FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2001
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, Massachusetts 01653
(Address of principal executive offices)
(Zip Code)
(508) 855-1000
(Registrant's telephone number, including area code)
_________________________________________________________________
(Former name, former address and former fiscal year, if changed
since last report)
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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: 52,755,523
shares of common stock outstanding, as of May 1, 2001.
31
Total Number of Pages Included in This Document
Page 1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Comprehensive Income 6
Consolidated Statements of Cash Flows 7
Notes to Interim Consolidated Financial Statements 8-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-29
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
(In millions, except per share data) 2001 2000
REVENUES
Premiums $ 563.5 $ 523.5
Universal life and investment
product policy fees 100.4 102.5
Net investment income 165.8 155.5
Net realized investment losses (17.4) (47.1)
Other income 36.1 34.5
------- -------
Total revenues 848.4 768.9
------- -------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses
and loss adjustment expenses 556.7 489.2
Policy acquisition expenses 116.1 117.7
Other operating expenses 138.8 120.3
------- -------
Total benefits, losses and expenses 811.6 727.2
------- -------
Income before federal income taxes 36.8 41.7
------- -------
Federal income tax (benefit) expense
Current (5.4) (6.7)
Deferred 11.8 14.2
------- -------
Total federal income tax expense 6.4 7.5
------- -------
Income before minority interest and
cumulative effect of change in
accounting principle 30.4 34.2
Minority interest:
Distributions on mandatorily redeemable
preferred securities of a subsidiary
trust holding solely junior subordinated
debentures of the Company (4.0) (4.0)
------- -------
Income before cumulative effect of change in
in accounting principle 26.4 30.2
Cumulative effect of change in accounting
principle (less applicable income tax
benefit of $1.7 for the quarter ended
March 31, 2001) (3.2) -
------- -------
Net income $ 23.2 $ 30.2
======= =======
PER SHARE DATA
Basic
Income before cumulative effect of change
in accounting principle $ 0.50 $ 0.56
Cumulative effect of change in
accounting principle (less applicable
income tax benefit of $0.03 for the
quarter ended March 31, 2001) (0.06) -
------- -------
Net income $ 0.44 $ 0.56
======= =======
Weighted average shares outstanding 52.6 53.9
======= =======
Diluted
Income before cumulative effect of change
in accounting principle $ 0.50 $ 0.56
Cumulative effect of change in
accounting principle (less applicable
income tax benefit of $0.03 for the
quarter ended March 31, 2001) (0.06) -
------- -------
Net income $ 0.44 $ 0.56
======= =======
Weighted average shares outstanding 53.1 54.3
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
Page 3
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2001 2000
(In millions, except per share data)
ASSETS
Investments:
Fixed maturities-at fair value
(amortized cost of $8,287.1 and
$8,153.7) $ 8,428.5 $ 8,118.0
Equity securities-at fair value
(cost of $69.5 and $60.0) 92.9 85.5
Mortgage loans 600.5 617.6
Policy loans 382.8 381.3
Other long-term investments 172.1 193.2
-------- --------
Total investments 9,676.8 9,395.6
-------- --------
Cash and cash equivalents 823.4 281.1
Accrued investment income 155.4 155.4
Premiums, accounts and notes receivable, net 612.9 618.1
Reinsurance receivable on paid and unpaid
losses, benefits and unearned premiums 1,415.6 1,423.8
Deferred policy acquisition costs 1,612.0 1,608.2
Deferred federal income taxes 52.0 103.8
Other assets 613.9 564.6
Separate account assets 15,594.4 17,437.4
-------- --------
Total assets $ 30,556.4 $ 31,588.0
======== ========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $ 3,690.3 $ 3,617.4
Outstanding claims, losses and loss
adjustment expenses 2,854.2 2,880.9
Unearned premiums 1,005.4 981.6
Contractholder deposit funds and other
policy liabilities 2,115.4 2,193.1
-------- --------
Total policy liabilities and accruals 9,665.3 9,673.0
-------- --------
Expenses and taxes payable 791.1 768.6
Reinsurance premiums payable 101.0 122.3
Trust instruments supported by funding
obligations 1,338.0 621.5
Short-term debt 64.6 56.6
Long-term debt 199.5 199.5
Separate account liabilities 15,594.4 17,437.4
-------- --------
Total liabilities 27,753.9 28,878.9
-------- --------
Minority interest:
Mandatorily redeemable preferred
securities of a subsidiary trust
holding solely junior subordinated
debentures of the Company 300.0 300.0
-------- --------
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value, 20.0
million shares authorized, none issued - -
Common stock, $0.01 par value, 300.0
million shares authorized, 60.4 million
shares issued 0.6 0.6
Additional paid-in capital 1,761.1 1,765.3
Accumulated other comprehensive income 63.8 (5.2)
Retained earnings 1,091.9 1,068.7
Treasury stock at cost (7.6 million and
7.7 million shares) (414.9) (420.3)
-------- --------
Total shareholders' equity 2,502.5 2,409.1
-------- --------
Total liabilities and shareholders'
equity $ 30,556.4 $ 31,588.0
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
Page 4
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
Three Months Ended
March 31,
(In millions) 2001 2000
PREFERRED STOCK
Balance at beginning and end of period $ - $ -
------- -------
COMMON STOCK
Balance at beginning and end of period 0.6 0.6
------- -------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period 1,765.3 1,770.5
Unearned compensation related to
restricted stock and other (4.2) (9.0)
------- -------
Balance at end of period 1,761.1 1,761.5
------- -------
ACCUMULATED OTHER COMPREHENSIVE INCOME
NET UNREALIZED APPRECIATION (DEPRECIATION)
ON INVESTMENTS
Balance at beginning of period (5.2) (75.3)
Net appreciation on available-for-sale
securities and derivative instruments 106.1 39.9
Provision for deferred federal income
taxes (37.1) (14.0)
------- -------
Other comprehensive income 69.0 25.9
------- -------
Balance at end of period 63.8 (49.4)
------- -------
RETAINED EARNINGS
Balance at beginning of period 1,068.7 882.2
Net income 23.2 30.2
------- -------
Balance at end of period 1,091.9 912.4
------- -------
TREASURY STOCK
Balance at beginning of period (420.3) (337.8)
Shares purchased at cost - (30.5)
Shares reissued at cost 5.4 10.9
------- -------
Balance at end of period (414.9) (357.4)
------- -------
Total shareholders' equity $ 2,502.5 $ 2,267.7
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
Page 5
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
(In millions) 2001 2000
Net income $ 23.2 $ 30.2
Other comprehensive income:
Available-for-sale securities:
Net appreciation during the period 115.0 39.9
Provision for deferred federal income taxes (40.2) (14.0)
------ ------
Total available-for-sale securities 74.8 25.9
------ ------
Derivative instruments:
Net depreciation during the period (8.9) -
Benefit for deferred federal income taxes 3.1 -
------ ------
Total derivative instruments (5.8) -
------ ------
Other comprehensive income 69.0 25.9
------ ------
Comprehensive income $ 92.2 $ 56.1
====== ======
The accompanying notes are an integral part of these consolidated
financial statements.
Page 6
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
(In millions) 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 23.2 $ 30.2
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Net realized losses 17.4 47.1
Net amortization and depreciation 3.6 7.7
Deferred federal income taxes 11.8 14.2
Change in deferred acquisition costs (17.9) (53.1)
Change in premiums and notes receivable,
net of reinsurance payable (16.0) (27.3)
Change in accrued investment income - 7.5
Change in policy liabilities and
accruals, net 167.7 (117.4)
Change in reinsurance receivable 8.2 3.1
Change in expenses and taxes payable (81.7) (27.7)
Separate account activity, net 0.1 (0.1)
Other, net (23.5) 14.8
------- -------
Net cash provided by (used in)
operating activities 92.9 (101.0)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities 356.2 867.6
Proceeds from disposals of equity securities 0.1 8.8
Proceeds from disposals of other investments 24.1 4.8
Proceeds from mortgages matured or collected 16.3 24.6
Purchase of available-for-sale fixed
maturities (474.2) (1,167.5)
Purchase of equity securities (9.5) (0.1)
Purchase of other investments (6.5) (18.0)
Capital expenditures (3.3) (2.4)
------- -------
Net cash used in investing activities (96.8) (282.2)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds 47.2 602.2
Withdrawals from contractholder deposit
funds (227.9) (391.9)
Deposits to trust instruments supported by
funding obligations 728.8 27.3
Withdrawals from trust instruments supported by
funding obligations (12.3) -
Change in short-term debt 8.0 3.1
Treasury stock purchased at cost - (30.5)
Treasury stock reissued at cost 2.4 10.9
------- -------
Net cash provided by financing activities 546.2 221.1
------- -------
Net change in cash and cash equivalents 542.3 (162.1)
Cash and cash equivalents, beginning of period 281.1 464.8
------- -------
Cash and cash equivalents, end of period $ 823.4 $ 302.7
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
Page 7
ALLMERICA FINANCIAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements of Allmerica
Financial Corporation ("AFC" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the requirements of Form 10-Q.
The interim consolidated financial statements of AFC include the accounts of
First Allmerica Financial Life Insurance Company ("FAFLIC"); Allmerica
Financial Life Insurance and Annuity Company ("AFLIAC"); The Hanover
Insurance Company ("Hanover"); Citizens Insurance Company of America
("Citizens"), and other insurance and non-insurance subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
The accompanying interim consolidated financial statements reflect, in the
opinion of the Company's management, all adjustments necessary for a fair
presentation of the financial position and results of operations. The
results of operations for the three months ended March 31, 2001, are not
necessarily indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with the Company's
2000 Annual Report to Shareholders, as filed on Form 10-K with the
Securities and Exchange Commission.
2. New Accounting Pronouncements
In December 2000, the American Institute of Certified Public Accountants
issued Statement of Position 00-3, "Accounting by Insurance Enterprises for
Demutualization and Formations of Mutual Insurance Holding Companies and For
Certain Long-Duration Participating Contracts" ("SoP No. 00-3"). SoP No.
00-3 requires that closed block assets, liabilities, revenues and expenses
be displayed together with all other assets, liabilities, revenues and
expenses of the insurance enterprise based on the nature of the particular
item, with appropriate disclosures relating to the closed block. In
addition, the SoP provides guidance on the accounting for participating
contracts issued before and after the date of demutualization, recording of
closed block earnings and related policyholder dividend liabilities, and the
accounting treatment for expenses and equity balances at the date of
demutualization. This statement became effective for fiscal years beginning
after December 15, 2000. The adoption of SoP No. 00-3 did not have a
material impact on the Company's financial position or results of operations.
Certain prior year amounts have been reclassified to conform to the required
presentation in the current year.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No.
133 requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
the type of hedge transaction. For fair value hedge transactions in which
the Company is hedging changes in an asset's, liability's or firm
commitment's fair value, changes in the fair value of the derivative
instruments will generally be offset in the income statement by changes in
the hedged item's fair value. For cash flow hedge transactions, in which
the Company is hedging the variability of cash flows related to a variable
rate asset, liability, or a forecasted transaction, changes in the fair
value of the derivative instrument will be reported in other comprehensive
income. The gains and losses on the derivative instrument that are reported
in other comprehensive income will be reclassified into earnings in the
periods in which earnings are impacted by the variability of the cash flows
of the hedged item. To the extent any hedges are determined to be
ineffective, all or a portion of the change in value of the derivative will
be recognized currently in earnings. This statement became effective for
fiscal years beginning after June 15, 2000. The Company adopted Statement
No. 133 on January 1, 2001. In accordance with the transition provisions of
the statement, the Company recorded a $3.2 million charge, net-of-taxes, in
earnings to recognize all derivative instruments at their fair values. This
adjustment represents net losses that were previously deferred in other
comprehensive income on derivative instruments that do not qualify for hedge
accounting. The Company recorded an offsetting gain in other comprehensive
income of $3.3 million, net-of-tax, to recognize these derivative
instruments.
Page 8
3. Summary of New Significant Accounting Policies
Accounting for Derivatives and Hedging Activities
All derivatives are recognized on the balance sheet at their fair value. On
the date the derivative contract is entered into, the Company designates the
derivative as (1) a hedge of the fair value of a recognized asset or
liability ("fair value" hedge); (2) a hedge of a forecasted transaction or
of the variability of cash flows to be received or paid related to a
recognized asset or liability ("cash flow" hedge); (3) a foreign-currency
fair value or cash flow hedge ("foreign currency" hedge); or (4) "held for
trading". Changes in the fair value of a derivative that is highly
effective and that is designated and qualifies as a fair value hedge, along
with the gain or loss on the hedged asset or liability that is attributable
to the hedged risk, are recorded in current period earnings. Changes in the
fair value of a derivative that is highly effective and that is designated
and qualifies as a cash flow hedge are recorded in other comprehensive
income, until earnings are affected by the variability of cash flows (e.g.,
when periodic settlements on a variable-rate asset or liability are
recorded in earnings). Changes in the fair value of derivatives that are
highly effective and that are designated and qualify as foreign currency
hedges are recorded in either current period earnings or other comprehensive
income, depending on whether the hedge transaction is a fair value hedge or
a cash flow hedge. Lastly, changes in the fair value of derivative trading
instruments are reported in current period earnings.
The Company may hold financial instruments that contain "embedded"
derivative instruments. The Company assesses whether the economic
characteristics of the embedded derivative are clearly and closely related
to the economic characteristics of the remaining component of the financial
instrument, or host contract, and whether a separate instrument with the
same terms as the embedded instrument would meet the definition of a
derivative instrument. When it is determined that (1) the embedded
derivative possesses economic characteristics that are not clearly and
closely related to the economic characteristics of the host contract, and
(2) a separate instrument with the same terms would qualify as a
derivative instrument, the embedded derivative is separated from the host
contract, carried at fair value, and designated as a fair-value, cash-flow,
or foreign currency hedge, or as a trading derivative instrument.
The Company formally documents all relationships between hedging instruments
and hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair value, cash flow, or foreign
currency hedges to specific assets and liabilities on the balance sheet or
to specific forecasted transactions. The Company also formally assesses,
both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items. When it
is determined that a derivative is not highly effective as a hedge or that
it has ceased to be a highly effective hedge, the Company discontinues hedge
accounting prospectively, as discussed below.
The Company discontinues hedge accounting prospectively when (1) it is
determined that the derivative is no longer effective in offsetting changes
in the fair value or cash flows of a hedged item, including forecasted
transactions; (2) the derivative expires or is sold, terminated, or
exercised; (3) the derivative is no longer designated as a hedge
instrument, because it is unlikely that a forecasted transaction will
occur; or (4) management determines that designation of the derivative as a
hedge instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the
derivative will continue to be carried on the balance sheet at its fair
value, and the hedged asset or liability will no longer be adjusted for
changes in fair value. When hedge accounting is discontinued because it is
probable that a forecasted transaction will not occur, the derivative
will continue to be carried on the balance sheet at its fair value, and
gains and losses that were accumulated in other comprehensive income will be
recognized immediately in earnings. In all other situations in which
hedge accounting is discontinued, the derivative will be carried at its fair
value on the balance sheet, with changes in its fair value recognized in
current period earnings.
Page 9
4. Discontinued Operations
During the second quarter of 1999, the Company approved a plan to exit its
group life and health insurance business, consisting of its Employee Benefit
Services ("EBS") business, its Affinity Group Underwriters ("AGU") business
and its accident and health assumed reinsurance pool business ("reinsurance
pool business"). During the third quarter of 1998, the Company ceased
writing new premiums in the reinsurance pool business, subject to certain
contractual obligations. Prior to 1999, these businesses comprised
substantially all of the former Corporate Risk Management Services segment.
Accordingly, the operating results of the discontinued segment, including
its reinsurance pool business, have been reported in the Consolidated
Statements of Income as discontinued operations in accordance with
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB Opinion No. 30"). In the third quarter of 1999, the
operating results from the discontinued segment were adjusted to reflect the
recording of additional reserves related to accident claims from prior
years. The Company also recorded a $30.5 million loss, net of taxes, on the
disposal of this segment, consisting of after tax losses from the run-off of
the group life and health business of approximately $46.9 million, partially
offset by net proceeds from the sale of the EBS business of approximately
$16.4 million. Subsequent to a measurement date of June 30, 1999,
approximately $20.1 million of the aforementioned $46.9 million loss has
been generated from the operations of the discontinued business.
In March of 2000, the Company transferred its EBS business to Great-West
Life and Annuity Insurance Company of Denver and received consideration of
approximately $26 million, based on renewal rights for existing policies.
The Company retained policy liabilities estimated at $132.9 million at March
31, 2001 related to this business.
As permitted by APB Opinion No. 30, the Consolidated Balance Sheets have not
been segregated between continuing and discontinued operations. At March
31, 2001 and 2000, the discontinued segment had assets of approximately
$448.7 million and $560.9 million, respectively, consisting primarily of
invested assets and reinsurance recoverables, and liabilities of
approximately $432.7 million and $501.8 million, respectively, consisting
primarily of policy liabilities. Revenues for the discontinued operations
were $9.0 million and $77.7 million for the quarters ended March 31, 2001
and 2000, respectively.
5. Significant Transactions
As of March 31, 2001, the Company has repurchased approximately $436.3
million, or approximately 7.9 million shares, of its common stock under
programs authorized by the Board of Directors (the "Board"). As of March
31, 2001, the Board had authorized total stock repurchases of $500.0
million, leaving approximately $63.7 million available to the Company for
future repurchases.
During the second quarter of 2000, the Company adopted a formal company-wide
restructuring plan. This plan is the result of a corporate initiative that
began in the fall of 1999, intended to reduce expenses and enhance revenues.
This plan consists of various initiatives including a series of internal
reorganizations, consolidations in home office operations, consolidations in
field offices, changes in distribution channels and product changes. As a
result of the Company's restructuring plan, it recognized a pre-tax charge
of $21.4 million during 2000. Approximately $5.7 million of this charge
relates to severance and other employee related costs resulting from the
elimination of approximately 360 positions, of which 222 employees have been
terminated as of March 31, 2001. All levels of employees, from staff to
senior management, were affected by the restructuring. In addition,
approximately $15.7 million of this charge relates to other restructuring
costs, consisting of one-time project costs, lease cancellations and the
present value of idle leased space. As of March 31, 2001, the Company has
made payments of approximately $19.5 million related to this restructuring
plan, of which approximately $5.0 million relates to severance and other
employee related costs.
Page 10
6. Derivative Instruments
The Company maintains an overall risk management strategy that incorporates
the use of derivative instruments to minimize significant unplanned
fluctuations in earnings that are caused by interest rate or foreign
currency volatility. The operations of the Company are subject to risk
resulting from interest rate fluctuations to the extent that there is a
difference between the amount of the Company's interest-earning assets and
the amount of interest-bearing liabilities that are paid, withdrawn, mature
or re-price in specified periods. The principal objective of the Company's
asset/liability management activities is to provide maximum levels of net
investment income while maintaining acceptable levels of interest rate and
liquidity risk and facilitating the funding needs of the Company. The
Company has developed an asset/liability management approach tailored to
specific insurance or investment product objectives. The investment
assets of the Company are 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. 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 markets, borrowers, industries, and sectors.
The Company uses derivative financial instruments, primarily interest rate
swaps and futures contracts, with indices that correlate to balance sheet
instruments to modify its indicated net interest sensitivity to levels
deemed to be appropriate. Specifically, for floating rate funding
agreements that are matched with fixed rate securities, the Company manages
the risk of cash flow variability by hedging with interest rate swap
contracts designed to pay fixed and receive floating interest. Under
interest rate swap contracts, the Company agrees to exchange, at specified
intervals, the difference between fixed and floating interest amounts
calculated on an agreed-upon notional principal amount. Additionally, the
Company uses exchange traded financial futures contracts to hedge against
interest rate risk on anticipated guaranteed investment contract ("GIC")
sales and other funding agreements, as well as the reinvestment of fixed
maturities. The Company is exposed to interest rate risk from the time of
sale of the GIC until the receipt of the deposit and purchase of the
underlying asset to back the liability. Similarly, the Company is exposed
to interest rate risk on fixed maturities reinvestments from the time of
maturity until the purchase of new fixed maturities. The Company only trades
futures contracts with nationally recognized brokers, which the Company
believes have adequate capital to ensure that there is minimal danger of
default.
As a result of the Company's issuance of trust instruments supported by
funding obligations denominated in foreign currencies, as well as the
Company's investment in securities denominated in foreign currencies,
the Company's operating results are exposed to changes in exchange rates
between the U.S. dollar and the Swiss Franc, Japanese Yen, British Pound
and Euro. From time to time, the Company may also have exposure to other
foreign currencies. To mitigate the short-term effect of changes in
currency exchange rates, the Company regularly hedges by entering into
foreign exchange swap contracts to hedge its net foreign currency exposure.
Additionally, the Company enters into compound currency/interest rate swap
contracts to hedge foreign currency and interest rate exposure on specific
trust instruments supported by funding obligations. Under these swap
contracts, the Company agrees to exchange interest and principal related to
foreign fixed income securities and trust obligations payable in foreign
currencies, at current exchange rates, for the equivalent payment in U.S.
dollars translated at a specific currency exchange rate.
By using derivative instruments, the Company is exposed to credit risk. If
the counterparty fails to perform, credit risk is equal to the extent of the
fair value gain (including any accrued receivable) in a derivative. The
Company regularly assesses the financial strength of its counterparties and
generally enters into forward or swap agreements with counterparties rated
"A" or better by nationally recognized rating agencies. Depending on the
nature of the derivative transaction, bilateral collateral arrangements may
be required.
The Company's derivative activities are monitored by management, who
review portfolio activities and risk levels. Management also oversees all
derivative transactions to ensure that the types of transactions entered
into and the results obtained from those transactions are consistent with
the Company's risk management strategy and with Company policies and
procedures.
Fair Value Hedges
The Company enters into compound foreign currency/interest rate swaps to
convert its foreign denominated fixed rate trust instruments supported by
funding obligations to US dollar floating rate instruments. For the
period ended March 31, 2001, the Company recognized a net gain of $0.6
million (reported as other income in the Consolidated Statements of Income),
which represented the ineffective portion of all fair value hedges. All
components of each derivative's gain or loss are included in the assessment
of hedge effectiveness, unless otherwise noted.
Page 11
Cash Flow Hedges
The Company enters into various types of interest rate swap contracts to
hedge exposure to interest rate fluctuations. Specifically, for floating
rate funding agreement liabilities that are matched with fixed rate
securities, the Company manages the risk of cash flow variability by hedging
with interest rate swap contracts. Under these swap contracts, the Company
agrees to exchange, at specified intervals, the difference between fixed and
floating interest amounts calculated on an agreed-upon notional principal
amount. The Company also purchases long futures contracts and sells short
futures contracts on margin to hedge against interest rate fluctuations
associated with the sale of GICs and other funding agreements, as well as
the reinvestment of fixed maturities. The Company is exposed to interest
rate risk from the time of sale of the GIC until the receipt of the deposit
and purchase of the underlying asset to back the liability. Similarly, the
Company is exposed to interest rate risk on reinvestments of fixed maturities
from the time of maturity until the purchase of new fixed maturities. The
Company uses US Treasury Note Futures to hedge this risk.
The Company also enters into foreign currency swap contracts to hedge foreign
currency exposure on specific fixed income securities, as well as compound
foreign currency/interest rate swap contracts to hedge foreign currency and
interest rate exposure on specific trust instruments supported by funding
obligations. Under these swap contracts, the Company agrees to exchange
interest and principal related to foreign fixed maturities and trust
obligations payable in foreign currencies, at current exchange rates, for
the equivalent payment in U.S. dollars translated at a specific currency
exchange rate.
For the period ended March 31, 2001, the Company recognized a net gain
of $1.9 million, (reported as other income in the Consolidated Statements
of Income), which represented the total ineffectiveness of all cash flow
hedges. All components of each derivative's gain or loss are included in
the assessment of hedge effectiveness, unless otherwise noted.
Gains and losses on derivative contracts that are reclassified from
accumulated other comprehensive income to current period earnings are
included in the line item in which the hedged item is recorded. As of
March 31, 2001, $68.0 million of the deferred net losses on derivative
instruments accumulated in other comprehensive income could be recognized
in earnings during the next twelve months depending on the forward interest
rate and currency rate environment. Transactions and events that (1) are
expected to occur over the next twelve months and (2) will necessitate
reclassifying to earnings these derivatives gains (losses) include (a) the
re-pricing of variable rate trust instruments supported by funding
obligations, (b) the interest payments (receipts) on foreign denominated
trust instruments supported by funding obligations and foreign securities,
(c) the anticipated sale of GICs and other funding agreements, and (d) the
anticipated reinvestment of fixed maturities. The maximum term over which
the Company is hedging its exposure to the variability of future cash flows
(for all forecasted transactions, excluding interest payments on variable-
rate debt) is 12 months.
Trading Activities
The Company enters into insurance portfolio-linked and credit default swap
contracts for investment purposes. Under the insurance portfolio-linked swap
contracts, the Company agrees to exchange cash flows according to the
performance of a specified underwriter's portfolio of insurance business.
As with interest rate swap contracts, the primary risk associated with
insurance portfolio-linked swap contracts is the inability of the
counterparty to meet its obligation. Under the terms of the credit default
swap contracts, the Company assumes the default risk of a specific high
credit quality issuer in exchange for a stated annual premium. In the case
of default, the Company will pay the counterparty par value for a pre-
determined security of the issuer. The primary risk associated with these
transactions is the default risk of the underlying companies. The Company
regularly assesses the financial strength of its counterparties and the
underlying companies in default swap contracts, and generally enters into
forward or swap agreements with companies rated "A" or better by nationally
recognized rating agencies. Because the underlying principal of swap
contracts is not exchanged, the Company's maximum exposure to counterparty
credit risk is the difference in payments exchanged, which at March 31,
2001, wwas not material to the Company. The Company does not require
collateral or other security to support financial instruments with credit
risk. These products are not linked to specific assets and liabilities on
the balance sheet or to a forecasted transaction, and therefore do not
qualify for hedge accounting.
The swap contracts are marked to market with any gain or loss recognized
currently. The fair values of swap contracts outstanding were $(0.3)
million at March 31, 2001 and December 31, 2000. The net amount receivable
or payable under insurance portfolio-linked swap contracts is recognized
when the contracts are marked to market. The net increase (decrease) in
realized investment gains related to these contracts was $0.1 million,
$(0.7) million and $(0.2) million for the three months ended March 31,
2001 and the years ended December 31, 2000 and 1999, respectively.
Page 12
The stated annual premium under credit default swap contracts is recognized
currently in net investment income. There was no net increase to investment
income related to credit default swap contracts for the three months ended
March 31, 2001; however, there was a net increase of $0.2 million and $0.4
million for the years ended December 31, 2000 and 1999, respectively.
7. Federal Income Taxes
Federal income tax expense for the three months ended March 31, 2001 and
2000, has been computed using estimated effective tax rates. These rates
are revised, if necessary, at the end of each successive interim period to
reflect the current estimates of the annual effective tax rates.
8. Other Comprehensive Income
The following table provides a reconciliation of gross unrealized gains
(losses) to the net balance shown in the Statements of Comprehensive Income:
(Unaudited)
Three Months Ended
March 31,
(In millions) 2001 2000
Unrealized gains (losses) on available-for-sale
securities:
Unrealized holding gains (losses) arising
during period (net of income taxes of $37.4
million and $1.0 million in 2001 and 2000,
respectively) $ 63.8 $ (11.2)
Less: reclassification adjustment for losses
included in net income (net of income tax
benefit of $2.8 million and $13.0 million in
2001 and 2000, respectively) (11.0) (37.1)
------- -------
Total available-for-sale securities 74.8 25.9
------- -------
Unrealized losses on derivative instruments:
Unrealized holding losses arising during period
(net of income tax benefit of $4.2 million in
2001) (7.5) -
Less: reclassification adjustment for losses
included in net income (net of income tax
benefit of $1.1 million in 2001) (1.7) -
------- -------
Total derivative instruments (5.8) -
------- -------
Other comprehensive income $ 69.0 $ 25.9
======= =======
Page 13
9. Closed Block
Included in the Consolidated Statements of Income in the first three months
of 2001 and 2000 is a net pre-tax contribution from the Closed Block of $5.3
million and $3.2 million, respectively. Summarized financial information of
the Closed Block is as follows:
(Unaudited)
March 31, December 31,
(In millions) 2001 2000
ASSETS
Fixed maturities-at fair value (amortized
cost of $406.7 and $400.3) $ 411.7 $ 397.5
Mortgage loans 143.9 144.9
Policy loans 189.7 191.7
Cash and cash equivalents 0.6 1.9
Accrued investment income 14.9 14.6
Deferred policy acquisition costs 10.6 11.0
Other assets 3.1 6.4
------- -------
Total assets $ 774.5 $ 768.0
======= =======
LIABILITIES
Policy liabilities and accruals $ 816.4 $ 808.9
Policyholder dividends 8.0 20.0
Other liabilities 3.8 0.8
------- -------
Total liabilities $ 828.2 $ 829.7
======= =======
(Unaudited)
Three Months
Ended
March 31,
(In millions) 2001 2000
REVENUES
Premiums $ 25.1 $ 26.0
Net investment income 14.0 13.2
Net realized investment losses - (0.3)
------- -------
Total revenues 39.1 38.9
------- -------
BENEFITS AND EXPENSES
Policy benefits 33.5 34.8
Policy acquisition expenses - 0.6
Other operating expenses 0.3 0.3
------- -------
Total benefits and expenses 33.8 35.7
------- -------
Contribution from the Closed Block $ 5.3 $ 3.2
======= =======
Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed
Block does not represent the actual profitability of the Closed Block
operations. Operating costs and expenses outside of the Closed Block
are, therefore, disproportionate to the business outside the Closed Block.
10. Segment Information
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. The separate financial information of each segment is presented
consistent with the way results are regularly evaluated by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. A summary of the Company's reportable segments is
included below.
Page 14
The Risk Management Segment manages its products through three distribution
channels identified as Standard Markets, Sponsored Markets, and Specialty
Markets. Maintaining a strong regional focus, Standard Markets sells
property and casualty insurance products through independent agents and
brokers primarily in the Northeast, Midwest and Southeast United States.
Sponsored Markets offers property and casualty products to members of
affinity groups and other organizations. This distribution channel also
focuses on worksite distribution, which offers discounted property and
casualty (automobile and homeowners) insurance through employer sponsored
programs. Specialty Markets offers specialty or program property and
casualty business nationwide. This channel focuses on niche classes of
risks and leverages specific underwriting processes.
The Asset Accumulation group includes two segments: Allmerica Financial
Services and Allmerica Asset Management. The Allmerica Financial Services
segment includes variable annuities, variable universal life and traditional
life insurance products, as well as group retirement products, such as
defined benefit and 401(k) plans and tax-sheltered annuities. Through its
Allmerica Asset Management segment, the Company offers its customers the
option of investing in GICs, such as short-term and long-term funding
agreements. Short-term funding agreements are investment contracts issued
to institutional buyers, such as money market funds, corporate cash
management programs and securities lending collateral programs, which
typically have short maturities and periodic interest rate resets based on
an index such as LIBOR. Long-term funding agreements are investment
contracts issued to various businesses or charitable trusts, which are used
to support debt issued by the trust to foreign and domestic institutional
buyers, such as banks, insurance companies, and pension plans. These
funding agreements have long maturities and may be issued with a fixed or
variable interest rate based on an index such as LIBOR. This segment is
also a Registered Investment Advisor providing investment advisory services,
primarily to affiliates and to third parties, such as money market and other
fixed income clients.
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.
Management evaluates the results of the aforementioned segments based on a
pre-tax and pre-minority interest basis. Segment income is determined by
adjusting net income for net realized investment gains and losses, net gains
and losses on disposals of businesses, discontinued operations,
extraordinary items, the cumulative effect of accounting changes and certain
other items which management believes are not indicative of overall
operating trends. While these items may be significant components in
understanding and assessing the Company's financial performance, management
believes that the presentation of segment income enhances understanding of
the Company's results of operations by highlighting net income attributable
to the normal, recurring operations of the business. However, segment
income should not be construed as a substitute for net income determined in
accordance with generally accepted accounting principles.
Page 15
Summarized below is financial information with respect to business segments:
(Unaudited)
Three Months Ended
March 31,
(In millions) 2001 2000
Segment revenues:
Risk Management $ 601.3 $ 557.5
Asset Accumulation:
Allmerica Financial Services 223.2 229.3
Allmerica Asset Management 39.7 29.3
------- -------
Subtotal 262.9 258.6
------- -------
Corporate 1.0 1.0
Intersegment revenues (1.9) (1.1)
------- -------
Total segment revenues 863.3 816.0
Adjustments to segment revenues:
Net realized losses (17.4) (47.1)
Gains on derivatives 2.5 -
------- -------
Total revenues $ 848.4 $ 768.9
======= =======
Segment income (loss) before federal income
taxes, minority interest, and cumulative
effect of change in accounting principle:
Risk Management $ 16.2 $ 43.1
Asset Accumulation:
Allmerica Financial Services 44.3 54.4
Allmerica Asset Management 6.0 5.1
------- -------
Subtotal 50.3 59.5
------- -------
Corporate (16.2) (14.5)
------- -------
Segment income before federal income
taxes and minority interest 50.3 88.1
Adjustments to segment income:
Net realized investment losses, net of
amortization (16.0) (46.4)
Gains on derivatives 2.5 -
------- -------
Income before federal income taxes,
minority interest and cumulative effect
of change in accounting principle $ 36.8 $ 41.7
======= =======
Identifiable Assets Deferred Acquisition Costs
(Unaudited) (Unaudited)
March 31, December 31, March 31, December 31,
(In millions) 2001 2000 2001 2000
Risk Management $ 6,124.3 $ 6,186.6 $ 191.4 $ 187.2
--------- --------- -------- --------
Asset Accumulation:
Allmerica Financial
Services 21,465.2 23,082.5 1,420.5 1,420.8
Allmerica Asset
Management 2,893.6 2,238.4 0.1 0.2
--------- --------- -------- --------
Subtotal 24,358.8 25,320.9 1,420.6 1,421.0
Corporate 73.3 80.5 - -
--------- --------- -------- --------
Total $ 30,556.4 $ 31,588.0 $ 1,612.0 $ 1,608.2
========= ========= ======== ========
Page 16
11. Earnings Per Share
The following table provides share information used in the calculation of
the Company's basic and diluted earnings per share:
(Unaudited)
Quarter Ended
March 31,
(In millions, except per share data) 2001 2000
Basic shares used in the calculation of
earnings per share 52.6 53.9
Dilutive effect of securities:
Employee stock options 0.4 0.2
Non-vested stock grants 0.1 0.2
----- -----
Diluted shares used in the calculation
of earnings per share 53.1 54.3
===== =====
Per share effect of dilutive securities on
income from continuing operations before
cumulative effect of change in accounting
principle $ - $ -
===== =====
Per share effect of dilutive securities on
net income $ - $ -
===== =====
12. Commitments and Contingencies
Litigation
In 1997, a lawsuit on behalf of a putative class was instituted against the
Company alleging fraud, unfair or deceptive acts, breach of contract,
misrepresentation, and related claims in the sale of life insurance
policies. In November 1998, the Company and the plaintiffs entered into a
settlement agreement and in May 1999, the Federal District Court in
Worcester, Massachusetts approved the settlement agreement and certified
the class for this purpose. AFC recognized a $31.0 million pre-tax
expense in 1998 related to this litigation. Although the Company believes
that this expense reflects appropriate recognition of its obligation under
the settlement, this estimate assumes the availability of insurance coverage
for certain claims, and the estimate may be revised based on the amount of
reimbursement actually tendered by AFC's insurance carriers, and based on
changes in the Company's estimate of the ultimate cost of the benefits to be
provided to members of the class.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the Company's opinion, based
on the advice of legal counsel, the ultimate resolution of these proceedings
will not have a material effect on the Company's consolidated financial
statements. However, liabilities related to these proceedings could be
established in the near term if estimates of the ultimate resolution of these
proceedings are revised.
Page 17
PART I
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the interim consolidated results of operations and
financial condition of the Company should be read in conjunction with the
interim Consolidated Financial Statements and related footnotes included
elsewhere herein and the Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the 2000 Annual Report to
Shareholders, as filed on Form 10-K with the Securities and Exchange
Commission.
INTRODUCTION
The results of operations for Allmerica Financial Corporation and
subsidiaries ("AFC" or "the Company") include the accounts of First
Allmerica Financial Life Insurance Company ("FAFLIC"); Allmerica Financial
Life Insurance and Annuity Company ("AFLIAC"); The Hanover Insurance Company
("Hanover"); Citizens Insurance Company of America ("Citizens"); and certain
other insurance and non-insurance subsidiaries.
Description of 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. The separate financial information of each segment is presented
consistent with the way results are regularly evaluated by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance.
Results of Operations
Consolidated Overview
Consolidated net income includes the results of each segment of the Company,
which management evaluates on a pre-tax and pre-minority interest basis. In
addition, net income also includes certain items which management believes
are not indicative of overall operating trends, such as net realized
investment gains and losses, net gains and losses on disposals of businesses,
discontinued operations, extraordinary items, the cumulative effect of
accounting changes and certain other items. While these items may be
significant components in understanding and assessing the Company's financial
performance, management believes that the presentation of "Adjusted Net
Income", which excludes these items, enhances understanding of the Company's
results of operations by highlighting net income attributable to the normal,
recurring operations of the business. However, adjusted net income should
not be construed as a substitute for net income determined in accordance
with generally accepted accounting principles.
The Company's consolidated net income for the first quarter decreased $7.0
million, or 23.2%, to $23.2 million, compared to $30.2 million for the same
period in 2000. The reduction in net income resulted primarily from a
decrease in adjusted net income of $29.2 million during the first quarter of
2001, partially offset by a $23.8 million decline in net realized investment
losses.
Page 18
The following table reflects adjusted net income and a reconciliation to
consolidated net income. Adjusted net income consists of segment income
(loss), federal income taxes on segment income and minority interest on
preferred dividends.
(Unaudited)
Three Months Ended
March 31,
(In millions) 2001 2000
Segment income (loss) before federal
income taxes and minority interest:
Risk Management $ 16.2 $ 43.1
------ ------
Asset Accumulation:
Allmerica Financial Services 44.3 54.4
Allmerica Asset Management 6.0 5.1
------ ------
Subtotal 50.3 59.5
Corporate (16.2) (14.5)
------ ------
Segment income before federal income
taxes and minority interest 50.3 88.1
Federal income taxes on segment income (9.1) (17.7)
Minority interest on preferred dividends (4.0) (4.0)
------ ------
Adjusted net income 37.2 66.4
Adjustments (net of taxes and amortization,
as applicable):
Net realized investment losses (12.4) (36.2)
Gains on derivatives 1.6 -
------ ------
Income before cumulative effect of change in
accounting principle: 26.4 30.2
Cumulative effect of change in accounting
principle, net of applicable taxes (3.2) -
------ ------
Net income $ 23.2 $ 30.2
====== ======
The Company's segment income before taxes and minority interest decreased
$37.8 million, or 42.9%, to $50.3 million in the first quarter of 2001.
This decrease is attributable to $26.9 million and $10.1 million of lower
income from the Risk Management and Allmerica Financial Services segments,
respectively. The decrease in the Risk Management segment was primarily
attributable to decreased favorable reserve development of $63.1 million,
partially offset by the impact of increased premiums of approximately $22
million due to rate changes and decreased catastrophe losses of $8.4
million. Allmerica Financial Services' segment income decreased $10.1
million, principally due to increased operating expenses and lower asset-
based fee income resulting primarily from a decrease in market value of
assets under management in the variable product lines. These items were
partially offset by an increase in the Allmerica Asset Management segment
income of $0.9 million, principally due to increased earnings from GICs.
The effective tax rate for segment income was 18.2% for the first quarter of
2001 compared to 20.1% for the first quarter of 2000. The decrease in the
tax rate was primarily due to lower underwriting income, to an increase in
the proportion of tax-exempt investment income to pre-tax income and to an
increase in the dividends received deduction associated with the Company's
variable products.
Net realized losses on investments, after taxes, were $12.4 million in the
first quarter of 2001, resulting primarily from impairments of fixed
maturities. Management expects that there likely will be additional
impairments on fixed maturities in future periods that will have a negative
impact on results. During the first quarter of 2000, net realized losses
on investments after taxes of $36.2 million resulted primarily from losses
on sales of fixed maturities. These losses relate principally to sales of
$437.8 million of fixed income securities in the Risk Management segment in
order to reinvest the proceeds in higher yielding securities.
During the first quarter of 2001, the Company recognized a $3.2 million loss,
net of taxes, upon adoption of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
Page 19
Segment Results
The following is management's discussion and analysis of the Company's
results of operations by business segment. The segment results are
presented before taxes and minority interest and other items which
management believes are not indicative of overall operating trends,
including realized gains and losses.
Risk Management
The following table summarizes the results of operations for the Risk
Management segment:
(Unaudited)
Three Months Ended
March 31,
(In millions) 2001 2000
Segment revenues
Net premiums written $ 566.7 $ 527.6
======= =======
Net premiums earned $ 538.0 $ 497.0
Net investment income 56.8 55.2
Other income 6.5 5.3
------- -------
Total segment revenues 601.3 557.5
Losses and operating expenses
Losses and LAE (1) 437.9 375.7
Policy acquisition expenses 96.4 92.1
Other operating expenses 50.8 46.6
------- -------
Total losses and operating expenses 585.1 514.4
------- -------
Segment income $ 16.2 $ 43.1
======= =======
(1) Includes policyholders' dividends of $2.1 million and $2.7 million for
the quarters ended March 31, 2001 and 2000, respectively.
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31,
2000
Risk Management's segment income decreased $26.9 million to $16.2 million in
the first quarter of 2001. The decline in segment income is primarily
attributable to increased losses and loss adjustment expenses ("LAE")
resulting from a $63.1 million decrease in favorable development on prior
years' reserves, from $43.7 million of favorable development in the first
quarter of 2000 to $19.4 million of adverse development for the same period
in 2001. The decrease in favorable development is related about equally to
an increase in commercial lines loss costs, and to the Company's having
captured, in 1999 and 2000, the accumulated benefits of its claim redesign
efforts. These efforts resulted in reduced reserves related to prior
accident years, primarily in the personal automobile line in the
Northeast, and lower claim settlement costs. Favorable development also
decreased due to approximately $15 million of adverse development, in 2001,
related to fourth quarter 2000 non-catastrophe weather related claims in the
Midwest. In addition, the frequency of non-catastrophe weather related
losses increased $9.0 million in the first quarter of 2001 from the same
period in the prior year due to the severe winter weather in the Northeast.
Partially offsetting these items is the approximately $22 million impact of
rate increases, primarily in the commercial lines. Improved current year
claims severity in the personal automobile line and improved current year
claims frequency in the workers' compensation line also favorably impacted
results. In addition, catastrophe losses decreased $8.4 million, to $6.8
million for the first quarter of 2001, compared to $15.2 million for the
same period in 2000.
Distribution channel results are reported using Statutory accounting
principles, which are prescribed by state insurance regulators. The primary
difference between statutory and generally accepted accounting principles
("GAAP") is the deferral of certain underwriting costs under GAAP that are
amortized over the life of the policy. Under statutory accounting
principles, these costs are recognized when incurred or paid. Management
reviews the operations of this business based upon statutory results.
Page 20
The following table summarizes the results of operations for the distribution
channels of the Risk Management segment:
(Unaudited)
Three Months Ended March 31, 2001
Standard Sponsored Specialty
(In millions, except ratios) Markets Markets Markets Other (2) Total
Statutory net premiums
written $ 392.8 $ 161.5 $ 10.7 $ 0.3 $ 565.3
----------------------------------------------
Statutory combined ratio (1) 104.2 112.2 127.0 N/M 107.8
----------------------------------------------
Statutory underwriting loss $ (21.0) $ (20.5) $ (3.1) $ (5.2) $ (49.8)
Reconciliation to segment ---------------------------------------
income:
Net investment income 56.8
Other income and
expenses, net 3.5
Other Statutory to GAAP
adjustments 5.7
------
Segment income $ 16.2
======
(Unaudited)
Three Months Ended March 31, 2000
Standard Sponsored Specialty
(In millions, except ratios) Markets Markets Markets Other (2) Total
Statutory net premiums
written $ 369.2 $ 151.6 $ 6.4 $ 0.3 $ 527.5
----------------------------------------------
Statutory combined ratio (1) 103.7 96.6 120.3 N/M 102.5
----------------------------------------------
Statutory underwriting (loss)
profit $ (18.3) $ 2.0 $ (1.3) $ (2.4) $ (20.0)
Reconciliation to segment ---------------------------------------
income:
Net investment income 55.2
Other income and
expenses, net 2.6
Other Statutory to GAAP
adjustments 5.3
------
Segment income $ 43.1
======
(1) Statutory combined ratio is a common industry measurement of the
results of property and casualty insurance underwriting. This ratio is
the sum of the ratio of incurred claims and claim expenses to premiums
earned and the ratio of underwriting expenses incurred to premiums
written. Federal income taxes, net investment income and other non-
underwriting expenses are not reflected in the statutory combined ratio.
(2) Includes results from certain property and casualty business which the
Company has exited. The decline in underwriting results is primarily
attributable to unprofitable business in California.
N/M - Not meaningful
Standard Markets
Standard Markets' net premiums written increased $23.6 million, or 6.4%, to
$392.8 million for the first quarter of 2001. This is primarily the result
of increases of $10.4 million, or 13.8%, $5.8 million, or 11.0%, and $3.8
million, or 3.0%, in the commercial multiple peril, commercial automobile,
and personal automobile lines, respectively. The increase in the commercial
multiple peril line is primarily the result of 16.2%, 11.0%, and 10.9% rate
increases in Michigan, Massachusetts, and Maine, respectively, and a 4.7%
policies in force increase since March 31, 2000. Commercial multiple peril
policies in force increased due to continued growth in the small business
owners package policy. In addition, commercial automobile rates increased
6.8%, 10.3%, and 14.3% in Michigan, Massachusetts, and New York,
respectively, over the prior year. The increase in the personal automobile
line is primarily the result of a 6.1% increase in policies in force
partially offset by net rate decreases of 5.4% and 1.4% in Massachusetts and
Michigan, respectively. Management believes that net rate reductions may
continue to unfavorably impact future premiums in Massachusetts.
Page 21
Standard Markets' underwriting results declined $2.7 million, or 14.8%, to an
underwriting loss of $21.0 million in the first quarter of 2001. This is
primarily attributable to the aforementioned decrease in favorable
development on prior years' loss reserves. This is partially offset by
the approximately $22 million impact of rate increases, primarily in the
commercial lines. Catastrophe losses in 2001 decreased $13.6 million, to
$1.1 million, compared to $14.7 million for the same period in 2000. In
addition, improved current year claims severity in the personal automobile
line and improved current year claims frequency in the workers'
compensation line favorably impacted results for the first quarter of 2001.
Sponsored Markets
Sponsored Markets' net premiums written increased $9.9 million, or 6.5%, to
$161.5 million in the first quarter of 2001. This is primarily attributable
to a $6.4 million, or 5.0%, increase in the personal automobile line. Net
premiums written increased in this line due to a 4.8% increase in policies in
force, partially offset by the aforementioned net rate decreases in
Massachusetts and Michigan. In addition, homeowners' net premiums written
increased $3.3 million, primarily attributable to a 3.9% growth in policies
in force and a 7.2% Michigan rate increase. Approximately 70% of Sponsored
Markets' business is written in the State of Michigan.
Sponsored Markets' underwriting results declined $22.5 million to an
underwriting loss of $20.5 million in the first quarter of 2001. This is
primarily attributable to a decrease in favorable development due to
adverse development of fourth quarter 2000 non-catastrophe weather related
claims in Michigan, an increase in commercial lines loss costs, and a
decline in the favorable impact from the Company's aforementioned claim
redesign efforts. An increase in weather related current year claims
frequency in the personal automobile line also unfavorably impacted
results. In addition, catastrophe losses increased $5.1 million, to $5.6
million in the first quarter of 2001, compared to $0.5 million for the
first quarter of 2000. Partially offsetting these items is improved
current year claims severity in the homeowners line in 2001.
Specialty Markets
Specialty Markets' net premiums written increased $4.3 million, to $10.7
million in the first quarter of 2001. This increase is primarily
attributable to 106.9% and 10.5% growth in policies in force in the
commercial automobile line and the commercial multiple peril line,
respectively, since March 31, 2000.
Specialty Markets' underwriting results declined $1.8 million to an
underwriting loss of $3.1 million for the first quarter of 2001. The
decline in underwriting results is primarily the result of an absence of
ceding commission income from business that has not been renewed.
Investment Results
Net investment income before tax was $56.8 million and $55.2 million for the
three months ended March 31, 2001 and 2000, respectively. The increase in net
investment income in 2001 primarily reflects higher yields, partially offset
by a reduction in average invested assets of $96.2 million, or 2.6%, to
$3,601.6 million in 2001, compared to $3,697.8 million in 2000. This
reduction in average invested assets is due to transfers of cash and
securities of $108.0 million to the corporate segment during the second
quarter of 2000. Average pre-tax yields on debt securities increased to
7.1% in 2001 compared to 6.7% in 2000, due to a shift in investment
strategy providing for investments in taxable securities instead of tax
exempt securities, to maximize after-tax investment yields.
Reserve for Losses and Loss Adjustment Expenses
The Risk Management segment maintains reserves for its property and casualty
products to provide for the Company's ultimate liability for losses and loss
adjustment expenses 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 point in time, of what
management expects 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 claim severity and judicial theories
of liability and other factors. The inherent uncertainty of estimating
insurance reserves is greater for certain types of property and casualty
insurance lines, particularly workers' compensation and other liability
lines, where a longer period of time may elapse before a definitive
determination of ultimate liability may be made, and where the
technological, judicial and political climates involving these types of
claims are changing.
The Company regularly updates its reserve estimates as new information
becomes available and further events occur which may impact the resolution
of unsettled claims. Changes in prior reserve estimates are reflected in
results of operations in the period such changes are determined to be needed
and recorded.
Page 22
The table below provides a reconciliation of the beginning and ending
reserve for unpaid losses and LAE as follows:
(Unaudited)
Three Months Ended
March 31,
(In millions) 2001 2000
Reserve for losses and LAE, beginning of period $ 2,719.1 $ 2,615.9
Incurred losses and LAE, net of reinsurance
recoverable:
Provision for insured events of current year 416.0 416.7
Increase (decrease) in provision for insured
events of prior years 19.4 (43.7)
-------- --------
Total incurred losses and LAE 435.4 373.0
-------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events
of current year 119.7 119.5
Losses and LAE attributable to insured events
of prior years 305.5 246.7
-------- --------
Total payments 425.2 366.2
-------- --------
Change in reinsurance recoverable on unpaid
losses (11.8) 2.0
-------- --------
Reserve for losses and LAE, end of period $ 2,717.5 $ 2,624.7
======== ========
As part of an ongoing process, the reserves have been re-estimated for all
prior accident years and were increased by $19.4 million and decreased by
$43.7 million for the quarters ended March 31, 2001 and 2000, respectively.
During the first quarter of 2001, estimated loss reserves for claims
occurring in prior years increased $35.9 million. During the first quarter
of 2000, favorable development on prior years' loss reserves was $29.0
million. This $64.9 million decrease is the result of an increase in
commercial lines loss costs, and the Company having captured, in 1999 and
2000, the accumulated benefits of its claim redesign efforts. These
efforts resulted in reduced reserves related to prior accident years,
primarily in the personal automobile line in the Northeast. Favorable
development also decreased due to adverse development, in 2001, related to
fourth quarter 2000 non-catastrophe weather related claims in Michigan.
These claims primarily affected the personal automobile, workers'
compensation and commercial automobile lines. Favorable development on
prior years' loss adjustment expense reserves was $16.5 million and $14.7
million for the first quarters of 2001 and 2000, respectively. The favorable
development in both periods is primarily attributable to claims process
improvement initiatives taken by the Company over the past three years.
Since 1997, the Company has lowered claim settlement costs through increased
utilization of in-house attorneys and consolidation of claims offices.
These measures are substantially complete.
Reserves established for current year losses and LAE consider the factors
that resulted in the favorable development of prior years' loss and LAE
reserves during 2000 and earlier years. Accordingly, current year reserves
are modestly lower, relative to those initially established for similar
exposures in prior years and the Company currently expects no significant
adverse or favorable development for the remainder of the year.
Due to the nature of the business written by the Risk Management segment,
the exposure to environmental liabilities is relatively small and therefore
its reserves are relatively small compared to other types of liabilities.
Loss and LAE reserves related to environmental damage and toxic tort
liability, included in the reserve for losses and LAE, were $36.5 million
and $45.3 million, net of reinsurance of $12.5 million and $11.0 million in
the first quarters of 2001 and 2000, respectively. The Company does not
specifically underwrite policies that include this coverage, but as case law
expands policy provisions and insurers' liability beyond the intended
coverage, the Company may be required to defend such claims. The Company
estimated its ultimate liability for these claims based upon currently known
facts, reasonable assumptions where the facts are not known, current law and
methodologies currently available. Although these outstanding claims are not
significant, their existence gives rise to uncertainty and are discussed
because of the possibility that they may become significant. The Company
currently believes that recorded reserves related to these claims are
adequate. The environmental liability could be revised in the near term if
the estimates used in determining the liability are revised.
Inflation generally increases the cost of losses covered by insurance
contracts. The effect of inflation on the Company varies by product.
Property and casualty insurance premiums are established before the amount
of losses and LAE, and the extent to which inflation may affect such expenses
are known. Consequently, the Company attempts, in establishing rates and
reserves, to anticipate the potential impact of inflation in the projection
of ultimate costs. The impact of inflation has been relatively insignificant
in recent years. However, inflation could contribute to increased losses
and LAE in the future.
Page 23
The Company 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 Company 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.
Asset Accumulation
Allmerica Financial Services
The following table summarizes the results of operations for the Allmerica
Financial Services segment for the periods indicated.
(Unaudited)
Three Months Ended
March 31,
(In millions) 2001 2000
Segment revenues
Premiums $ 25.5 $ 26.5
Fees 100.4 102.5
Investment and other income 97.3 100.3
------ ------
Total segment revenues 223.2 229.3
Policy benefits, claims and losses 93.7 91.7
Policy acquisition and other operating expenses 85.2 83.2
------ ------
Segment income $ 44.3 $ 54.4
====== ======
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31,
2000
Segment income decreased $10.1 million, or 18.6%, to $44.3 million during
the first quarter of 2001. This decrease primarily reflects higher
operating expenses as well as lower asset-based fee income, principally
attributable to market depreciation in the variable product lines.
Segment revenues decreased $6.1 million, or 2.7%, in the first quarter of
2001, primarily due to decreased fees and a decline in investment and other
income. Fee income from variable annuities decreased $2.5 million, or 4.3%,
in 2001. A decline in the market value of average assets under management
resulted in decreased fee income of $5.7 million. This was partially offset
by fees of $3.2 million from additional deposits. Non-variable universal
life policy fees and group retirement product fees decreased $0.8 million
and $0.6 million, respectively, in the first quarter of 2001. These
decreases resulted primarily from a decline in average invested assets due
to the continued shift in focus to variable life insurance and annuity
products as well as to the Company's decision to cease marketing activities
for new group retirement business. These decreases in fee income were
partially offset by a $1.8 million, or 8.7% increase in individual variable
universal life policy fees, primarily due to additional deposits.
Investment and other income decreased $3.0 million, or 3.0%, to $97.3
million. The $1.8 million reduction in investment income is primarily
attributable to lower average invested assets in the annuity product lines
due to prior year transfers to the separate accounts from the general
account. The decrease in other income is primarily due to lower sales
volumes in an independent marketing organization and to lower investment
management fees resulting from decreased average assets.
Policy benefits, claims and losses increased to $2.0 million, or 2.2%, to
$93.7 million in the first quarter of 2001, primarily due to less favorable
mortality experience in the individual variable universal life product line.
Policy acquisition and other operating expenses increased $2.0 million, or
2.4%, to $85.2 million in the first quarter of 2001. An increase in other
operating expenses of $7.2 million, or 12.7%, to $64.1 million resulted
primarily from increases in technology and distribution costs. Partially
offsetting this increase was a $5.2 million decrease in policy acquisition
expenses. This decline primarily reflects the lower annuity profits in the
current quarter which resulted in less current year amortization of related
deferred costs.
Page 24
Statutory Premiums and Deposits
The following table sets forth statutory premiums and deposits by product
for the Allmerica Financial Services segment.
(Unaudited)
Three Months Ended
March 31,
(In millions) 2001 2000
Insurance:
Traditional life $ 16.2 $ 16.6
Universal life 4.6 5.8
Variable universal life 58.3 51.2
Individual health 0.1 0.1
Group variable universal life 38.4 11.5
------- -------
Total insurance 117.6 85.2
------- -------
Annuities:
Separate account annuities 498.4 678.9
General account annuities 230.4 138.7
Retirement investment accounts 2.3 3.5
------- -------
Total individual annuities 731.1 821.1
Group annuities 94.9 168.6
------- -------
Total annuities 826.0 989.7
------- -------
Total premiums and deposits $ 943.6 $1,074.9
======= =======
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31,
2000
For the three months ended March 31, 2001, total premiums and deposits
decreased $131.3 million, or 12.2%, to $943.6 million. These decreases are
primarily due to lower separate account and group annuity deposits,
partially offset by higher general account annuity deposits. The Company
believes that the lower separate account and group annuity deposits reflect
an industry-wide trend resulting from a general decline in the equity
markets. In addition, group annuity deposits decreased due to the
Company's decision to cease marketing activities for new group retirement
business. Partially offsetting these decreases were higher annuity deposits
into the Company's general account. These additional deposits resulted from
the introduction of an annuity program which provides enhanced crediting
rates for one year on certain general account deposits. The Company expects
that this program will end during the second quarter of 2001.
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 ("Zurich-Scudder"), Pioneer Investment
Management, Inc. and Delaware Management Company ("Delaware"). Select,
Partners and Agency represented, respectively, 38%, 36%, and 26% of
individual annuity deposits in the first quarter of 2001, and Zurich-Scudder
represented 26% of all individual annuity deposits. During the first quarter
of 2000, Select, Partners and Agency represented, respectively, 27%, 44% and
29% of individual annuity deposits. The increase in deposits within the
Select channel resulted primarily from the aforementioned annuity program
with enhanced crediting rates. The Company anticipates that sales through
the Delaware distribution channel, which represented 3% of individual annuity
deposits in the current quarter, will continue to decrease as Delaware
emphasizes its proprietary products.
Page 25
Allmerica Asset Management
The following table summarizes the results of operations for the Allmerica
Asset Management segment for the periods indicated.
(Unaudited)
Three Months Ended
March 31,
(In millions) 2001 2000
Interest margins on GICs
Net investment income $ 36.9 $ 26.4
Interest credited 32.0 22.4
------ ------
Net interest margin 4.9 4.0
------ ------
Fees and other income
External 1.7 1.6
Internal 1.4 1.3
Other operating expenses (2.0) (1.8)
------ ------
Segment income $ 6.0 $ 5.1
====== ======
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31,
2000
Segment income increased $0.9 million, or 17.6%, to $6.0 million during the
first quarter of 2001. This increase is primarily due to increased earnings
on GICs resulting from additional long-term funding agreement deposits.
These deposits grew from approximately $420 million at March 31, 2000 to more
than $1.6 billion at March 31, 2001.
Corporate
The following table summarizes the results of operations for the Corporate
segment for the periods indicated.
(Unaudited)
Three Months Ended
March 31,
(In millions) 2001 2000
Segment revenues
Net investment income $ 1.0 $ 1.0
Interest expense 3.8 3.8
Other operating expenses 13.4 11.7
------ ------
Segment loss $ (16.2) $ (14.5)
====== ======
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31,
2000
The segment loss increased $1.7 million, or 11.7%, to $16.2 million in the
First quarter of 2001 primarily as a result of certain corporate overhead
costs previously allocated to other operating segments.
Interest expense for both periods relates primarily to the interest paid on
the Senior Debentures of the Company.
Page 26
Investment Portfolio
The Company had investment assets diversified across several asset classes,
as follows:
(Unaudited)
March 31, 2001 December 31, 2000
Carrying % of Total Carrying % of Total
(Dollars in millions) Value Carrying Value Value Carrying Value
Fixed maturities (1) $ 8,428.5 80.3% $ 8,118.0 83.9%
Equity securities (1) 92.9 0.9 85.5 0.9
Mortgages 600.5 5.7 617.6 6.4
Policy loans 382.8 3.7 381.3 3.9
Cash and cash equivalents 823.4 7.8 281.1 2.9
Other long-term investments 172.1 1.6 193.2 2.0
-------- ----- -------- -----
Total $10,500.2 100.0% $ 9,676.7 100.0%
======== ===== ======== =====
(1) The Company carries fixed maturities and equity securities in its
investment portfolio at market value.
Total investment assets increased $823.5 million, or 8.5%, to $10.5 billion
during the first quarter of 2001. This increase resulted primarily from
increased cash and cash equivalents of $542.3 million and fixed maturities
of $310.5 million. The increase in cash and cash equivalents is primarily
due to the timing of investment purchases, as well as to the introduction of
an annuity program in the Allmerica Financial Services segment in March
2001. The program provides enhanced crediting rates for one year on certain
general account deposits. The increase in fixed maturities is principally
due to the investment of funds received from the sale of the Company's long-
term funding agreements by the Allmerica Asset Management segment.
The Company's fixed maturity portfolio is comprised of primarily investment
grade corporate securities, tax-exempt issues of state and local
governments, U.S. government and agency securities and other issues. Based
on ratings by the National Association of Insurance Commissioners,
investment grade securities comprised 88.0% and 88.1% of the Company's total
fixed maturity portfolio at March 31, 2001 and December 31, 2000,
respectively. The average yield on fixed maturities was 7.7% and 7.3% for
the three months ended March 31, 2001 and 2000, respectively. Although
management expects that new funds will be invested primarily in investment
grade fixed maturities, the Company may invest a portion of new funds in
below investment grade fixed maturities or equity interests.
Income Taxes
AFC and its domestic subsidiaries (including certain non-insurance
operations) file a consolidated United States federal income tax return.
Entities included within the consolidated group are segregated into either
a life insurance or a non-life insurance company subgroup. The consolidation
of these subgroups is subject to certain statutory restrictions on the
percentage of eligible non-life tax losses that can be applied to offset
life company taxable income.
The provision for federal income taxes before minority interest, discontinued
operations and the effect of a change in accounting principle was $6.4
million during the first quarter of 2001 compared to $7.5 million during the
same period in 2000. These provisions resulted in consolidated effective
federal tax rates of 17.4% and 18.0% for the quarters ended March 31, 2001
and 2000, respectively. The decrease in the tax rate is primarily due to
lower underwriting income and to an increase in the dividends received
deduction associated with the Company's variable products. These decreases
in the rate were partially offset by lower realized capital losses in 2001
as compared to 2000.
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash
flows to meet the cash requirements of business operations. As a holding
company, AFC's primary source of cash is dividends from its insurance
subsidiaries. However, dividend payments to AFC by its insurance
subsidiaries are subject to limitations imposed by state regulators, such
as the requirement that cash dividends be paid out of unreserved and
unrestricted earned surplus and restrictions on the payment of
"extraordinary" dividends, as defined. During the first quarter of 2001,
AFC did not receive any dividend payments from its insurance subsidiaries.
Page 27
Sources of cash for the Company's insurance subsidiaries are from premiums
and fees collected, investment income and maturing investments. Primary
cash outflows are paid benefits, claims, losses and loss adjustment
expenses, policy acquisition expenses, other underwriting expenses and
investment purchases. Cash outflows related to benefits, claims,
losses and loss adjustment expenses can be variable because of uncertainties
surrounding settlement dates for liabilities for unpaid losses and because
of the potential for large losses either individually or in the aggregate.
The Company periodically adjusts its investment policy to respond to changes
in short-term and long-term cash requirements.
Net cash provided by operating activities was $92.9 million during the first
quarter of 2001, compared to net cash used in operating activities of $101.0
million for the same period of 2000. The increase in 2001 is primarily the
result of funds received from the introduction of a new annuity program with
enhanced crediting rates, the timing of settlements with reinsurance
companies and decreased federal income tax payments. These increases in
cash were partially offset by increased loss and LAE payments in the property
and casualty business.
Net cash used in investing activities was $96.8 million and $282.2 million
during the first quarters of 2001 and 2000, respectively. The decrease in
cash used in 2001 is primarily due to a $181.9 million year over year
decrease in net purchases of fixed maturities due to the timing of
investing new funding agreement deposits.
Net cash provided by financing activities was $546.2 million and $221.1
million during the first quarters of 2001 and 2000, respectively. The
increase in 2001 is primarily due to an increase in net funding agreement
deposits, including trust instruments supported by funding obligations, of
$298.2 million and a $30.5 million year over year reduction in cash used for
the Company's share repurchase program.
In the opinion of management, AFC has sufficient funds at the holding company
or available through dividends from FAFLIC and Hanover, or through available
credit facilities to meet its obligations to pay interest on the Senior
Debentures, Capital Securities and dividends, when and if declared by the
Board of Directors, on the common stock. Whether the Company will pay
dividends in the future depends upon the costs of administration as compared
to the benefits conferred, and upon the earnings and financial condition of
AFC.
Based on current trends, the Company expects to continue to generate
sufficient positive operating cash to meet all short-term and long-term cash
requirements. The Company maintains a high degree of liquidity within the
investment portfolio in fixed maturity investments, common stock and short-
term investments. AFC has $150.0 million available under a committed
syndicated credit agreement which expires on May 28, 2001. The Company
expects to renew this agreement. Borrowings under this agreement are
unsecured and incur interest at a rate per annum equal to, at the Company's
option, a designated base rate or the eurodollar rate plus applicable
margin. At March 31, 2001, no amounts were outstanding under this
agreement. The Company had $64.6 million of commercial paper borrowings
outstanding at March 31, 2001. These borrowings are used in connection
with the Company's premium financing business, which is included in the Risk
Management segment.
Contingencies
The Company's insurance subsidiaries are routinely engaged in various legal
proceedings arising in the normal course of business, including claims for
punitive damages. Additional information on other litigation and claims
may be found in Note 12 "Commitments and Contingencies - Litigation" to the
consolidated financial statements. In the opinion of management, none of
such contingencies are expected to have a material effect on the Company's
consolidated financial position, although it is possible that the results
of operations in a particular quarter or annual period would be materially
affected by an unfavorable outcome.
Forward-Looking Statements
The Company wishes to caution readers that the following important factors,
among others, in some cases have affected and in the future could affect,
the Company's actual results and could cause the Company's actual results
for 2001 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. When
used in the MD&A discussion, the words "believes", "anticipated", "expects"
and similar expressions are intended to identify forward looking
statements. See "Important Factors Regarding Forward-Looking Statements"
filed as Exhibit 99-2 to the Company's Annual Report on Form 10-K for the
period ended December 31, 2000.
Page 28
Factors that may cause actual results to differ materially from those
contemplated or projected, forecast, estimated or budgeted in such forward
looking statements include among others, the following possibilities: (i)
adverse catastrophe experience and severe weather; (ii) adverse loss
development for events the Company insured in prior years or adverse trends
in mortality and morbidity; (iii) heightened competition, including the
intensification of price competition, the entry of new competitors, and the
introduction of new products by new and existing competitors, or as the
result of consolidation within the financial services industry and the entry
of additional financial institutions into the insurance industry; (iv)
adverse state and federal legislation or regulation, including decreases in
rates, limitations on premium levels, increases in minimum capital and
reserve requirements, benefit mandates, limitations on the ability to manage
care and utilization, and tax treatment of insurance and annuity products,
as well as continued compliance with state and federal regulations; (v)
changes in interest rates causing a reduction of investment income or in the
market value of interest rate sensitive investments; (vi) failure to
obtain new customers, retain existing customers or reductions in policies in
force by existing customers; (vii) difficulties in recruiting new or
retaining existing career agents, wholesalers and partnership relations to
support the sale of variable products, (viii) higher service, administrative,
or general expense due to the need for additional advertising, marketing,
administrative or management information systems expenditures; (ix) loss or
retirement of key executives; (x) increases in medical costs, including
increases in utilization, costs of medical services, pharmaceuticals,
durable medical equipment and other covered items; (xi) changes in the
Company's liquidity due to changes in asset and liability matching; (xii)
restrictions on insurance underwriting, based on genetic testing and other
criteria; (xiii) adverse changes in the ratings obtained from independent
rating agencies, such as Moody's, Standard and Poor's and A.M. Best, (xiv)
lower appreciation on or decline in value of the Company's managed
investments or the investment markets in general, resulting in reduced
variable product sales, assets and related fees and increased surrenders;
(xv) possible claims relating to sales practices for insurance products;
(xvi) failure of a reinsurer of the Company's policies to pay its
liabilities under reinsurance contracts; (xvii) earlier than expected
withdrawals from the Company's general account annuities, GICs (including
funding agreements), and other insurance products; (xviii) changes in the
mix of assets comprising the Company's investment portfolio and the
fluctuation of the market value of such assets; (xix) losses resulting from
the Company's participation in certain reinsurance pools; (xx) adverse
results of regulatory audits related to the Company's prior years' federal
income tax filings; (xxi) losses due to foreign currency fluctuations, and
(xxii) the inability to realize expense savings and enhanced revenues from
restructuring initiatives.
Page 29
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
None
(b) Reports on Form 8K
None
Page 30
SIGNATURES
Pursuant to the requirements of the Securities 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
Dated May 14, 2001
/s/ John F. O'Brien
---------------------------------------
John F. O'Brien
President and Chief Executive Officer
Dated May 14, 2001
/s/ Edward J. Parry III
---------------------------------------
Edward J. Parry III
Vice President, Chief Financial Officer
and Principal Accounting Officer
Page 31