EXHIBIT 99.2
ALLMERICA FINANCIAL CORPORATION
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The Company wishes to caution readers that the following important factors,
among others, in some cases have affected the Company's results and in the
future could cause actual results and needs of the Company to vary materially
from forward-looking statements made from time to time by the Company on the
basis of management's then-current expectations. The businesses in which the
Company is engaged are in rapidly changing and competitive markets and involve a
high degree of risk, and accuracy with respect to forward looking projections is
difficult.
Geographic Concentration in the Property and Casualty Insurance Business
Substantially all of the Company's property and casualty insurance
subsidiaries net premiums written and earnings are generated in Michigan and the
Northeast (Connecticut, Maine, Massachusetts, New York, New Jersey, New
Hampshire, Rhode Island and Vermont). The revenues and profitability of the
Company's property and casualty insurance subsidiaries are therefore subject to
prevailing economic, regulatory, demographic and other conditions, including
adverse weather, in Michigan and the Northeast.
Cyclicality in the Property and Casualty Insurance Industry
Historically, the property and casualty insurance industry has been highly
cyclical. The property and casualty industry's profitability can be affected
significantly by price competition, volatile and unpredictable developments such
as extreme weather conditions and natural disasters, legal and regulatory
developments affecting insurer liability, extracontractual liabilities and the
size of jury awards, medical and other costs, fluctuations in interest rates and
other factors that affect investment returns and other general economic
conditions and trends that may affect the adequacy of reserves.
Over the past several years, the property and casualty insurance industry as
a whole has been in a soft market. Competition for premiums in the property and
casualty insurance markets may continue to have an adverse impact on the
Company's rates and profitability.
Catastrophe Losses in the Property and Casualty Insurance Industry
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 Company 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 hurricanes, earthquakes, tornadoes,
wind, hail, fires, severe winter weather and explosions, and the frequency and
severity of catastrophes are inherently unpredictable. The extent of losses
from a catastrophe is a function of two factors: the total amount of insured
exposure in the area affected by the event and the severity of the event.
Although catastrophes can cause losses in a variety of property and casualty
lines, homeowners and commercial property insurance have in the past generated
the vast majority of the Company's catastrophe-related claims. The Company
purchases catastrophe reinsurance as protection against catastrophe losses. The
Company believes, based upon its review of its reinsurers' financial statements
and reputations in the reinsurance marketplace, that the financial condition of
its reinsurers is sound. However, reinsurance is subject to credit risks
(including over-concentration within the industry), and there can be no
assurance that reinsurance will be adequate to protect the Company against such
losses or that such reinsurance will continue to be available to the Company in
the future at commercially reasonable rates.
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Uncertainty Regarding Adequacy of Property and Casualty Loss Reserves
The Company's property and casualty insurance subsidiaries maintain reserves
to cover their estimated ultimate liability for losses and loss adjustment
expenses ("LAE") with respect to reported and unreported claims incurred as of
the end of each accounting period. These reserves are estimates, involving
actuarial projections at a given time, of what the Company's property and
casualty insurance subsidiaries expect the ultimate settlement and
administration of claims will cost based on facts and circumstances then known,
predictions of future events, estimates of future trends in claims severity and
judicial theories of liability, legislative activity and other factors. The
inherent uncertainties of estimating reserves are greater for certain types of
property and casualty insurance lines, particularly workers' compensation, where
a longer period of time may elapse before a definitive determination of ultimate
liability may be made, and environmental liability, where the technological,
judicial and political climates involving these types of claims are changing.
The Company's property and casualty insurance subsidiaries regularly review
reserving techniques, reinsurance and overall reserve adequacy. Based upon (i)
review of historical data, legislative enactments, judicial decision, legal
developments in imposition of damages, changes in political attitudes and trends
in general economic conditions; (ii) review of per claim information; (iii)
historical loss experience of the property and casualty insurance subsidiaries
and the industry; and (iv) the relatively short-term nature of most of its
property and casualty insurance policies, management believes that adequate
provision has been made for reserves. However, establishment of appropriate
reserves is an inherently uncertain process involving estimates of future losses
and there can be no certainty that currently established reserves will prove
adequate in light of subsequent actual experience. These estimates are
regularly reviewed and revised.
Sensitivity to Interest Rates Relative to Life Insurance Subsidiaries
The Company's life insurance subsidiaries are exposed to risk of
disintermediation and reduction in interest spread or profit margins when
interest rates fluctuate. Bond calls, mortgage prepayments, contract surrenders
and withdrawals of life insurance policies, annuities and guaranteed investment
contracts are influenced by the interest rate environment. Since the Company's
life insurance subsidiaries' general account investment portfolios consist
primarily of fixed income assets, the investment portfolio market value and the
yields on newly invested and reinvested assets vary depending on interest rates.
Management attempts to mitigate any negative impact of interest rate changes
through asset/liability management, product design, management of crediting
rates, use of hedging techniques, relatively high surrender charges and
management of mortality charges and dividend scales with respect to its in force
life insurance policies.
Sensitivity to Equity Markets Relative to Life Insurance Subsidiaries
The Company's life insurance subsidiaries are exposed to risk of reduced
variable product assets, fewer deposits and lower related fee income, and
increased surrenders that may result from equity market declines. In addition, a
decrease in variable product assets may result in the expectation of reduced
future profit margins, which could require the Company to accelerate the
amortization of deferred policy acquisition costs.
Liquidity
AFC is dependent on its insurance subsidiaries for cash flows. As such, the
Company is exposed to risk of decreased cash flows due to changes in its
subsidiaries ability to generate sufficient cash inflows from new or existing
customers or from increased cash outflows. Cash outflows may result from claims
activity, surrenders, lapses or changes in asset values due to fluctuations in
the investment markets. In addition, a shortage of available cash could limit
the Company's ability to generate product sales (deposits), as most life and
annuity sales require immediate cash payments to agents, brokers or other
producers.
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Losses Due to Foreign Currency Fluctuations
A portion of the Company's investments consists of securities denominated in
foreign currencies. The Company also holds trust obligations backed by funding
agreements denominated in foreign currencies. The Company's operating results
are exposed to changes in exchange rates between the U.S. dollar and various
foreign currencies. Management attempts to mitigate any negative impact from
foreign currency fluctuations by entering into foreign exchange swap contracts
and compound foreign currency/interest rate swap contracts.
Uncertainty Regarding Accident and Health Assumed Reinsurance Pool Business
The Company believes that notwithstanding the losses incurred by the accident
and health assumed reinsurance business during the past several years, the
Company's reserves appropriately reflect both current claims and unreported
losses. However, due to the inherent volatility in this business, possible
issues related to the enforceability of reinsurance treaties in the industry and
to its recent history of increased losses, there can be no assurance that the
Company's current reserves are adequate or that the Company will not have losses
in the future. Although AFC has discontinued participation in these reinsurance
pools, the Company may become subject to claims related to prior years. AFC's
operating results and financial position may be harmed from liabilities
resulting from any such claims.
Regulatory, Surplus, Capital, Rating Agency and Related Matters
Insurance companies are subject to supervision and regulation by the state
insurance authority in each state in which they transact business. Such
supervision and regulation relate to numerous aspects of an insurance company's
business and financial condition, including limitations on the authorization of
lines of business, underwriting limitations, the setting of premium rates, the
establishment of standards of solvency, the licensing of insurers and agents,
concentration of investments, levels of reserves, the payment of dividends,
transactions with affiliates, changes of control and the approval of policy
forms. Such regulation is concerned primarily with the protection of
policyholders.
State regulatory oversight and various proposals at the federal level
(including the proposed adoption of a federal regulatory framework for insurance
companies) may in the future adversely affect the Company's ability to sustain
adequate returns in certain lines of business. In recent years, the state
insurance regulatory framework has come under increased federal scrutiny, and
certain state legislatures have considered or enacted laws that alter and, in
many cases, increase state authority to regulate insurance companies and
insurance holding company systems. Further, the National Association of
Insurance Commissioners ("NAIC") and state insurance regulators are reexamining
existing laws and regulations, and as a condition to accreditation have required
the adoption of certain model laws which specifically focus on insurance company
investments, issues relating to the solvency of insurance companies, risk-based
capital ("RBC") guidelines, interpretations of existing laws, the development of
new laws, and the definition of extraordinary dividends.
The capacity for an insurance company's growth in premiums is in part a
function of its statutory surplus. Maintaining appropriate levels of statutory
surplus, as measured by state insurance regulators, is considered important by
state insurance regulatory authorities and the private agencies that rate
insurers' claims-paying abilities and financial strength. Failure to maintain
certain levels of statutory surplus could result in increased regulatory
scrutiny, action by state regulatory authorities or a downgrade by the private
rating agencies.
The NAIC uses a system for assessing the adequacy of statutory capital for
life and health insurers and property and casualty insurers. The system, known
as risk-based capital, is in addition to the states' fixed dollar minimum
capital and other requirements. The system is based on risk-based formulas
(separately defined for life and health insurers and property and casualty
insurers) that apply prescribed factors to the
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various risk elements in an insurer's business to report a minimum capital
requirement proportional to the amount of risk assumed by the insurer.
Management believes that its 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 protections of investors. Such
ratings are neither a rating of securities nor a recommendation to buy, hold or
sell any security. Further downgrades may have a material adverse effect on the
Company's business and prospects.
State Guaranty Funds, Shared Markets Mechanisms and Pooling Arrangements
All fifty states of the United States have insurance guaranty fund laws
requiring all life and health and property and casualty insurance companies
doing business within the state to participate in guaranty associations, which
are organized to pay contractual obligations under insurance policies issued by
impaired or insolvent insurance companies. These associations levy assessments
(up to prescribed limits) on all member insurers in a particular state on the
basis of the proportionate share of the premiums written by member insurers in
the lines of business in which the impaired or insolvent insurer is engaged.
Mandatory assessments by state guaranty funds are used to cover losses to
policyholders of insolvent or rehabilitated companies and can be partially
recovered through a reduction in future premium taxes in many states. These
assessments may increase in the future depending upon the rate of insolvencies
of insurance companies.
In addition, as a condition to the ability to conduct business in various
states, the Company's property and casualty insurance subsidiaries are 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. The Company cannot predict whether
its participation in these shared market mechanisms or pooling arrangements will
provide underwriting profits or losses to the Company.
Competition
The Company's business is composed of three principal segments: Risk
Management, Allmerica Financial Services, and Allmerica Asset Management. Each
of these industry segments, in general, is highly competitive. The Company's
products and services compete not only with those offered by insurance
companies, but also with products offered by other financial institutions. In
all of its segments, many of the Company's competitors are larger and have
greater financial, technical, and operating resources than those of the Company.
In addition, the Company may face additional competition from banks and other
financial institutions since prior regulatory prohibitions on the ability of
such institutions to directly or indirectly engage in the insurance business
have been repealed.
Retention of Key Executives
The future success of the Company will be affected by its continued ability
to attract and retain qualified executives. The Company's success is dependent
in large part on John F. O'Brien, the loss of whom could adversely affect the
Company's business. The Company does not have an employment agreement with Mr.
O'Brien or any of its key executives.
Retention of Variable Products Relationships
The future sale of variable products will be affected by the Company's
ability to recruit new or retain existing career agents, wholesalers, broker-
dealers, partnership and other distribution relations.
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Competition for such relationships is intense. The success of the variable
products line is highly dependent on these relationships and deterioration in
them could adversely affect future sales and surrender activities. Sales of
annuity products are particularly dependent on the relationship with Zurich-
Kemper.
Federal Income Tax Legislation
Currently, under the 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, only when the insurance or annuity benefits are actually
paid or to be paid.
In the past, legislation has been proposed that would have curtailed the tax-
favored treatment of the life insurance and annuity products offered by the
Company. These proposals were not enacted; however, such proposals or similar
proposals are, from time to time considered by Congress, the Treasury Department
or other federal agencies. If these or similar proposals directed at limiting
the tax-favored treatment of life insurance policies and annuity contracts were
enacted, market demand for such products offered by the Company would be
adversely affected.
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.
Sales Practices
A number of civil jury verdicts have been returned against life and health
insurers in the jurisdictions in which the Company does business involving the
insurers' sales practices or disclosures, alleged agent misconduct, failure to
properly supervise agents, and other matters. Some of the lawsuits have
resulted in the award of substantial judgements against the insurer, including
material amounts of punitive damages. In some states, juries have substantial
discretion in awarding punitive damages in these circumstances. The Company and
its subsidiaries, from time to time are involved in such litigation. Although
the outcome of any litigation cannot be predicted with certainty, to date, no
such lawsuit has resulted in the award of any material amount of damages against
the Company for which the Company has not established appropriate reserves.
Sales of variable life insurance and annuity products are subject to
regulation by the Securities and Exchange Commission ("SEC"), NASD Regulation,
Inc. ("NASDR") and various other federal, state and self-regulatory agencies.
Recently, the SEC, NASDR and various other agencies have increased scrutiny of
sales practices relating to the sales of variable life insurance and annuity
products, particularly bonus annuity products, including in the areas of
suitability and replacements. Such increased scrutiny and accompanying adverse
publicity could negatively impact sales activities.
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