EXHIBIT 99.2
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.
Risks Relating to our Risk Management Business
Our results may fluctuate as a result of cyclical changes in the property and
casualty insurance industry.
We generate a significant portion of our total revenues through our
property and casualty insurance subsidiaries. The results of companies in the
property and casualty insurance industry historically have been subject to
significant fluctuations and uncertainties. Our profitability could be affected
significantly by:
. increases in costs occurring after the time our insurance products are
priced;
. competitive and regulatory pressures which may affect the prices of
our products and the nature of the risks covered;
. volatile and unpredictable developments, including severe weather
catastrophes;
. legal, regulatory and socio-economic developments, such as new
theories of insurer liability and related claims, increases in the
size of jury awards, and increases in construction, automobile repair
and medical and rehabilitation costs;
. fluctuations in interest rates, inflationary pressures, default rates
and other factors that affect investment returns; and
. other general economic conditions and trends that may affect the
adequacy of reserves.
The demand for property and casualty insurance can also vary
significantly based on general economic conditions, rising as the overall level
of economic activity increases and falling as such activity decreases. The
fluctuations in demand and competition could produce underwriting results that
would have a negative impact on our results of operations and financial
condition.
Actual losses from claims against our property and insurance subsidiaries may
exceed their reserves for claims.
Our property and casualty insurance subsidiaries maintain reserves to
cover their estimated ultimate liability for losses and loss adjustment expenses
with respect to reported and unreported claims incurred as of the end of each
accounting period. Reserves do not represent an exact calculation of liability.
Rather, reserves represent estimates, involving actuarial projections at a given
time, of what they expect the ultimate settlement and administration of claims
will cost based on facts and circumstances then known to them, predictions of
future events, estimates of future trends in claims frequency and severity and
judicial theories of liability, costs of repair and replacement, legislative
activity and other factors.
The inherent uncertainties of estimating reserves are greater for
certain types of property and casualty insurance lines. These include 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.
We regularly review our reserving techniques, reinsurance and the
overall adequacy of our reserves based upon:
. our review of historical data, legislative enactments, judicial
decisions, legal developments in imposition of damages, changes in
political attitudes and trends in general economic conditions;
. our review of per claim information;
. historical loss experience of our property and casualty insurance
subsidiaries and the industry as a whole; and
. the relative short-term nature of most of our property and casualty
insurance policies.
Because setting reserves is inherently uncertain, we cannot provide
assurance that the existing reserves or future reserves established by our
property and casualty insurance subsidiaries will prove adequate in light of
subsequent events. Our results of operations and financial condition could
therefore be materially affected by adverse loss development for events that we
insure.
Due to our geographical concentration in our Risk Management business, changes
in the economic, regulatory and other conditions in the regions where we operate
could have a significant negative impact on our business as a whole.
We generate a significant portion of our property and casualty
insurance net premiums written and earnings in Michigan, Massachusetts and other
states in the Northeast, including Connecticut, Maine, New York, New Jersey, New
Hampshire, Rhode Island and Vermont. In the nine months ended September 30,
2001, approximately 36.5% and 16.8% of our net written premium in our Risk
Management business was generated in the states of Michigan and Massachusetts,
respectively. The revenues and profitability of our property and casualty
insurance subsidiaries are therefore subject to prevailing economic, regulatory,
demographic and other conditions, including adverse weather, in Michigan and the
Northeast. Because of our strong regional focus, our business as a whole could
be significantly affected by changes in the economic, regulatory and other
conditions in the regions where we transact business.
Catastrophe losses could materially reduce our profitability or cash flow.
Our property and casualty insurance subsidiaries are subject to claims
arising out of catastrophes that may have a significant impact on their results
of operations and financial condition. We may experience catastrophe losses
which could have a material adverse impact on our business. Catastrophes can be
caused by various events including hurricanes, earthquakes, tornadoes, wind,
hail, fires, severe winter weather, sabotage, terrorist actions and explosion.
The frequency and severity of catastrophes are inherently unpredictable.
The extent of gross 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. The extent of net losses depends on the amount
and collectibility of reinsurance.
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 our catastrophe-related claims. Our catastrophe
losses have historically been principally weather related, particularly snow and
ice damage from winter storms.
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We purchase catastrophe reinsurance as protection against catastrophe
losses. Based upon our review of our reinsurers' financial statements and
reputations in the reinsurance marketplace, we believe that the financial
condition of our reinsurers is sound. However, reinsurance is subject to credit
risks, including those resulting from over-concentration within the industry.
The availability, scope of coverage and cost of reinsurance could be adversely
affected by the losses incurred from the September 11, 2001 terrorist attacks
and the perceived risks associated with possible future terrorist activities. We
cannot currently estimate the impact of these events on us. We also cannot
provide assurance that our current reinsurance will be adequate to protect us
against future catastrophe losses or that reinsurance or with coverage
provisions reflective of the risks underwritten in our primary policies will
continue to be available to us at commercially reasonable rates or with coverage
provisions reflective of the risks underwritten in our primary policies.
We may incur financial losses resulting from our participation in shared market
mechanisms and mandatory and voluntary pooling arrangements.
As a condition to conducting business in several states, our property
and casualty insurance subsidiaries are required to participate in mandatory
property and casualty shared market mechanisms or pooling arrangements. These
arrangements are designed to provide various insurance coverages to individuals
or other entities that otherwise are unable to purchase such coverage
voluntarily provided by private insurers. We cannot predict whether our
participation in these shared market mechanisms or pooling arrangements will
provide underwriting profits or losses to us. In 2000, 1999 and 1998, we
incurred an underwriting loss from participation in these mechanisms and pooling
arrangements of $26.1 million, $24.2 million and $14.7 million, respectively.
We may face similar losses in the future.
In addition, we may be adversely affected by liabilities resulting
from our previous participation in certain voluntary assumed reinsurance pools,
including accident and health reinsurance pools. We discontinued our
participation in such pools in 1998 but remain subject to claims from periods in
which we participated as well as for certain continuing obligations in a limited
number of accident and health pools that we were prohibited from exiting in
full. Although the accident and health assumed reinsurance business has suffered
substantial losses during the past several years, we believe that our 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, we cannot provide assurance that our current reserves are
adequate or that we will not incur losses in the future. Although we have
discontinued participation in these reinsurance pools as described above, we may
become subject to claims related to prior years or from pools we could not exit
in full. Our operating results and financial position may be harmed from
liabilities resulting from any such claims.
Our profitability could be adversely affected by periodic changes to our
relationships with our agencies.
Our Risk Management segment reviews our agencies from time to time to
identify those that do not meet our profitability standards or are not
strategically aligned with our business. Following these periodic reviews, we
may restrict such agencies' access to certain types of policies or terminate our
relationship with them, subject to applicable contractual and regulatory
requirements to renew certain policies for a limited time. For example, we
recently identified approximately 600 agencies with whom we plan to either limit
or terminate our relationship. Although we currently anticipate a decline of
approximately $200 million in our annual written premium as a result of these
actions, we expect our overall profitability to improve over time as a result of
expected lower losses incurred. However, we cannot be sure that we will achieve
the desired results from these measures, and our failure to do so could
negatively affect our operating results and financial position.
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Risks Relating to our Asset Accumulation Business
Interest rate fluctuations could negatively affect our profitability.
Some of our products, including guaranteed investment contracts,
funding agreements, the general account options in our variable products,
traditional whole and universal life insurance and fixed annuities expose us to
the risk that changes in interest rates will reduce our "spread", or the
difference between the amounts that we are required to pay under the contracts
and the rate of return we are able to earn on our general account investments
intended to support our obligations under the contracts. Declines in our spread
from these products or other spread businesses we conduct could have a material
adverse effect on our business or results of operations.
In periods of increasing interest rates, we may not be able to replace
the assets in our general account investment portfolios with higher yielding
assets needed to fund the higher crediting rates necessary to keep our interest
sensitive products competitive. We therefore may have to accept a lower spread
and thus lower profitability or face a decline in sales and greater loss of
existing contracts and related assets. In periods of declining interest rates,
we may have to reinvest the cash we receive as interest or return of principal
on our investments in lower yielding instruments then available. Moreover,
borrowers may prepay fixed-income securities, commercial mortgages and mortgage-
backed securities in our general account in order to borrow at lower market
rates, which
increases this risk. Because we are entitled to reset the interest rates on our
general account supported life insurance and annuity products and guaranteed
investment contracts only at limited, pre-established intervals, and since many
of our policies have guaranteed minimum interest or crediting rates, our spreads
could decrease and potentially become negative.
A decline in market interest rates available on investments could also
reduce our return from investments of capital that do not support particular
policy obligations, which could have a material adverse effect on our results of
operations.
Increases in interest rates may cause increased surrenders and withdrawal of
insurance products.
In periods of increasing interest rates, policy loans and surrenders
and withdrawals of life insurance policies and annuity contracts may increase as
policyholders seek to buy products with perceived higher returns. This process
may lead to a flow of cash out of our businesses. These outflows may require
investment assets to be sold at a time when prices for those assets are lower
because of the increase in market interest rates, which may result in realized
investment losses. The value of fixed income investments, in particular, tends
to fluctuate in an inverse relationship to interest rates. A sudden demand
among consumers to change product types or withdraw funds could lead us to sell
assets at a loss to meet the demand for funds. In addition, unanticipated
withdrawals and terminations also may require us to accelerate the amortization
of deferred policy acquisition costs. This would increase our current expenses.
A continued decline or increase in volatility in the securities markets may
negatively affect our business.
Our investment-based and asset management products and services expose us
to the risk that sales will continue to decline and lapses in variable life and
annuity products and withdrawal of assets from other investment products will
increase if, as a result of a continued market downturn, increased market
volatility or other market conditions, customers become dissatisfied with their
investments. A declining market also leads to lower account balances as a
result of decreases in market value of assets under management. In many cases,
our fees in these businesses are based on a percentage of the assets we manage
and, if account values decline, our fee revenue declines. A declining market
also results in a decline in the volume of transactions that we execute for our
customers in our brokerage business, and therefore a decline in our commission
and fee revenue.
In addition, the lower account balances that result from a declining
securities market particularly affect our variable annuity products that offer
guaranteed minimum death benefits, or GMDB. Under certain market conditions,
including those we currently face, the assets in an annuitant's account may be
insufficient to satisfy our
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GMDB obligations at the time of the annuitant's death. In this case, we must
satisfy the difference from other cash sources. In the event that a significant
number of deaths of such annuitants occur at a time that account balances are
decreased as a result of a market downturn, our liquidity, level of statutory
capital and earnings would be significantly and adversely affected. In recent
quarters, our GMDB expense has been approximately $2 million to $3 million per
quarter, net of adjustment for deferred policy acquisition cost amortization,and
we expect such expense to increase by approximately $6 million to $8 million per
quarter, net of adjustment for deferred policy acquisition costs amortization,
as a result of the sustained decline in the financial markets we currently face.
Additional declines in the financial markets could further increase this
expense.
Actual losses from claims against our life insurance subsidiaries may exceed
their reserves for claims.
For our life insurance and annuity products, we calculate reserves based on
assumptions and estimates such as estimated premiums we will receive over the
assumed life of policy, the timing of the event covered by the insurance policy,
the expected life of the insured or annuitant, the anticipated market
performance of underlying investments, the amount of benefits or claims to be
paid and the investment returns on the assets we purchase with the premiums we
receive. We establish reserves based on assumptions and estimates of mortality
and morbidity rates, policy and claim termination rates, benefit amounts,
investment returns and other factors. Because setting reserves is inherently
uncertain, we cannot provide assurance that our existing reserves or future
reserves to support our obligations under our life and insurance annuity
products will prove adequate in light of subsequent events. Our results of
operations and financial condition could therefore be materially affected by
adverse loss development for events that we insure.
We rely heavily on key relationships to market our variable products, and we
could lose sales if we are unable to maintain these relationships.
The future sale of our variable products will depend on our ability to
recruit new or retain existing career agents, wholesalers, broker-dealers,
partnership and other distribution relationships. For example, our relationship
with Zurich-Kemper is important for marketing our annuity products. In the nine
months ended September 30, 2001, Zurich-Kemper generated approximately 27% of
our annuity product sales, based on statutory premiums and deposits. Competition
for such relationships is intense. Our success in marketing of our variable
products is highly dependent on these relationships and deterioration in them
could adversely affect future sales and surrender activities.
We could be adversely affected by litigation regarding insurers' sales
practices.
A number of civil jury verdicts have been returned against life and health
insurers in the jurisdictions in which we do business. These cases involved 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 are given substantial
discretion in awarding punitive damages in these circumstances. We, from time to
time, are subject to litigation of this type.
Risks Relating to our Business Generally
Other market fluctuations and general economic, market and political conditions
may also negatively affect our business and profitability.
At September 30, 2001, we held approximately $11.0 billion of investment
assets in categories such as fixed maturities, equity securities, mortgage loans
and other long-term investments. Our investment returns, and thus our
profitability, may be adversely affected from time to time by conditions
affecting our specific investments and, more generally, by stock, bonds, real
estate and other market fluctuations and general economic, market and political
conditions. Our ability to make a profit on insurance products, fixed annuities
and guaranteed investment
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products depends in part on the returns on investments supporting our
obligations under these products and the value of specific investments may
fluctuate substantially depending on the foregoing conditions. We use a variety
of strategies to hedge our exposure to interest rate and other market risk.
However, hedging strategies are not always available and carry certain credit
risks, and our hedging could be ineffective.
The current uncertainties in the U.S. and international economic and
investment climates have adversely affected our businesses and profitability in
2001, and can be expected to continue to do so, unless conditions improve.
General uncertainties in our business illustrate this risk. The incomes from
our Risk Management and Allmerica Financial Services segments in the first nine
months of 2001 decreased by 58.8% and 27.2%, respectively, compared to the same
period in 2000. As we announced in our press release dated October 29, 2001,
our forecasts for net operating earnings for the three months and year ended
December 31, 2001 are materially lower than ranges we had previously announced
for such periods.
Market conditions also affect the value of assets under our employee
pension plans. The expense or benefit related to our employee pension plans
results from several factors, including changes in the market value of plan
assets, interest rates and employee compensation levels. We recognized net
expenses of $3.9 million related to our employee pension plans during the nine
months ended September 30, 2001. In 2002, we expect a significant increase in
such costs due to a decline in the market value of plan assets and interest
rates in 2001. Such increased costs could negatively affect our results of
operations.
In addition, debt securities comprise a material portion of our
investment portfolio. The issuers of those securities, as well as borrowers
under the loans we make, customers, trading counterparties, counterparties under
swaps and other derivative contracts and reinsurers, may be affected by the
declining market. These parties may default on their obligations to us due to
bankruptcy, lack of liquidity, downturns in the economy or real estate values,
operational failure or other reasons. The current uncertain trend in the U.S.
and other economies has resulted in rising investment impairments. Our ability
to fulfill our debt and other obligations could be adversely affected by the
default of third parties on their obligations owed to us.
We are a holding company and rely on our insurance company subsidiaries for cash
flow; we may not be able to receive dividends from our subsidiaries in needed
amounts.
We are a holding company for a diversified group of insurance and financial
services companies and our principal assets are the shares of capital stock of
our subsidiaries. Our ability to make required debt service payments as well as
our ability to pay operating expenses and pay dividends to shareholders, depends
upon the receipt of sufficient funds from our subsidiaries.
The payment of dividends by our insurance company subsidiaries is subject
to regulatory restrictions and will depend on the surplus and future earnings of
these subsidiaries, as well as the regulatory restrictions. For example, during
the nine months ended September 30, 2001, we received $100.0 million of
dividends from our property and casualty businesses. Additional dividends from
our insurance subsidiaries prior to April 2002 would be considered
"extraordinary" and would require approval from state regulators. In addition,
we have agreed with the Commonwealth of Massachusetts Insurance Commissioner not
to receive any dividends from FAFLIC in 2001 without the commissioner's prior
approval. The ability of FAFLIC to make dividends may also be affected by our
commitment with the Commonwealth of Massachusetts Insurance Commissioner to
maintain a minimum risk-based capital ratio for FAFLIC of 225% until after
December 31, 2004. In the event that FAFLIC's risk-based capital falls below
225%, the Commissioner has the authority to require FAFLIC to increase the ratio
to at least 225% pursuant to a reasonable plan approved by the Commissioner.
This ratio is higher than that which we would otherwise be required to maintain
under state law and could impede our ability to receive dividends from FAFLIC.
We have not received, and cannot depend on receiving, dividends from our life
insurance subsidiaries.
Because of the regulatory limitations on the payment of dividends from our
insurance company subsidiaries, we may not always be able to receive dividends
from these subsidiaries at times and in amounts necessary to meet our debt and
other obligations. The inability of our subsidiaries to pay dividends to us in
an
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amount sufficient to meet our debt service and funding obligations would have a
material adverse effect on us. These regulatory dividend restrictions also
impede our ability to transfer cash and other capital resources among our
subsidiaries.
Our dependence on our insurance subsidiaries for cash flow exposes us to
the risk of changes in their 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 investment losses. In
addition, a shortage of available cash could limit our life and annuity
companies' ability to generate product sales (deposits), as most life and
annuity sales require immediate cash payments to agents, brokers or other
producers upon the sale of the product. Reductions in cash flow from our
subsidiaries would have a material adverse effect on our business and results of
operations.
Fluctuations in currency exchange rates may adversely affect our financial
condition.
We have investments in securities denominated in foreign currencies. As of
September 30, 2001, our investments in foreign currency denominated securities
amounted to approximately $22.3 million, based on the exchange ratio prevailing
on that date between the U.S. dollar and the relevant foreign currency . We
also hold trust obligations backed by funding obligations denominated in foreign
currencies. As a result, we are exposed to changes in exchange rates between the
U.S. dollar and various foreign currencies, including the Swiss Franc, Japanese
Yen, British Pound and the Euro. To the extent these exchange rates fluctuate in
the future, our financial condition could be adversely affected.
We enter into foreign exchange swap contracts and compound foreign currency
or interest rate swap contracts from time to time to mitigate risks from foreign
currency fluctuations. However, we cannot provide assurance that these measures
will be adequate, or that these risks will not adversely affect our business.
Furthermore, swap contracts and similar transactions also expose us to credit
risk with the counter-party to the transaction.
Our businesses are heavily regulated and changes in regulation may reduce our
profitability.
Our insurance businesses are subject to supervision and regulation by the
state insurance authority in each state in which we transact business. This
system of supervision and regulation relates to numerous aspects of an
insurance company's business and financial condition, including limitations on
the authorization of lines of business, underwriting limitations, the ability to
terminate agents, supervisory and liability responsibilities for agents and
registered representatives, the setting of premium rates, the requirement to
write certain classes of business which we might otherwise avoid or charge
different 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. Most insurance regulations are
designed to protect the interests of policyholders rather than stockholders and
other investors.
State regulatory oversight and various proposals at the federal level may
in the future adversely affect our 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. Products that are also "securities", such as variable life
insurance and variable annuities, are also subject to federal and state
securities laws and such products and their distribution are regulated and
supervised by the Securities and Exchange Commission, the National Association
of Securities Dealers, or NASD, and state securities commissions. Our business
could be negatively impacted by adverse state and federal legislation or
regulation, including those resulting in:
. decreases in rates;
. limitations on premium levels;
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. increases in minimum capital and reserve requirements;
. benefit mandates;
. limitations on the ability to manage care and utilization;
. requirements to write certain classes of business;
. tax treatment of insurance and annuity products; and
. restrictions on underwriting.
We are rated by several rating agencies, and a decline in our ratings could
adversely affect our operations.
Ratings have become increasingly important in establishing the competitive
position of insurance companies. Our ratings are important in marketing the
products of our insurance companies to our agents and customers, since rating
information is broadly disseminated and generally used throughout the industry.
Our insurance company subsidiaries are rated by A.M. Best and Moody's, and
certain of our insurance company subsidiaries are rated for their claims-paying
ability by Standard & Poor's and Fitch. These ratings reflect a rating agency's
opinion of our insurance subsidiaries' financial strength, operating
performance, strategic position and ability to meet their obligations to
policyholders. These ratings are not evaluations directed to investors, and are
not recommendations to buy, sell or hold our securities. Our ratings are
subject to periodic review by the rating agencies and we cannot guarantee the
continued retention of our ratings.
Negative changes in our level of statutory surplus could adversely affect our
rates and profitability.
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. Regulators may
require that additional capital be contributed to increase the level of
statutory surplus. Failure to maintain certain levels of statutory surplus
could result in increased regulatory scrutiny, action by state regulatory
authorities or a downgrade by private rating agencies.
The National Association of Insurance Commissioners, or 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 various risk elements in an insurer's business and investments to
report a minimum capital requirement proportional to the amount of risk assumed
by the insurer. We believe that any failure to maintain appropriate levels of
statutory surplus would have an adverse impact on our rates and profitability.
We are subject to mandatory assessments by state guaranty funds; an increase in
these assessments could adversely affect our results of operations and financial
condition.
All fifty states of the United States have insurance guaranty fund laws
requiring life and property and casualty insurance companies doing business
within the state to participate in guaranty associations. These associations
are organized to pay contractual obligations under insurance policies issued by
impaired or insolvent insurance companies. The 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
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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. During 2001, we had a total assessment of approximately $2.4
million levied against us. These assessments may increase in the future
depending upon the rate of insolvencies of insurance companies. An increase in
assessments could adversely affect our results of operations and financial
condition.
Intense competition could negatively affect our ability to maintain or increase
our profitability.
We compete with a large number of other companies in each of our three
principal segments: risk management, financial services and asset management.
We compete, and will continue to compete, with national and regional insurers,
mutual companies, specialty insurance companies, underwriting agencies and
financial services institutions. In recent years, there has been substantial
consolidation and convergence among companies in the financial services
industry, particularly as the laws separating banking, insurance and securities
have been relaxed, resulting in increased competition from large, well-
capitalized financial services firms. Many of our competitors have greater
financial, technical and operating resources than we do. In addition,
competition in the property and casualty insurance markets has intensified over
the past several years. This competition may have an adverse impact on our
revenues and profitability.
A number of new, proposed or potential legislative or industry developments
could further increase competition in our industry. These developments include:
. the enactment of the Gramm-Leach-Bliley Act of 1999, which could
result in increased competition from new entrants to our markets;
. the implementation of commercial lines deregulation in several states;
. programs in which state-sponsored entities provide property insurance
in catastrophe prone areas or other alternative markets types of
coverage; and
. changing practices caused by the Internet, which have led to greater
competition in the insurance business in general.
In addition, we could face heightened competition resulting from the entry
of new competitors and the introduction of new products by new and existing
competitors. Increased competition could make it difficult for us to obtain new
customers, retain existing customers or maintain policies in force by existing
customers. It could also result in increasing our service, administrative,
policy acquisition or general expense due to the need for additional advertising
and marketing of our products. We cannot provide assurance that we will be able
to maintain our current competitive position in the markets in which we operate,
or that we will be able to expand our operations into new markets. If we fail to
do so, our business could be materially adversely affected.
If we are unable to attract and retain qualified personnel, we may not be able
to compete effectively and our operations could be impacted significantly.
Our future success will be affected by our continued ability to attract and
retain qualified executives. Our success depends in large part on our President
and Chief Executive Officer, John F. O'Brien, the loss of whom could adversely
affect our business. We do not currently have an employment agreement with Mr.
O'Brien or any of our key executives.
We cannot guarantee that our reinsurers will pay in a timely fashion, if at all.
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We purchase reinsurance by transferring part of the risk that we have
assumed (known as ceding) to a reinsurance company in exchange for part of the
premium we receive in connection with the risk. As of September 30, 2001, our
reinsurance receivable amounted to approximately $1.4 billion. Although
reinsurance makes the reinsurer liable to us to the extent the risk is
transferred or ceded to the reinsurer, it does not relieve us (the reinsured) of
our liability to our policyholders or, in cases where we are a reinsurer, to our
reinsureds. Accordingly, we bear credit risk with respect to our reinsurers.
We cannot be sure that our reinsurers will pay the reinsurance recoverables owed
to us currently or in the future or that they will pay such recoverables on a
timely basis. Additionally, as discussed above, the availability, scope of
coverage, cost, and creditworthiness of reinsurance could also be adversely
affected as a result of the September 11, 2001 terrorist attacks and the
perceived risks associated with future terrorist activies. We cannot currently
estimate the impact of these events on us.
Changes in federal income tax law could make some of our products less
attractive to customers and increase our tax costs.
In June 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001
was enacted. The 2001 Act contains provisions that will, over time,
significantly lower individual tax rates. This will have the effect of reducing
the benefits of deferral on the build-up value of annuities and life insurance
products. The 2001 Act also includes provisions that will eliminate, over time,
the estate, gift and generation-skipping taxes and partially eliminate the step-
up in basis rule applicable to property held in a decedent's estate. Some of
these changes might hinder our life and annuity product sales and result in
increased surrender of insurance products. We cannot predict the overall effect
on the sales of our products of the tax law changes included in the 2001 Act.
Congress has, from time to time, also considered other tax legislation that
could make our products less attractive to consumers, including legislation that
would reduce or eliminate the benefit of the current federal income tax rule
under which tax on the build-up value of annuities and life insurance products
can generally be deferred until payments are made to our policyholder or other
beneficiary and excluded when paid as a death benefit under a life insurance
contract.
Congress, as well as foreign, state and local governments, also consider
from time to time legislation that could increase our tax costs. If such
legislation is adopted, our consolidated net income could decline.
We cannot predict whether such legislation will be enacted, what the
specific terms of any such legislation will be or how, if at all, it might
affect sales of our products.
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