insurance policies owned by businesses is eligible for deduction even though
investment earnings during the accumulation period are tax-deferred.
Several legislative proposals are currently under consideration by Congress
that could modify or repeal the existing estate tax laws. If these or similar
proposals were enacted, the market demand for some of the Company's life
products could be adversely affected. The Company cannot predict the impact of
such changes in tax law.
14
Products
The following table reflects premiums and deposits on a statutory accounting
practices ("SAP") basis, including universal life and investment-oriented
contract deposits, for the segment's major product lines, including the Closed
Block, for the years ended December 31, 2000, 1999 and 1998. Receipts from
various products are treated differently under GAAP and SAP. Under GAAP,
universal life, variable universal life and annuity deposits are not included
in revenues but are recorded directly to policyholder account balances.
2000 1999 1998
-------- -------- --------
(In millions)
Statutory Premiums and Deposits
Variable universal life........................ $ 209.1 $ 187.0 $ 158.7
Group variable universal life.................. 47.7 94.9 73.3
Separate account annuities..................... 2,555.1 1,922.2 2,583.6
General account annuities(1)................... 524.7 830.2 622.2
Retirement investment account annuities........ 9.3 16.4 20.1
Group annuities................................ 463.1 409.3 563.9
Universal life................................. 59.2 71.8 23.6
Traditional life............................... 70.2 77.4 55.9
Individual health.............................. 0.2 0.3 0.6
-------- -------- --------
Total statutory premiums and deposits............ $3,938.6 $3,609.5 $4,101.9
======== ======== ========
- --------
(1) The general account includes approximately $145.7 million in 2000 and
$590.5 million in 1999 of deposits made in association with an annuity
program which provides, for a limited time, enhanced crediting rates on
deposits made into the Company's general account and transferred ratably,
over a period of time, into the Company's separate accounts.
While the Company continues to offer certain traditional insurance products,
its current focus for new business in this segment is on the sale of variable
products.
Variable Products
The Company's variable products offered through this segment include
variable universal life insurance and variable annuities. The Company's
variable universal life insurance products combine the flexible terms of the
Company's universal life insurance policy with separate account investment
opportunities. The Company also offers a variable joint life product through
this segment. The Company's variable annuities offer the investment
opportunities of the Company's separate accounts and provide a vehicle for
tax-deferred savings. These products are sold pursuant to registration
statements under the Securities Act or exemptions from registration
thereunder.
The Company seeks to achieve product distinction with respect to its
variable products on the basis of quality and diversity of the separate
account investment options underlying these products. The Company's variable
universal life and annuity products offer a variety of account investment
options with choices ranging from money market funds to international equity
funds. The number of these investment options has increased from 98 in 1998 to
more than 150 in 2000, including those underlying the products sold through
alternative distribution channels. For management of these separate accounts,
the Company supplements its in-house expertise in managing fixed income assets
with the equity management expertise of well-known mutual fund advisors, such
as Fidelity Investments, as well as other independent management firms who
specialize in the management of institutional assets. Additionally, the
Company utilizes the services of an experienced investment consultant to the
pension industry to assist it in the selection of these institutional managers
and in the ongoing monitoring of their performance.
Retirement Products
In addition to the above, the Company provides consulting and investment
services to defined benefit and defined contribution retirement plans of
corporate employers. The Company also offers participant recordkeeping
15
and administrative services to defined benefit and defined contribution
retirement plans. Currently, the Company provides administration and
recordkeeping for approximately 337 qualified pension and profit sharing
plans, which have assets totaling $2.2 billion, and cover approximately 57,729
participants. In 2001, the Company has agreed to sell the defined contribution
business to Minnesota Life Insurance Company in a transaction scheduled to
close in 2001. This sale is based on the Company's conclusion that this
business lacked scale to compete effectively in the 401(k) market with an
annuity based product. In addition, the Company does not plan to continue
marketing efforts for its defined benefit business. It expects to continue to
administer its defined benefit business which, in recent years, has not
experienced new sales.
Traditional Products
The Company's primary insurance products contained in this segment are
traditional life insurance products, including whole life and universal life,
as well as fixed annuities and retirement plan funding products.
The Company's universal life insurance product is an interest-sensitive
product which offers flexibility in arranging the amount of insurance
coverage, the premium level and the premium payment period. The Company also
offers joint life products through this segment designed to meet estate
planning needs. These products offer flexible premiums and benefits and cover
two lives, with benefits paid at the first or second death, depending on the
policy.
Distribution
The Company's life insurance and annuity products are distributed primarily
through three distribution channels; (1) "Agency", which consists of the
Company's career agency force; (2) "Select", which consists of a network of
third party broker-dealers; and (3) "Partners", which includes distributors of
the mutual funds advised by Zurich Scudder Investments (formerly "Scudder
Kemper Investments, Inc.") ("Zurich-Scudder"), Pioneer Investment Management,
Inc ("Pioneer"), and Delaware Management company ("Delaware").
The Company's national career agency sales force consists of 692 agents,
housed in 19 general agencies located in or adjacent to most of the major
metropolitan centers in the United States. Virtually all of these agents are
licensed both as insurance agents and securities broker-dealers by the
National Association of Securities Dealers ("NASD"), qualifying them to sell
the full range of the Company's products. The Company has focused on improving
the productivity and reducing the cost of its career agency system through
performance-based compensation, higher performance standards for agency
retention and agency training programs. The Company also regularly conducts
comprehensive financial planning seminars and fact-to-face presentations to
address different investment objectives of clients. During 2000, total
statutory premiums and deposits from sales of variable annuities through the
agency sales force totaled $885.7 million, compared to $930.1 million and
$871.3 million in 1999 and 1998, respectively. Total statutory premiums from
sales of variable life insurance through the agency sales force totaled $66.3
million in 2000, compared to $97.6 million and $48.7 million in 1999 and 1998,
respectively.
In addition, both the Select and Partners distribution channels have made
significant contributions to the overall growth of variable product sales in
this segment. Products sold through these channels include Allmerica Select
life and annuity products, which are distributed through independent broker-
dealers and financial planners, as well as annuity products sold through
alliances with mutual fund partners. The Company's strategy is to increase
sales under its existing distribution channels and to continue to pursue
additional relationships in these markets. Through these distribution
channels, the Company has obtained access to over 531 distribution firms
employing over 81,892 sales personnel. In addition, establishment of these
channels has enabled the Company to offer a broader range of investment
options through alliances with Zurich-Scudder, Pioneer, and Delaware mutual
funds as well as other financial institutions. During 2000, total statutory
premiums and deposits from sales of variable annuities through additional
distribution channels totaled $2,194.1 million, compared to $1,822.3 million
and $2,334.5 million in 1999 and 1998, respectively. In addition, total
statutory premiums from sales of variable life insurance through additional
distribution channels totaled $62.1 million in 2000, compared to $55.4 million
and $32.8 million in 1999 and 1998, respectively.
16
The Company has developed a number of new marketing and client service
initiatives in order to encourage sales of its products and improve customer
satisfaction. As part of its focus on the sale of investment-oriented
insurance products, the Company has emphasized a financial planning approach
utilizing face-to-face presentations and seminar programs to address different
client needs. In order to identify a favorable prospective client base, the
Company has developed a system utilizing advanced demographic screening and
telemarketing techniques. The Company also regularly delivers seminars focused
on retirement planning to these prospective clients. During 2000, the Company
delivered 878 seminars nationally with a total of 26,040 attendees. While
developed for and primarily utilized by the agency channel, these programs are
being extended to the Company's other distribution channels.
Underwriting
Life insurance underwriting involves a determination of the type and amount
of risk which an insurer is willing to accept and the price charged to do so.
The Company's insurance underwriting standards for this segment attempt to
produce mortality results consistent with the assumptions used in product
pricing. Underwriting also determines the amount and type of reinsurance
levels appropriate for a particular risk profile and thereby allows
competitive risk selection. Underwriting rules and guidelines are based on the
mortality experience of the Company, as well as of the insurance industry and
the general population. The Company also uses a variety of medical tests to
evaluate certain policy applications, based on the size of the policy, the age
of the applicant and other factors.
The Company's product specifications are designed to prevent anti-selection.
Mortality assumptions are thoroughly communicated and monitored. The
underwriting department tracks the profitability indicators of business by
each distribution channel, including the mix of business, percentage of
substandard and declined cases and placement ratio. Ongoing internal
underwriting audits, conducted at multiple levels, monitor consistency of
underwriting requirements and philosophy. Routine independent underwriting
audits conducted by its reinsurers have supported the Company's underwriting
policies and procedures.
Insurance Reserves
The Company has established liabilities for policyholders' account balances
and future policy benefits in the Consolidated Balance Sheets included in the
2000 Annual Report to Shareholders, the applicable portions of which are
incorporated herein by reference, to meet obligations on various policies and
contracts. Policyholders' account balances for universal life and investment-
type policies are equal to cumulative account balances: deposits plus credited
interest, less expense and mortality charges and withdrawals. The Company
holds a separate reserve for annuity minimum death benefits. Future policy
benefits for traditional products are computed on the basis of assumed
investment yields, mortality, persistency, morbidity and expenses (including a
margin for adverse deviation), which are established at the time of issuance
of a policy and generally vary by product, year of issue and policy duration.
The Company periodically reviews both reserve assumptions and policyholder
liabilities.
Reinsurance
Consistent with the general practice in the life insurance industry, the
Company has reinsured portions of the coverage provided by this segment's
insurance products with other insurance companies. Insurance is ceded
principally to reduce net liability on individual risks, to provide protection
against large losses and to obtain a greater diversification of risk. Although
reinsurance does not legally discharge the ceding insurer from its primary
liability for the full amount of policies reinsured, it does make the
reinsurers liable to the insurer to the extent of the reinsurance ceded. The
Company maintains a gross reserve for reinsurance liabilities. The Company
ceded approximately 5.2% of this segment's total statutory life insurance
premiums in 2000.
With respect to life policies of the Allmerica Financial Services segment,
the Company has reinsurance agreements in place, established on an annual
term, for both automatic and facultative reinsurance. Under automatic
reinsurance, the Company's retention is currently $2.0 million per life. The
reinsurer is automatically
17
bound for up to three times the Company's retention, or $6.0 million, with
certain restrictions that determine the binding authority with the various
reinsurers. For life policies greater than $8.0 million, the Company obtains
facultative reinsurance. Under facultative reinsurance, the facultative
reinsurer reviews all of the underwriting information relating to the policies
prior to issuing the reinsurance and reinsures on a policy by policy basis.
Depending on the nature of the risk and the size of the policy, the
facultative reinsurance could be provided by one company or several. The
Company sometimes facultatively reinsures certain policies under $2.0 million
which do not satisfy the Company's underwriting guidelines.
The Company seeks to enter into reinsurance treaties with highly rated
reinsurers. All of the reinsurers utilized by this segment have received an
A.M. Best rating of "A- (Excellent)" or better (Best's Insurance Reports, 1999
edition). The Company believes that it has established appropriate reinsurance
coverage for this segment based upon its net retained insured liabilities
compared to its surplus. Based on its review of its reinsurers' financial
positions and reputations in the reinsurance marketplace, the Company believes
that its reinsurers are financially sound.
The Company also obtains catastrophe reinsurance for life insurance in this
segment through a catastrophe accident pool. The maximum pool reinsurance
available per company is $50.0 million and the maximum pool reinsurance
available for a single event is $125.0 million. Any amounts in excess of these
limits are the responsibility of the company suffering the loss. Each
participant in the pool pays a premium based on the share of claims paid by
the pool. The Company's share of pool losses is approximately 0.7%. There have
been three claims for which the Company's share was approximately $94,000
since the Company entered the pool on January 1, 1989. Approximately 121
companies currently participate in this pool.
Effective January 1, 1998, the Company entered into an agreement with a
highly rated reinsurer to reinsure the mortality risk on the universal life
and variable universal life lines of business. In addition, the Company
maintains coinsurance agreements to reinsure substantially all of its
individual disability income and yearly renewable term business.
Competition
There is strong competition among insurance companies seeking clients for
the types of insurance, annuities and investment products sold by the Company
in this segment. As of December 31, 2000, there were approximately 1,500
companies that offer life insurance in the United States, most of which offer
one or more products similar to those offered by the Company. In some cases
these products are offered through similar marketing techniques. In addition,
the Company may face additional competition from banks and other financial
institutions since prior regulatory restrictions on the sale of insurance and
securities by these institutions have been repealed.
The Company believes that, based upon its extensive experience in the
market, the principal competitive factors affecting the sale of its life
insurance and related investment products are price, financial strength and
claims-paying ratings, size and strength of distribution force, range of
product lines, product quality, reputation and name recognition, value-added
service and, with respect to variable insurance and annuity products,
investment management performance of the underlying separate accounts.
Allmerica Asset Management
General
Through the Allmerica Asset Management segment, the Company offers Stable
Value Products, such as Guaranteed Investment Contracts ("GICs") and funding
agreements, to ERISA-qualified retirement plans as well as other non-ERISA
institutional buyers, such as money market funds and securities lending
collateral reinvestment programs. Also, Euro-GICs, a type of funding
agreement, were issued in conjunction with a new European Medium Term Note
program. In addition, this segment includes a Registered Investment Advisor,
which provides investment advisory services to affiliates and to other
institutions, such as insurance companies, retirement plans and mutual funds.
For the year ended December 31, 2000, this segment accounted for
approximately $149.2 million, or 4.6%, of consolidated segment revenues, and
income of $22.5 million, or 6.0%, of consolidated segment income before
federal income taxes and minority interest.
18
Products and Services
Stable Value Products
The Company offers its customers the option of investing in Stable Value
Products such as the traditional GIC and the non-qualified GIC, often referred
to as funding agreements. The traditional GIC is issued to ERISA-qualified
retirement plans, and provides a fixed guaranteed interest rate and fixed
maturity for each contract. Some traditional GICs provide for a specific lump
sum deposit and no withdrawals prior to maturity. Other traditional GICs allow
for window deposits and/or benefit-sensitive withdrawals prior to maturity,
for which the Company builds an additional risk charge into the guaranteed
interest rate. The funding agreement is similar to the traditional GIC, except
that it is issued to non-ERISA institutional buyers, such as money market
funds and securities lending collateral reinvestment programs. This market
tends to prefer short duration instruments, so it is typical for the funding
agreements sold in this market to have short maturities and periodic interest
rate resets, based on an index such as LIBOR. Some buyers prefer to invest in
instruments with longer maturities and either fixed or floating rate
characteristics. The Company is able to structure its funding agreements to
accommodate these buyers. Funding agreements sold through the Euro-GIC program
tend to have longer maturities, from 3-10 years, and may utilize either fixed
or variable interest rates also based on an index such as LIBOR, and be
denominated in either U.S. dollars or foreign currencies. Deposits from
customers in 2000 were invested primarily in these longer-term funding
agreements.
During 2000, funding agreement deposits were approximately $1.1 billion, as
compared to $1.0 billion and $1.1 billion in 1999 and 1998, respectively.
During 2000, deposits of approximately $305 million were short maturity
floating rate products, while $764 million were longer maturity products,
including Euro-GIC deposits of approximately $564 million. In addition,
traditional GIC deposits totaled approximately $2.0 million, $3.0 million, and
$0.3 million in 2000, 1999, and 1998, respectively. The continued low volume
of traditional GIC deposits reflects the Company's decision to sell these
products only when the profit margins meet the Company's standards. The
Company expects to continue its sales of funding agreements in 2001.
Investment Advisory Services
Through its registered investment advisor, Allmerica Asset Management, Inc.,
the Company provides investment advisory services to affiliates and to other
institutions, including unaffiliated insurance companies, retirement plans,
foundations and mutual funds. At December 31, 2000, Allmerica Asset Management
had assets under management of approximately $14.0 billion, of which
approximately $2.2 billion represented assets managed for third party clients
(i.e. entities unaffiliated with the Company). Assets under management for
third party clients grew by approximately $112.5 million during 2000.
Distribution
The Company distributes Stable Value Products through brokers, investment
bankers, GIC investment managers and directly from the Home Office. Investment
advisory services are marketed directly.
Competition
Prior to 1997, GIC deposits consisted primarily of traditional GICs. The
Company introduced its funding agreement product in the latter part of 1997.
There are approximately two dozen insurance companies that compete in the
funding agreement market. Funding agreements are one of a variety of
instruments being purchased by the buyers in this market, and the Company
views these other instruments as comprising the primary competition. Short-
term commercial paper issued by corporations is the most common of these
competing instruments. The primary factors affecting the ability to sell are
the yields offered, short term ratings (and to a lesser extent, claims paying
ratings) and product structure. By utilizing asset/liability management
techniques, the Company is able to offer yields and product structures that
are very competitive with comparably rated instruments, while earning an
attractive return on capital. During the third quarter of 1999, uncertainties
in the short maturity floating rate funding agreement market prompted a number
of investors to terminate their funding agreements with the Company and
request the return of their funds. These termination requests received
19
by the Company were paid in a timely manner. Management does not expect
significant deposits in short-term funding agreements to continue due to a
diminished market for this product.
The Company introduced its Euro-GIC product in the latter part of 1999.
Currently, there are approximately a dozen insurance companies that compete in
this market. Euro-GICs are one of a variety of instruments being purchased by
institutional investors in a competitive European market. The Company
considers these other instruments as comprising the primary competition, of
which medium term notes issued by corporations are the most common form of
these competing instruments. The primary factors affecting the ability to sell
Euro-GICs are the yields offered, the credit ratings assigned to the program,
and the familiarity of the Company name among investors in Europe. As such,
the Company periodically sends representatives to Europe to meet with
potential investors and has established new relationships with several
investment banking firms who manage the distribution of this product.
Investment Portfolio
General
At December 31, 2000, the Company held $9.7 billion of investment assets,
including $736.0 million of investment assets in the Closed Block. These
investments are generally of high quality and broadly diversified across asset
classes and individual investment risks. The major categories of investment
assets are: fixed maturities, which includes both investment grade and below
investment grade public and private debt securities; equity securities;
mortgage loans, principally on commercial properties; policy loans and other
long-term investments. The remainder of the investment assets is comprised of
cash and cash equivalents.
Management has an integrated approach to developing an investment strategy
for the Company that maximizes income, while incorporating overall asset
allocation, business segment objectives, and asset/liability management
tailored to specific insurance or investment product requirements. The
Company's integrated approach and the execution of the investment strategy are
founded upon a value orientation. The Company's investment professionals seek
to identify undervalued securities in the markets through extensive
fundamental research and credit analysis. Management believes this research-
driven, value orientation is a key to achieving the overall investment
objectives of producing superior rates of return, preserving capital and
meeting the financial goals of the Company's business segments.
The appropriate asset allocation for the Company (the selection of broad
investment categories such as fixed maturities, equity securities and
mortgages) is determined by management initially through a process that
focuses overall on the types of businesses in each segment that the Company
engages in and the level of surplus (net worth) required to support these
businesses.
At the segment level, the Company has developed an asset/liability
management approach tailored to specific insurance, investment product and
income objectives. The investment assets of the Company are then managed in
over 20 portfolio segments consistent with specific products or groups of
products having similar liability characteristics. As part of this approach,
management develops investment guidelines for each portfolio consistent with
the return objectives, risk tolerance, liquidity, time horizon, tax and
regulatory requirements of the related product or business segment. Specific
investments frequently meet the requirements of, and are acquired by, more
than one investment portfolio (or investment segment of the general account of
FAFLIC or AFLIAC, with each investment segment holding a pro rata interest in
such investments and the cash flows therefrom). Management has a general
policy of diversifying investments both within and across all portfolios. The
Company monitors the credit quality of its investments and its exposure to
individual borrowers, industries, sectors and, in the case of mortgages,
property types and geographic locations. All investments held by the Company's
insurance subsidiaries are subject to diversification requirements under
insurance laws.
Consistent with this management approach, portfolio managers maintain close
working relationships with the managers of related product lines within the
Risk Management, Allmerica Financial Services and Allmerica Asset Management
segments.
20
Rating Agencies
Insurance companies are rated by rating agencies to provide both industry
participants and insurance consumers meaningful information on specific
insurance companies. Higher ratings generally indicate financial stability and
a stronger ability to pay claims.
As of February 28, 2001, A.M. Best affirmed FAFLIC's, AFLIAC's, Hanover's
and Citizens' financial condition rating of A (Ecxcellent).
As of February 28, 2001, Standard & Poor's affirmed FAFLIC's, AFLIAC's and
Hanover's, together with its subsidiaries, including Citizens Insurance,
claims-paying ability rating of AA- (Excellent).
As of February 28, 2001, Moody's affirmed FAFLIC's, AFLIAC's and Hanover's
financial strength rating of A1 (Good).
Management believes that its strong ratings are important factors in
marketing the products of its insurance companies to its agents and customers,
since rating information is broadly disseminated and generally used throughout
the industry. Insurance company ratings are assigned to an insurer based upon
factors relevant to policyholders and are not directed toward protection of
investors. Such ratings are neither a rating of securities nor a
recommendation to buy, hold or sell any security.
Employees
The Company has approximately 5,700 employees located throughout the
country. Management believes relations with employees and agents are good.
ITEM 2
PROPERTIES
The Company's headquarters are located at 440 Lincoln Street, Worcester,
Massachusetts, and consist primarily of approximately 758,000 rentable square
feet of office and conference space owned in fee and includes the headquarters
of Hanover.
Citizens owns its home office, located at 645 W. Grand River, Howell,
Michigan, which is approximately 137,000 rentable square feet. Citizens also
owns a three-building complex located at 808 North Highlander Way, Howell,
Michigan, with approximately 207,000 rentable square feet, where various
business operations are conducted.
The Company leases office space for its sales force throughout the United
States. The leased property houses agency offices and group insurance sales
offices. Hanover and Citizens also lease offices throughout the country for
its field employees.
The Company believes that its facilities are adequate for its present needs
in all material respects.
ITEM 3
LEGAL PROCEEDINGS
Reference is made to Note 21 on page 77 of the Notes to Consolidated
Financial Statements of the 2000 Annual Report to Shareholders, the applicable
portions of which are incorporated herein by reference.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.
21
PART II
ITEM 5
MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
Common Stock and Shareholder Ownership
The common stock of Allmerica Financial Corporation is traded on the New
York Stock Exchange under the symbol "AFC". On March 21, 2001, the Company had
42,167 shareholders of record and 53.2 million shares outstanding. On the same
date, the trading price of the Company's common stock was $48.91 per share.
Common Stock Prices and Dividends
High Low Dividends
------ ------ ---------
2000
First Quarter......................................... $53.50 $35.31 --
Second Quarter........................................ $60.13 $46.31 --
Third Quarter......................................... $65.44 $54.00 $0.25
Fourth Quarter........................................ $72.50 $58.13 --
1999
First Quarter......................................... $57.88 $50.19 --
Second Quarter........................................ $62.25 $54.50 --
Third Quarter......................................... $64.44 $47.56 $0.25
Fourth Quarter........................................ $59.69 $46.50 --
2000 Dividend Schedule
Allmerica Financial Corporation declared an annual cash dividend of $0.25
per share on July 25, 2000, which was paid on November 15, 2000. The record
date for such dividend was November 1, 2000. The payment of future dividends,
if any, on the Company's Common Stock will be a business decision made by the
Board of Directors from time to time based upon the results of operations and
financial condition of the Company and such other factors as the Board of
Directors considers relevant.
Dividends paid by the Company may be funded from dividends paid to the
Company from its subsidiaries. Dividends from insurance subsidiaries are
subject to restrictions imposed by state insurance laws and regulations.
Reference is made to "Liquidity and Capital Resources" on pages 43 and 44 of
Management's Discussion and Analysis of Financial Condition and Results of
Operations and to Note 14 on pages 72 and 73 of the Notes to Consolidated
Financial Statements of the 2000 Annual Report to Shareholders, the applicable
portions of which are incorporated herein by reference.
ITEM 6
SELECTED FINANCIAL DATA
Reference is made to the "Five Year Summary of Selected Financial
Highlights" on page 21 of the 2000 Annual Report to Shareholders, which is
incorporated herein by reference.
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 22-45 of the 2000 Annual Report
to Shareholders, which is incorporated herein by reference.
22
ITEM 7A
QUANTATATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Reference is made to "Market Risk and Risk Management Policies" on pages 36-
42 of Management's Discussion and Analysis of Financial Condition and Results
of Operations of the 2000 Annual Report to Shareholders, which is incorporated
herein by reference.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements on pages 48-52
and the accompanying Notes to Consolidated Financial Statements on pages 53-78
of the 2000 Annual Report to Shareholders which meet the requirements of
Regulation S-X, and which include a summary of quarterly results of
consolidated operations (see Note 23 of Notes to Consolidated Financial
Statements--page 78), which is incorporated herein by reference.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
23
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
Information regarding Directors of the Company is incorporated herein by
reference from the Proxy Statement for the Annual Meeting of Shareholders to
be held May 15, 2001, to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is biographical information concerning the executive
officers of the Company.
John F. O'Brien, 57
Director, Chief Executive Officer and President of the Company since February
1995
See biography under "Directors of the Registrant" above.
Bruce C. Anderson, 56
Vice President of the Company since February 1995
Mr. Anderson has been Vice President of AFC since February 1995. Mr.
Anderson has been employed by FAFLIC since 1967 and has been Vice President
and Director of FAFLIC since October 1984 and April 1996, respectively.
Mark R. Colborn, 52
Vice President of the Company since March 2000
Mr. Colborn has been Vice President of AFC since March 2000. In addition,
Mr. Colborn has served as Vice President of FAFLIC since June 1992.
J. Kendall Huber, 46
Vice President and General Counsel of the Company since March 2000
Mr. Huber has been Vice President, General Counsel and Assistant Secretary
of AFC and FAFLIC since March 2000. Prior to joining AFC, Mr. Huber was
Executive Vice President, General Counsel, and Secretary of Promus Hotel
Corporation from February 1999 to January 2000. Previously, Mr. Huber was Vice
President and Deputy General Counsel of Legg Mason, Inc., from November 1998
to January 1999. He has also served as Vice President and Deputy General
Counsel of USF&G Corporation, where he was employed from March 1990 to August
1998.
John P. Kavanaugh, 46
Vice President and Chief Investment Officer of the Company since September
1996
Mr. Kavanaugh has been Vice President and Chief Investment Officer of AFC
since September 1996, has been employed by FAFLIC since 1983, and has been
Vice President of FAFLIC since December 1991.
24
Edward J. Parry, III, 41
Vice President of the Company since February 1995
Chief Financial Officer of the Company since December 1996
Mr. Parry has been Chief Financial Officer of AFC and FAFLIC since December
1996. He has also been Vice President of AFC since February 1995 and was
Treasurer from February 1995 to March 2000. He has been a Vice President of
FAFLIC since February 1993 and was Treasurer from February 1993 until March
2000.
Richard M. Reilly, 62
Vice President of the Company since February 1997
Mr. Reilly has been Vice President of AFC and FAFLIC since February 1997 and
November 1990, respectively. He has also been a Director and Vice President of
AFLIAC since November 1990 and President and Chief Executive Officer of AFLIAC
since August 1995. Mr. Reilly was Vice President of AFC from February 1995
through December 1995. Additionally, Mr. Reilly has been the President of
Allmerica Investment Trust, and Allmerica Securities Trust, each a registered
investment company, since February 1991.
Robert P. Restrepo, Jr., 50
Vice President of the Company since May 1998
Mr. Restrepo has been Vice President of AFC and FAFLIC since May 1998. He
was President, Chief Executive Officer and Director of Allmerica P&C from May
1998 to December 2000. Prior to joining AFC, Mr. Restrepo was Chief Executive
Officer, Personal Lines at Travelers Property and Casualty, a member of the
Travelers Group from January 1996 to May 1998. Additionally, Mr. Restrepo was
the Senior Vice President, Personal Lines at Aetna Life & Casualty Company
from March 1991 to January 1996.
Eric A. Simonsen, 55
Vice President of the Company since February 1995
Mr. Simonsen has been Vice President of AFC since February 1995. In
addition, he has served as Vice President and as a Director of FAFLIC since
September 1990 and April 1996, respectively. Mr. Simonsen was Chief Financial
Officer of AFC from February 1995 to December 1996 and of FAFLIC from
September 1990 to December 1996.
Gregory D. Tranter, 44
Vice President and Chief Information Officer of the Company since October
2000
Mr. Tranter has been Vice President and Chief Information Officer of AFC
since October 2000. Mr. Tranter has been Vice President and Chief Information
Officer of AFC's insurance subsidiaries since August 1998. Prior to joining
AFC, Mr. Tranter was Vice President, Automation Strategy of Travelers Property
& Casualty Company from April 1996 to July 1998. Mr. Tranter was employed by
Aetna Life & Casualty Company from 1983 to 1996.
ITEM 11
EXECUTIVE COMPENSATION
Incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 15, 2001, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
25
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 15, 2001, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 15, 2001, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
26
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The consolidated financial statements and accompanying notes thereto on
pages 48 through 78 of the 2000 Annual Report to Shareholders have been
incorporated herein by reference in their entirety.
Annual
Report
Page(s)
-------
Report of Independent Accountants..................................... 46
Consolidated Statements of Income for the years ended December 31,
2000, 1999 and 1998.................................................. 48
Consolidated Balance Sheets as of December 31, 2000 and 1999.......... 49
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998..................................... 50
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2000, 1999 and 1998..................................... 51
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998.................................................. 52
Notes to Consolidated Financial Statements............................ 53-78
(a)(2) Financial Statement Schedules
Page No. in
Schedule this Report
-------- -----------
Report of Independent Accountants on Financial
Statement Schedules.................................... 33
I Summary of Investments--Other than Investments in
Related Parties........................................ 34
II Condensed Financial Information of Registrant.......... 35-37
III Supplementary Insurance Information.................... 38-40
IV Reinsurance............................................ 41
V Valuation and Qualifying Accounts...................... 42
VI Supplemental Information concerning Property/Casualty
Insurance Operations................................... 43
(a)(3) Exhibit Index
Exhibits filed as part of this Form 10-K are as follows:
2.1 Plan of Reorganization.+
2.2 Stock and Asset Purchase Agreement by an among State Mutual Life
Assurance Company of America, 440 Financial Group of Worcester, Inc.,
and The Shareholder Services Group, Inc. dated as of March 9, 1995.+
3.1 Certificate of Incorporation of AFC.+
3.2 By-Laws of AFC.+
4 Specimen Certificate of Common Stock.+
4.1 Form of Indenture relating to the Debentures between the Registrant and
State Street Bank & Trust Company, as trustee.++
4.2 Form of Global Debenture.++
4.3 Amended and Restated Declaration of Trust of AFC Capital Trust I dated
February 3, 1997.+++++
4.4 Indenture dated February 3, 1997 relating to the Junior Subordinated
Debentures of AFC.+++++
4.5 Series A Capital Securities Guarantee Agreement dated February 3,
1997.+++++
4.6 Common Securities Guarantee Agreement dated February 3, 1997.+++++
27
4.8 Rights Agreement dated as of December 16, 1997, between the Registrant
and First Chicago Trust Company of New York as Rights Agent, filed as
Exhibit 1 to the Company's Form 8-A dated December 17, 1997 is
incorporated herein by reference.
10.3 Administrative Services Agreement between State Mutual Life Assurance
Company of America and The Hanover Insurance Company, dated July 19,
1989.+
10.4 First Allmerica Financial Life Insurance Company Employees' 401(k)
Matched Savings Plan incorporated by reference to Exhibit 10.1 to the
Allmerica Financial Corporation Registration Statement on Form 8-K
(No. 333-576) and incorporated herein by reference originally filed
with the Commission on January 24, 1996.
10.5 State Mutual Life Assurance Company of America Excess Benefit
Retirement Plan.+
10.6 State Mutual Life Assurance Company of America Supplemental Executive
Retirement Plan.+
10.7 State Mutual Incentive Compensation Plan.+
10.8 State Mutual Companies Long-Term Performance Unit Plan.+
10.9 Indenture of Lease between State Mutual Life Assurance Company of
America and the Hanover Insurance Company dated July 3, 1984 and
corrected First Amendment to Indenture of Lease dated December 20,
1993.+
10.12 Lease dated March 23, 1993 by and between Aetna Life Insurance Company
and State Mutual Life Assurance Company of America, including
amendments thereto, relating to property in Atlanta, Georgia.+
10.13 Stockholder Services Agreement dated as of January 1, 1992 between
Private Healthcare Systems, Inc. and State Mutual Life Assurance
Company of America, the successor to its wholly-owned subsidiary,
Group Healthcare Network, Inc.+
10.14 Lease dated January 26, 1995 by and between Citizens Insurance and
Upper Peninsula Commission for Area Progress, Inc., including
amendments thereto, relating to property in Escanaba, Michigan.+
10.16 Trust Indenture for the State Mutual Life Assurance Company of America
Employees' 401(k) Matched Savings Plan between State Mutual Life
Assurance Company of America and Bank of Boston/Worcester.+
10.17 State Mutual Life Assurance Company of America Non-Qualified Executive
Retirement Plan.+
10.18 State Mutual Life Assurance Company of America Non-Qualified Executive
Deferred Compensation Plan.+
10.19 The Allmerica Financial Cash Balance Pension Plan incorporated by
reference to Exhibit 10.19 to the Allmerica Financial Corporation
September 30, 1995 report on Form 10-Q and incorporated herein by
reference.
10.20 The Allmerica Financial Corporation Employment Continuity Plan.++++++
10.21 Amended and Restated Form of Non-Solicitation Agreement executed by
substantially all of the executive officers of AFC incorporated by
reference to Exhibit 10.21 to the Allmerica Financial Corporation June
30, 1997 report on Form 10-Q and incorporated herein by reference.
10.23 Amended Allmerica Financial Corporation Long-Term Stock Incentive
Plan.+++++++
10.24 The Allmerica Financial Corporation Director Stock Ownership Plan
incorporated by reference to Exhibit 10.21 to the Allmerica Financial
Corporation June 30, 1996 report on Form 10-Q and incorporated herein
by reference.
10.25 Reinsurance Agreement dated September 29, 1997 between First Allmerica
Financial Life Insurance Company and Metropolitan Life Insurance
Company.+++++++
10.26 Consolidated Service Agreement between Allmerica Financial Corporation
and its subsidiaries, dated January 1, 1998.+++++++
10.27 Deferral Agreement, dated April 4, 1997, between Allmerica Financial
Corporation and John F. O'Brien.+++++++
10.28 Severance Agreement, dated September 25, 1997, between First Allmerica
Financial Life Insurance Company and Larry C. Renfro.+++++++
10.29 Credit agreement dated as of June 17, 1998 between the Registrant and
the Chase Manhattan Bank.++++++++
28
10.30 Form of Deferral Agreement executed by substantially all of the
executive officers of AFC dated January 30, 1998.++++++++
10.31 Form of Restricted Stock Agreement, dated January 30, 1998 and
executed by substantially all of the executive officers of
AFC.++++++++
10.32 Form of Converted Stock Agreement, dated January 30, 1998 and executed
by substantially all of the executive officers of AFC.++++++++
10.33 Employment Arrangement, dated May 13, 1998 between First Allmerica
Financial Life Insurance Company and Robert P. Restrepo, Jr.++++++++
10.34 Restricted Stock Agreement, dated May 26, 1998, between Allmerica
Financial Corporation and Robert P. Restrepo, Jr.++++++++
10.35 Credit agreement dated as of December 1, 1998 between the Registrant
and the Chase Manhattan Bank.++++++++
10.36 Amendment to the Credit Agreement dated as of June 17, 1998 between
the Registrant and the Chase Manhattan Bank incorporated by reference
to Exhibit 10.36 to the Allmerica Financial Corporation June 30, 1999
report on Form 10-Q and incorporated herein by reference.
10.37 Allmerica Financial Corporation Short-Term Incentive Compensation Plan
incorporated herein by reference to Exhibit A contained in the
Registrant's Proxy Statement (Commission File No.
001-13754) originally filed with the Commission on March 31, 1999.
13 The following sections of the Annual Report to Shareholders for 2000
("2000 Annual Report") which are expressly incorporated by reference
into this Annual Report on Form 10-K:
.Management's Discussion and Analysis of Financial Condition and
Results of Operations at pages 22 through 45 of the 2000 Annual
Report.
.Consolidated Financial Statements and Notes thereto at pages 48
through 78 of the 2000 Annual Report.
.Report of Independent Accountants at page 46 of the 2000 Annual
Report.
.The information appearing under the caption "Five Year Summary of
Selected Financial Highlights" at page 21 of the 2000 Annual Report.
.The information appearing under the caption "Shareholder Information"
at page 80 of the 2000 Annual Report.
21 Subsidiaries of AFC.
23 Consent of Independent Accountants
24 Power of Attorney.
27 Financial Data Schedule.
99.1 Internal Revenue Service Ruling dated April 15, 1995.+
99.2 Important Factors Regarding Forward Looking Statements.
- --------
+ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's Registration Statement on Form S-
1 (No. 33-91766) originally filed with the Commission on May 1, 1995.
++ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's Registration Statement on Form S-
1 (No. 33-96764) originally filed with the Commission on September 11,
1995.
+++ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's 1995 Annual Report on Form 10-K
originally filed with the Commission on March 28, 1996.
++++ Incorporated by herein by reference to Exhibit I of the Current Report
of the Registrant (Commission File No. 1-13754) filed February 20,
1997.
+++++ Incorporated herein by reference to Exhibits 2, 3, 4, 5 and 6,
respectively, contained in the Registrant's Current Report on Form 8-K
filed on February 5, 1997.
++++++ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's 1996 Annual Report on Form 10-K
originally filed with the Commission on March 24, 1997.
29
+++++++ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's 1997 Annual Report on Form 10-K
originally filed with the Commission on March 27, 1998
++++++++ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's 1998 Annual Report Form 10-K
originally filed with the Commission on March 29, 1999.
(b) Reports on Form 8-K
None
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Allmerica Financial Corporation
Registrant
Date: March 23, 2001 /s/ John F. O'Brien
By: _________________________________
John F. O'Brien,
Chairman of the Board,
Chief Executive Officer
and President
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 23, 2001 /s/ John F. O'Brien
By: _________________________________
John F. O'Brien,
Chairman of the Board,
Chief Executive Officer and
President
Date: March 23, 2001 /s/ Edward J. Parry, III
By: _________________________________
Edward J. Parry III,
Vice President, Chief Financial
Officer and Principal Accounting
Officer
Date: March 23, 2001 *
By: _________________________________
Michael P. Angelini,
Director
Date: March 23, 2001 *
By: _________________________________
E. Gordon Gee,
Director
Date: March 23, 2001 *
By: _________________________________
Samuel J. Gerson,
Director
Date: March 23, 2001 *
By: _________________________________
Gail L. Harrison,
Director
31
Date: March 23, 2001 *
By: _________________________________
Robert P. Henderson,
Director
Date: March 23, 2001 *
By: _________________________________
M Howard Jacobson,
Director
Date: March 23, 2001 *
By: _________________________________
Wendell J. Knox,
Director
Date: March 23, 2001 *
By: _________________________________
Robert J. Murray,
Director
Date: March 23, 2001 *
By: _________________________________
Terrence Murray,
Director
Date: March 23, 2001 *
By: _________________________________
John R. Towers,
Director
Date: March 23, 2001 *
By: _________________________________
Herbert M. Varnum,
Director
/s/ Edward J. Parry
*By: ________________________________
Edward J. Parry,
Attorney-in-fact
32
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors
of Allmerica Financial Corporation
Our audits of the consolidated financial statements referred to in our report
dated February 1, 2001, appearing in the 2000 Annual Report to Shareholders of
Allmerica Financial Corporation (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
_____________________________________
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 1, 2001
33
Schedule I
ALLMERICA FINANCIAL CORPORATION
Summary of Investments--Other than Investments in Related Parties
December 31, 2000
Amount at
which shown
in the balance
Type of Investment Cost(1) Value sheet
- ------------------ -------- ------- --------------
(In millions)
Fixed maturities:
Bonds:
United States Government and government
agencies and authorities.................. $ 86.7 $ 89.2 $ 89.2
States, municipalities and political
subdivisions.............................. 1,966.7 2,018.5 2,018.5
Foreign governments........................ 52.1 53.9 53.9
Public utilities........................... 466.6 457.4 457.4
All other corporate bonds.................. 4,892.7 4,816.4 4,816.4
Redeemable preferred stocks.................. 288.5 285.1 285.1
-------- ------- --------
Total fixed maturities..................... 7,753.3 7,720.5 7,720.5
-------- ------- --------
Equity securities:
Common stocks:
Public utilities........................... 0.1 0.2 0.2
Banks, trust and insurance companies....... 0.1 3.0 3.0
Industrial, miscellaneous and all other.... 44.8 67.1 67.1
Nonredeemable preferred stocks............... 15.0 15.2 15.2
-------- ------- --------
Total equity securities.................... 60.0 85.5 85.5
-------- ------- --------
Mortgage loans on real estate.................. 472.7 XXXXXX 472.7
Policy loans................................... 189.6 XXXXXX 189.6
Other long-term investments.................... 207.0 XXXXXX 193.2
-------- ------- --------
Total investments.......................... $8,682.6 XXXXXX $8,661.5
======== ======= ========
- --------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums and
accretion of discounts.
34
Schedule II
ALLMERICA FINANCIAL CORPORATION
Condensed Financial Information of Registrant
Parent Company Only
Statements of Income for the Years Ended December 31,
2000 1999 1998
------ ------ ------
(In millions)
Revenues
Net investment income............................... $ 3.6 $ 5.3 $ 7.1
Net realized investment gains (losses).............. 2.6 (0.4) 1.7
------ ------ ------
Total revenues.................................... 6.2 4.9 8.8
------ ------ ------
Expenses
Interest expense.................................... 40.6 40.6 40.5
Operating expenses.................................. 2.7 2.3 2.5
------ ------ ------
Total expenses.................................... 43.3 42.9 43.0
------ ------ ------
Net loss before federal income taxes and equity in net
income of unconsolidated subsidiaries................ (37.1) (38.0) (34.2)
Income tax benefit:
Federal............................................. 13.2 14.2 12.4
State............................................... -- 0.3 0.5
Equity in net income of unconsolidated subsidiaries... 223.8 319.3 222.5
------ ------ ------
Net income............................................ $199.9 $295.8 $201.2
====== ====== ======
The condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto.
35
Schedule II (continued)
ALLMERICA FINANCIAL CORPORATION
Condensed Financial Information of Registrant
Parent Company Only
Balance Sheets
December 31,
------------------
2000 1999
-------- --------
(In millions,
except share
and per share
data)
Assets
Cash and cash equivalents................................ $ 26.6 $ 5.6
Investment in unconsolidated subsidiaries................ 2,922.6 2,761.5
Receivable from subsidiaries............................. 65.3 47.2
Other assets............................................. 8.7 7.4
-------- --------
Total assets........................................... $3,023.2 $2,821.7
======== ========
Liabilities
Expenses and taxes payable............................... $ 35.6 $ 14.8
Interest and dividends payable........................... 13.6 13.3
Short-term debt.......................................... 56.1 44.6
Long-term debt........................................... 508.8 508.8
-------- --------
Total liabilities...................................... 614.1 581.5
-------- --------
Shareholders' Equity
Preferred stock, par value $0.01 per share, 20.0 million
shares authorized, none issued.......................... -- --
Common stock, par value $0.01 per share, 300.0 million
shares authorized, 60.4 million shares issued at both
December 31, 2000 and December 31, 1999................. 0.6 0.6
Additional paid-in capital............................... 1,765.3 1,770.5
Accumulated other comprehensive income................... (5.2) (75.3)
Retained earnings........................................ 1,068.7 882.2
Treasury stock at cost (7.7 and 6.2 million shares)...... (420.3) (337.8)
-------- --------
Total shareholders' equity............................. 2,409.1 2,240.2
-------- --------
Total liabilities and shareholders' equity............. $3,023.2 $2,821.7
======== ========
The condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto.
36
Schedule II (continued)
ALLMERICA FINANCIAL CORPORATION
Condensed Financial Information of Registrant
Parent Company Only
Statement of Cash Flows for the Years Ended December 31,
2000 1999 1998
------- ------- -------
(In millions)
Cash flows from operating activities
Net income......................................... $ 199.9 $ 295.8 $ 201.2
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in undistributed income of subsidiaries.... (223.8) (319.3) (222.5)
Net realized investment (gains) losses............ (2.6) 0.4 (1.7)
Change in expenses and taxes payable.............. 22.5 (2.8) 24.7
Change in interest and dividends payable.......... 0.3 0.3 (2.8)
Change in receivable from subsidiaries............ (18.1) 3.3 (43.9)
Other, net........................................ (1.5) 1.7 8.0
------- ------- -------
Net cash used in operating activities............... (23.3) (20.6) (37.0)
------- ------- -------
Cash flows from investing activities
Capital contributed to unconsolidated
subsidiaries...................................... (16.9) (54.1) (95.7)
Proceeds from disposals and maturities of
available-for-sale fixed maturities............... 33.5 84.6 123.9
Purchase of available-for-sale fixed maturities.... -- (41.4) --
Proceeds from sale of common stock of subsidiary... -- 247.6 --
------- ------- -------
Net cash provided by investing activities........... 16.6 236.7 28.2
------- ------- -------
Cash flow from financing activities
Dividend received from unconsolidated
subsidiaries...................................... 109.8 39.5 50.0
Net proceeds from issuance of commercial paper..... 11.5 3.5 41.1
Net proceeds from issuance of common stock......... 0.6 1.1 11.4
Treasury stock purchased at cost................... (104.1) (250.2) (82.7)
Treasury stock reissued at cost.................... 23.3 6.2 --
Dividends paid to shareholders..................... (13.4) (13.5) (9.0)
------- ------- -------
Net cash provided by (used in) financing
activities......................................... 27.7 (213.4) 10.8
------- ------- -------
Net change in cash and cash equivalents............. 21.0 2.7 2.0
Cash and cash equivalents at beginning of the
period............................................. 5.6 2.9 0.9
------- ------- -------
Cash and cash equivalents at end of the period...... $ 26.6 $ 5.6 $ 2.9
======= ======= =======
The condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto.
37
Schedule III
ALLMERICA FINANCIAL CORPORATION
Supplementary Insurance Information
December 31, 2000
Future
policy Amortization
benefits, Other Benefits, of
Deferred losses, policy claims, deferred
policy claims and claims and Net losses and policy Other
acquisition loss Unearned benefits Premium investment settlement acquisition operating Premiums
costs expenses premiums payable revenue income expenses costs expenses written
----------- ---------- -------- ---------- -------- ---------- ---------- ------------ --------- --------
(In millions)
Risk Management.. $ 187.2 $3,017.5 $978.8 $ 25.1 $2,066.7 $218.4 $1,563.0 $373.2 $184.9 $2,153.4
Asset
Accumulation
Allmerica
Financial
Services........ 1,409.8 2,764.9 2.8 418.5 2.2 230.0 222.6 81.1 242.3 --
Allmerica Asset
Management...... 0.2 -- -- 1,636.5 -- 138.1 103.7 0.2 23.0 --
Corporate........ -- -- -- -- -- 6.3 -- -- 82.3 --
Eliminations..... -- -- -- -- -- (0.9) -- -- (7.0) --
-------- -------- ------ -------- -------- ------ -------- ------ ------ --------
Total........... $1,597.2 $5,782.4 $981.6 $2,080.1 $2,068.9 $591.9 $1,889.3 $454.5 $525.5 $2,153.4
======== ======== ====== ======== ======== ====== ======== ====== ====== ========
38
Schedule III (continued)
ALLMERICA FINANCIAL CORPORATION
Supplementary Insurance Information
December 31, 1999
Future
policy Amortization
benefits, Other Benefits, of
Deferred losses, policy claims, deferred
policy claims and claims and Net losses and policy Other
acquisition loss Unearned benefits Premium investment settlement acquisition operating Premiums
costs expenses premiums payable revenue income expenses costs expenses written
----------- ---------- -------- ---------- -------- ---------- ---------- ------------ --------- --------
(In millions)
Risk Management.. $ 173.3 $3,003.8 $887.2 $ 24.8 $1,948.2 $221.4 $1,420.3 $370.6 $197.0 $1,977.0
Asset
Accumulation
Allmerica
Financial
Services........ 1,213.1 2,659.8 3.0 700.2 2.3 251.1 232.1 59.1 211.7 --
Allmerica Asset
Management...... 0.4 -- -- 1,316.0 -- 138.2 118.3 0.2 8.5 --
Corporate........ -- -- -- -- -- 6.0 -- -- 65.3 --
Eliminations..... -- -- -- -- -- (1.0) -- -- (5.9) --
-------- -------- ------ -------- -------- ------ -------- ------ ------ --------
Total........... $1,386.8 $5,663.6 $890.2 $2,041.0 $1,950.5 $615.7 $1,770.7 $429.9 $476.6 $1,977.0
======== ======== ====== ======== ======== ====== ======== ====== ====== ========
39
Schedule III (continued)
ALLMERICA FINANCIAL CORPORATION
Supplementary Insurance Information
December 31, 1998
Future
policy Amortization
benefits, Other Benefits, of
Deferred losses, policy claims, deferred
policy claims and claims and Net losses and policy Other
acquisition loss Unearned benefits Premium investment settlement acquisition operating Premiums
costs expenses premiums payable revenue income expenses costs expenses written
----------- ---------- -------- ---------- -------- ---------- ---------- ------------ --------- --------
(In millions)
Risk Management.. $ 167.5 $2,955.4 $840.1 $ 21.4 $1,967.9 $229.8 $1,495.4 $379.7 $206.4 $1,956.7
Asset
Accumulation
Allmerica
Financial
Services........ 993.1 2,663.1 3.1 823.8 2.7 253.1 219.3 69.6 209.3 --
Allmerica Asset
Management...... 0.6 -- -- 1,791.8 -- 111.4 89.3 0.3 8.4 --
Corporate........ -- -- -- -- -- 11.9 -- -- 63.8 --
Eliminations..... -- -- -- -- -- (1.8) -- -- (7.6) --
-------- -------- ------ -------- -------- ------ -------- ------ ------ --------
Total........... $1,161.2 $5,618.5 $843.2 $2,637.0 $1,970.6 $604.4 $1,804.0 $449.6 $480.3 $1,956.7
======== ======== ====== ======== ======== ====== ======== ====== ====== ========
40
Schedule IV
ALLMERICA FINANCIAL CORPORATION
Reinsurance
December 31,
Assumed Percentage
Ceded to from of amount
Gross other other Net assumed to
amount companies companies amount net
--------- --------- --------- --------- ----------
(In millions)
2000
Life insurance in force..... $30,999.4 $19,329.9 $488.3 $12,157.8 4.02%
========= ========= ====== ========= =====
Premiums:
Life insurance............ $ 13.9 $ 10.7 $ 0.7 $ 3.9 17.95%
Accident and health
insurance................ 29.8 29.6 -- 0.2 --
Property and casualty
insurance................ 2,297.8 299.8 66.8 2,064.8 3.24%
--------- --------- ------ ---------
Total premiums.............. $ 2,341.5 $ 340.1 $ 67.5 $ 2,068.9 3.26%
========= ========= ====== ========= =====
1999
Life insurance in force..... $41,393.1 $21,251.5 $374.2 $20,515.8 1.82%
========= ========= ====== ========= =====
Premiums:
Life insurance............ $ 21.3 $ 18.6 $ 0.7 $ 3.4 20.59%
Accident and health
insurance................ 32.2 31.4 -- 0.8 --
Property and casualty
insurance................ 2,135.0 261.7 73.0 1,946.3 3.75%
--------- --------- ------ ---------
Total premiums.............. $ 2,188.5 $ 311.7 $ 73.7 $ 1,950.5 3.78%
========= ========= ====== ========= =====
1998
Life insurance in force..... $44,790.9 $23,886.9 $555.4 $21,459.4 2.59%
========= ========= ====== ========= =====
Premiums:
Life insurance............ $ 15.8 $ 13.3 $ 0.7 $ 3.2 21.88%
Accident and health
insurance................ 35.6 34.5 -- 1.1 --
Property and casualty
insurance................ 1,967.9 66.1 64.5 1,966.3 3.28%
--------- --------- ------ ---------
Total premiums.............. $ 2,019.3 $ 113.9 $ 65.2 $ 1,970.6 3.31%
========= ========= ====== ========= =====
41
Schedule V
ALLMERICA FINANCIAL CORPORATION
Valuation and Qualifying Accounts
December 31,
Additions
---------------------
Deductions
Balance at Charged to Charged to from Balance at
beginning of costs and other allowance end of
period expense accounts account period
------------ ---------- ---------- ---------- ----------
(In millions)
2000
Mortgage loans.......... $ 5.8 $(1.3) $-- $0.1 $ 4.4
Allowance for doubtful
accounts............... 5.8 8.4 -- 7.3 6.9
----- ----- ---- ---- -----
$11.6 $ 7.1 $-- $7.4 $11.3
===== ===== ==== ==== =====
1999
Mortgage loans.......... $11.5 $(2.4) $-- $3.3 $ 5.8
Allowance for doubtful
accounts............... 5.4 5.6 -- 5.2 5.8
----- ----- ---- ---- -----
$16.9 $ 3.2 $-- $8.5 $11.6
===== ===== ==== ==== =====
1998
Mortgage loans.......... $20.7 $(6.8) $-- $2.4 $11.5
Allowance for doubtful
accounts............... 6.1 4.4 -- 5.1 5.4
----- ----- ---- ---- -----
$26.8 $(2.4) $-- $7.5 $16.9
===== ===== ==== ==== =====
42
Schedule VI
ALLMERICA FINANCIAL CORPORATION
Supplemental Information Concerning Property and Casualty Insurance Operations
For the Years Ended December 31,
Reserves Discount,
for if any,
Deferred losses and deducted
policy loss from Net Net
Affiliation with acquisition adjustment previous Unearned premiums investment
Registrant costs expenses(2) column(1) premiums(2) earned income
---------------- ----------- ----------- --------- ----------- -------- ----------
(In millions)
Consolidated Property
and Casualty
Subsidiaries
2000.................. $183.9 $2,719.1 $-- $975.9 $2,064.8 $217.9
====== ======== ==== ====== ======== ======
1999.................. $167.3 $2,618.7 $-- $883.3 $1,946.3 $220.5
====== ======== ==== ====== ======== ======
1998.................. $164.9 $2,597.3 $-- $834.9 $1,966.3 $228.9
====== ======== ==== ====== ======== ======
Amortization
Losses and loss of deferred Paid losses
adjustment expenses policy and loss Net
------------------------ acquisition adjustment premiums
Current Year Prior Years expenses expenses written
------------ ----------- ------------ ----------- --------
2000.............. $1,634.9 $ (87.4) $373.2 $1,574.0 $2,151.6
======== ======= ====== ======== ========
1999.............. $1,601.4 $(183.4) $370.6 $1,499.1 $1,975.4
======== ======= ====== ======== ========
1998.............. $1,609.0 $(127.2) $379.7 $1,514.9 $1,955.1
======== ======= ====== ======== ========
- --------
(1) The Company does not employ any discounting techniques.
(2) Reserves for losses and loss adjustment expenses are shown gross of $816.9
million, $694.2 million and $591.7 million of reinsurance recoverable on
unpaid losses in 2000, 1999 and 1998, respectively. Unearned premiums are
shown gross of prepaid premiums of $63.2 million, $57.4 million and $37.9
million in 2000, 1999 and 1998, respectively.
43