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.
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, Massachusetts, New York, New Jersey, New
Hampshire, Rhode Island, Vermont and Maine). 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 developments
affecting insurer liability and the size of jury awards, 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, 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.
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,
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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 decisions, 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. The
Company's property and casualty insurance subsidiaries' reserves are annually
certified as required by insurance regulatory authorities.
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' 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 (including an increased focus on variable insurance products),
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.
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 Commissioner ("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
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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 has created a new system for assessing the adequacy of statutory
capital for life and health insurers and property and casualty insurers. The
new system, known as risk-based capital, is in addition to the states' fixed
dollar minimum capital and other requirements. The new 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 to report a minimum capital requirement
proportional to the amount of risk assumed by the insurer.
Because the investment of First Allmerica Financial Life Insurance Company
("FAFLIC"), a life insurance subsidiary of the Company, in Allmerica Property
& Casualty Companies, Inc. ("Allmerica P&C") represents a significant
percentage of FAFLIC's surplus, the trading price of the common stock of
Allmerica P&C will affect FAFLIC's RBC calculations and may affect the
FAFLIC's claims-paying ability and financial strength ratings. There can be no
assurance that capital requirements applicable to the FAFLIC's businesses will
not increase or that the FAFLIC will be able to meet minimum RBC requirements
in the future.
In addition, in March 1995, S&P lowered its claims-paying ability ratings of
FAFLIC and Allmerica Financial Life Insurance and Annuity Company to A+
(Good), and Moody's reduced FAFLIC's FinancialStrength Rating From Aa3
(Excellent) to 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. 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 four principal segments: Property and
Casualty Insurance, Corporate Risk Management Services, Retail Financial
Services, and Institutional Services. 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 and health maintenance organizations. In all
of its segments, many of the Company's competitors are larger and have greater
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financial, technical and operating resources than those of the Company. In
addition, the Company may face additional competition from banks and other
financial institutions should current regulatory restrictions on the sale of
insurance and securities by these institutions be 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.
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, 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.
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, and no such proposals or
similar proposals are currently under active consideration by the Congress.
Nevertheless, 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.
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, alleged agent misconduct, failure to properly
supervise agents, and other matters. Some of the lawsuits have resulted in the
award of substantial judgments 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, like other life and health insurers, 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.
In December 1996, the Company received notice from the Securities and
Exchange Commission (the "Commission") that it would be conducting a limited
inspection concerning the Company's marketing and sales practices associated
with variable insurance products. The Commission requested that certain
information be provided to it by the Company, which the Company promptly
complied with. No litigation has been instituted, nor has the Commission
initiated any further action with respect to this matter.
HEALTH CARE REFORM LEGISLATION
In the past, there have been, and currently there are, a number of proposals
introduced in the United States Congress and currently there are proposals
pending in state legislatures to reform the current health care system. Many
states have already enacted comprehensive health care reform legislation and a
number of legislative and regulatory proposals are currently being considered
at the state and federal level. Legislative proposals have included
requirements with respect to mandated universal health insurance coverage,
restrictions on preexisting condition limitations, community rating standards,
guaranteed issue and renewal requirements and restrictions on premium
increases. Some states have passed and many other states are considering
legislation that include voluntary health care purchasing alliances,
differential limitations in rates for new and renewal business or for
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demographic groups, and underwriting practice restrictions. These reforms
generally include the formation of voluntary purchasing alliances for small
employers (typically with less than 50-100 employees) and require insurers to
accept all qualified small employer groups as a condition of providing small
group insurance, prohibit the imposition of preexisting condition limitations
or medical condition terminations, and phase out experience-rating for small
employer groups. Certain jurisdictions also have enacted so-called "any
willing provider" laws which may decrease the demand for managed care plans.
While the Company cannot predict whether any of the proposals currently being
considered will be enacted or whether any new federal or state proposals will
be considered, and thus cannot predict what specific effects health care
reform may have on the Company's business, the Company's operations may be
adversely affected by changes to the health care system.
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