Allmerica Financial Corporation
Exhibit 99.1
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The Company wishes to caution readers that the following important
factors, among others, in some cases have affected the Company's results and in
the future could cause actual results and needs of the Company to vary
materially from forward-looking statements made from time to time by the
Company on the basis of management's then-current expectations. The businesses
in which the Company is engaged are in rapidly changing and competitive markets
and involve a high degree of risk, and accuracy with respect to forward-looking
projections is difficult.
Geographic Concentration in the Property and Casualty Insurance Business
Substantially all of the Company's property and casualty insurance
subsidiaries net premiums written and earnings are generated in Michigan and
the Northeast (Connecticut, Massachusetts, New York, New Jersey, New Hampshire,
Rhode Island, Vermont and Maine). The revenues and profitability of the
Company's property and casualty insurance subsidiaries are therefore subject to
prevailing economic, regulatory, demographic and other conditions, including
adverse weather, in Michigan and the Northeast.
Cyclicality in the Property and Casualty Insurance Industry
Historically, the property and casualty insurance industry has been highly
cyclical. The property and casualty industry's profitability can be affected
significantly by price competition, volatile and unpredictable developments
such as extreme weather conditions and natural disasters, legal developments
affecting insurer liability and the size of jury awards, fluctuations in
interest rates and other factors that affect investment returns and other
general economic conditions and trends that may affect the adequacy of
reserves.
Over the past several years, the property and casualty insurance industry as
a whole has been in a soft market. Competition for premiums in the property and
casualty insurance markets may continue to have an adverse impact on the
Company's rates and profitability.
Catastrophe Losses in the Property and Casualty Insurance Industry
Property and casualty insurers are subject to claims arising out of
catastrophes, which may have a significant impact on their results of
operations and financial condition. The Company may experience catastrophe
losses in the future which could have a material adverse impact on the Company.
Catastrophes can be caused by various events including hurricanes, earthquakes,
tornadoes, wind, hail, fires, severe winter weather and explosions, and the
frequency and severity of catastrophes are inherently unpredictable. The extent
of losses from a catastrophe is a function of two factors: the total amount of
insured exposure in the area affected by the event and the severity of the
event. Although catastrophes can cause losses in a variety of property and
casualty lines, homeowners and commercial property insurance have in the past
generated the vast majority of the Company's catastrophe-related claims. The
Company purchases catastrophe reinsurance as protection against catastrophe
losses. The Company believes, based upon its review of its reinsurers'
financial statements and reputations in the reinsurance marketplace, that the
financial condition of its reinsurers is sound. However, there can be no
assurance that reinsurance will be adequate to protect the Company against such
losses or that such reinsurance will continue to be available to the Company in
the future at commercially reasonable rates.
Uncertainty Regarding Adequacy of Property and Casualty Loss Reserves
The Company's property and casualty insurance subsidiaries maintain reserves
to cover their estimated ultimate liability for losses and loss adjustment
expenses ("LAE") with respect to reported and unreported claims incurred as of
the end of each accounting period. These reserves are estimates, involving
actuarial projections at a given time, of what the Company's property and
casualty insurance subsidiaries expect the ultimate settlement and
administration of claims will cost based on facts and circumstances then known,
predictions of future events, estimates of future trends in claims severity and
judicial theories of liability, legislative activity and other factors. The
inherent uncertainties of estimating reserves are greater for certain types of
property and casualty insurance lines, particularly workers' compensation,
where a longer period of time may elapse before a definitive determination of
ultimate liability may be made, and environmental liability, where the
technological, judicial and political climates involving these types of claims
are changing.
The company's property and casualty insurance subsidiaries regularly review
reserving techniques, reinsurance and overall reserve adequacy. Based upon (i)
review of historical data, legislative enactments, judicial decisions, legal
developments in imposition of damages, changes in political attitudes and
trends in general economic conditions; (ii) review of per claim information;
(iii) historical loss experience of the property and casualty insurance
subsidiaries and the industry; and (iv) the relatively short-term nature of
most of its property and casualty insurance policies, management believes that
adequate provision has been made for reserves. However, establishment of
appropriate reserves is an inherently uncertain process involving estimates of
future losses and there can be no certainty that currently established reserves
will prove adequate in light of subsequent actual experience. The Company's
property and casualty insurance subsidiaries' reserves are annually certified
as required by insurance regulatory authorities.
Sensitivity to Interest Rates Relative to Life Insurance Subsidiaries
The Company's life insurance subsidiaries are exposed to risk of
disintermediation and reduction in interest spread or profit margins when
interest rates fluctuate. Bond calls, mortgage prepayments, contract surrenders
and withdrawals of life insurance policies, annuities and guaranteed investment
contracts are influenced by the interest rate environment. Since the Company's
life insurance subsidiaries' investment portfolios consist primarily of fixed
income assets, the investment portfolio market value and the yields on newly
invested and reinvested assets vary depending on interest rates. Management
attempts to mitigate any negative impact of interest rate changes through
asset/liability management, product design (including an increased focus on
variable insurance products), management of crediting rates, use of hedging
techniques, relatively high surrender charges and management of mortality
charges and dividend scales with respect to its in force life insurance
policies.
Regulatory, Surplus, Capital, Rating Agency and Related Matters
Insurance companies are subject to supervision and regulation by the state
insurance authority in each state in which they transact business. Such
supervision and regulation relate to numerous aspects of an insurance company's
business and financial condition, including limitations on the authorization of
lines of business, underwriting limitations, the setting of premium rates, the
establishment of standards of solvency, the licensing of insurers and agents,
concentration of investments, levels of reserves, the payment of dividends,
transactions with affiliates, changes of control and the approval of policy
forms. Such regulation is concerned primarily with the protection of
policyholders.
State regulatory oversight and various proposals at the federal level
(including the proposed adoption of a federal regulatory framework for
insurance companies) may in the future adversely affect the Company's ability
to sustain adequate returns in certain lines of business. In recent years, the
state insurance regulatory framework has come under increased federal scrutiny,
and certain state legislatures have considered or enacted laws that alter and,
in many cases, increase state authority to regulate insurance companies and
insurance holding company systems. Further, the National Association of
Insurance Commissioner ("NAIC") and state insurance regulators are reexamining
existing laws and regulations, and as a condition to accreditation have
required the adoption of certain model laws which specifically focus on
insurance company investments, issues relating to the solvency of insurance
companies, risk-based capital ("RBC") guidelines, interpretations of existing
laws, the development of new laws, and the definition of extraordinary
dividends.
The capacity for an insurance company's growth in premiums is in part a
function of its statutory surplus. Maintaining appropriate levels of statutory
surplus, as measured by state insurance regulators, is considered important by
state insurance regulatory authorities and the private agencies that rate
insurers' claims-paying abilities and financial strength. Failure to maintain
certain levels of statutory surplus could result in increased regulatory
scrutiny, action by state regulatory authorities or a downgrade by the private
rating agencies.
The NAIC has created a new system for assessing the adequacy of statutory
capital for life and health insurers and property and casualty insurers. The
new system, known as risk-based capital, is in addition to the states' fixed
dollar minimum capital and other requirements. The new system is based on risk-
based formulas (separately defined for life and health insurers and property
and casualty insurers) that apply prescribed factors to the various risk
elements in an insurer's business to report a minimum capital requirement
proportional to the amount of risk assumed by the insurer.
Because the investment of First Allmerica Financial Life Insurance Company
("FAFLIC"), a life insurance subsidiary of the Company, in Allmerica Property &
Casualty Companies, Inc. ("Allmerica P&C") represents a significant percentage
of FAFLIC's surplus, the trading price of the common stock of Allmerica P&C
will affect FAFLIC's RBC calculations and may affect the FAFLIC's claims-paying
ability and financial strength ratings. There can be no assurance that capital
requirements applicable to the FAFLIC's businesses will not increase or that
the FAFLIC will be able to meet minimum RBC requirements in the future.
In addition, in March 1995, S&P lowered its claims-paying ability ratings of
FAFLIC and Allmerica Financial Life Insurance and Annuity Company to A+ (Good),
and Moody's reduced FAFLIC's Financial Strength Rating From Aa3 (Excellent) to
A1 (Good). Management believes that its strong ratings are important factors
in marketing the products of its insurance companies to its agents and
customers, since rating information is broadly disseminated and generally used
throughout the industry. Insurance company ratings are assigned to an insurer
based upon factors relevant to policyholders and are not directed toward
protection of investors. Such ratings are neither a rating of securities nor a
recommendation to buy, hold or sell any security. Further downgrades may have
a material adverse effect on the Company's business and prospects.
State Guaranty Funds, Shared Markets Mechanisms and Pooling Arrangements
All fifty states of the United States have insurance guaranty fund laws
requiring all life and health and property and casualty insurance companies
doing business within the state to participate in guaranty associations, which
are organized to pay contractual obligations under insurance policies issued by
impaired or insolvent insurance companies. These associations levy assessments
(up to prescribed limits) on all member insurers in a particular state on the
basis of the proportionate share of the premiums written by member insurers in
the lines of business in which the impaired or insolvent insurer is engaged.
Mandatory assessments by state guaranty funds are used to cover losses to
policyholders of insolvent or rehabilitated companies and can be partially
recovered through a reduction in future premium taxes in many states. These
assessments may increase in the future depending upon the rate of insolvencies
of insurance companies.
In addition, as a condition to the ability to conduct business in various
states, the Company's property and casualty insurance subsidiaries are required
to participate in mandatory property and casualty shared market mechanisms or
pooling arrangements, which provide various insurance coverages to individuals
or other entities that otherwise are unable to purchase such coverage
voluntarily provided by private insurers. The Company cannot predict whether
its participation in these shared market mechanisms or pooling arrangements
will provide underwriting profits or losses to the Company.
Competition
The Company's business is composed of four principal segments: Property and
Casualty Insurance, Corporate Risk Management Services, Retail Financial
Services, and Institutional Services. Each of these industry segments in
general is highly competitive. The Company's products and services compete not
only with those offered by insurance companies but also with products offered
by other financial institutions and health maintenance organizations. In all of
its segments, many of the Company's competitors are larger and have greater
financial, technical and operating resources than those of the Company. In
addition, the Company may face additional competition from banks and other
financial institutions should current regulatory restrictions on the sale of
insurance and securities by these institutions be repealed.
Retention of Key Executives
The future success of the Company will be affected by its continued ability
to attract and retain qualified executives. The Company's success is dependent
in large part on John F. O'Brien, the loss of whom could adversely affect the
Company's business. The Company does not have an employment agreement with Mr.
O'Brien.
Federal Income Tax Legislation
Currently, under the Code, holders of certain life insurance and annuity
products are entitled to tax-favored treatment on these products. For example,
income tax payable by policyholders on investment earnings under certain life
insurance and annuity products is deferred during the product's accumulation
period and is payable, if at all, only when the insurance or annuity benefits
are actually paid or to be paid. Also, for example, interest on loans up to
$50,000 secured by the cash value of certain insurance policies owned by
businesses is eligible for deduction even though investment earnings during the
accumulation period are tax-deferred.
In the past, legislation has been proposed that would have curtailed the tax-
favored treatment of the life insurance and annuity products offered by the
Company. These proposals were not enacted, and no such proposals or similar
proposals are currently under active consideration by the Congress.
Nevertheless, if these or similar proposals directed at limiting the tax-
favored treatment of life insurance policies and annuity contracts were
enacted, market demand for such products offered by the Company would be
adversely affected.