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, 2000
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: 53,660,690 shares
of common stock outstanding, as of May 1, 2000.
31
Total Number of Pages Included in This Document
Exhibit Index is on Page 31
Page 1
<PAGE>
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 8-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-27
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions, except per share data) 2000 1999
<S> <C> <C>
REVENUES
Premiums $ 497.5 $ 458.3
Universal life and investment
product policy fees 102.5 82.9
Net investment income 142.3 154.3
Net realized investment (losses) gains (46.8) 131.8
Other income 36.7 28.9
------ ------
Total revenues 732.2 856.2
------ ------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses
and loss adjustment expenses 453.4 443.2
Policy acquisition expenses 117.1 92.7
Other operating expenses 120.0 117.8
------ ------
Total benefits, losses and expenses 690.5 653.7
------ ------
Income from continuing operations before
federal income taxes 41.7 202.5
------ ------
Federal income tax expense (benefit)
Current (6.7) 54.0
Deferred 14.2 (6.3)
------ ------
Total federal income tax expense 7.5 47.7
------ ------
Income from continuing operations before
minority interest 34.2 154.8
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 from continuing operations 30.2 150.8
Income from operations of discontinued
business (less applicable income taxes of
$1.7 for the quarter ended March 31, 1999) - 3.3
------ ------
Net income $ 30.2 $ 154.1
====== ======
PER SHARE DATA
Basic
Income from continuing operations $ 0.56 $ 2.63
Income from operations of discontinued
business (less applicable income taxes
of $0.03 for the quarter ended
March 31, 1999) - 0.06
------ ------
Net income $ 0.56 $ 2.69
====== ======
Weighted average shares outstanding 53.9 57.3
====== ======
Diluted
Income from continuing operations $ 0.56 $ 2.61
Income from operations of discontinued
business (less applicable income taxes
of $0.03 for the quarter ended
March 31, 1999) - 0.06
------ ------
Net income $ 0.56 $ 2.67
====== ======
Weighted average shares outstanding 54.3 57.7
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 3
<PAGE>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
(In millions, except per share data) 2000 1999
<S> <C> <C>
ASSETS
Investments:
Fixed maturities-at fair value
(amortized cost of $7,342.2 and
$7,095.0) $ 7,211.8 $ 6,933.8
Equity securities-at fair value
(cost of $40.6 and $49.5) 77.7 83.2
Mortgage loans 506.6 521.2
Policy loans 175.0 170.5
Real estate and other long-term
investments 176.6 180.0
-------- --------
Total investments 8,147.7 7,888.7
-------- --------
Cash and cash equivalents 302.7 442.2
Accrued investment income 126.8 134.7
Deferred policy acquisition costs 1,442.2 1,386.8
Reinsurance receivable on paid and unpaid
losses, benefits and unearned premiums 1,276.7 1,279.9
Deferred federal income taxes 109.3 141.7
Premiums, accounts and notes receivable, net 602.2 583.5
Other assets 485.8 510.2
Closed Block assets 765.2 772.3
Separate account assets 18,595.5 17,629.6
--------- ---------
Total assets $ 31,854.1 $ 30,769.6
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $ 2,726.0 $ 2,825.0
Outstanding claims, losses and loss
adjustment expenses 2,833.3 2,838.6
Unearned premiums 920.7 890.2
Contractholder deposit funds and other
policy liabilities 2,216.1 2,041.0
-------- --------
Total policy liabilities and accruals 8,696.1 8,594.8
-------- --------
Expenses and taxes payable 772.9 795.5
Reinsurance premiums payable 64.3 73.0
Trust instruments supported by funding
obligations 77.9 50.6
Short-term debt 48.1 45.0
Long-term debt 199.5 199.5
Closed Block liabilities 833.0 842.1
Separate account liabilities 18,594.6 17,628.9
-------- --------
Total liabilities 29,286.4 28,229.4
-------- --------
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 10)
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 1,761.5 1,770.5
Accumulated other comprehensive income (49.4) (75.3)
Retained earnings 912.4 882.2
Treasury stock at cost (6.4 million and
6.2 million shares) (357.4) (337.8)
-------- --------
Total shareholders' equity 2,267.7 2,240.2
-------- --------
Total liabilities and shareholders'
equity $ 31,854.1 $ 30,769.6
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 4
<PAGE>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions) 2000 1999
<S> <C> <C>
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 1,770.5 1,768.8
Issuance of common stock - 0.6
Unearned compensation related to
restricted stock (9.0) 0.8
------- -------
Balance at end of period 1,761.5 1,770.2
------- -------
ACCUMULATED OTHER COMPREHENSIVE INCOME
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period (75.3) 180.5
Net appreciation (depreciation) on
available-for-sale securities 39.9 (161.6)
(Provision) benefit for deferred
federal income taxes (14.0) 56.4
------- -------
Other comprehensive gain (loss) 25.9 (105.2)
------- -------
Balance at end of period (49.4) 75.3
------- -------
RETAINED EARNINGS
Balance at beginning of period 882.2 599.9
Net income 30.2 154.1
Dividends to shareholders - -
------- -------
Balance at end of period 912.4 754.0
------- -------
TREASURY STOCK
Balance at beginning of period (337.8) (91.2)
Shares purchased at cost (30.5) (121.4)
Shares reissued at cost 10.9 -
------- -------
Balance at end of period (357.4) (212.6)
------- -------
Total shareholders' equity $ 2,267.7 $ 2,387.5
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 5
<PAGE>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions) 2000 1999
<S> <C> <C>
Net income $ 30.2 $ 154.1
Other comprehensive income
Net appreciation (depreciation) on
available-for-sale securities 39.9 (161.6)
(Provision) benefit for deferred
federal income taxes (14.0) 56.4
------ ------
Other comprehensive income (loss) 25.9 (105.2)
------ ------
Comprehensive income $ 56.1 $ 48.9
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 6
<PAGE>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions) 2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 30.2 $ 154.1
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Net realized losses (gains) 47.1 (132.2)
Net amortization and depreciation 7.7 8.8
Deferred federal income taxes 18.7 (6.3)
Change in deferred acquisition costs (53.1) (52.8)
Change in premiums and notes receivable,
net of reinsurance payable (27.3) (7.5)
Change in accrued investment income 7.5 2.6
Change in policy liabilities and
accruals, net (117.4) 46.7
Change in reinsurance receivable 3.1 (67.6)
Change in expenses and taxes payable (27.7) 48.6
Separate account activity, net (0.1) 47.4
Other, net 8.3 (3.8)
-------- --------
Net cash (used in) provided by
operating activities (103.0) 38.0
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities 867.6 531.0
Proceeds from disposals of equity securities 8.8 352.6
Proceeds from disposals of other investments 4.8 14.9
Proceeds from mortgages matured or collected 24.6 29.7
Purchase of available-for-sale fixed
maturities (1,167.5) (978.6)
Purchase of equity securities (0.1) (48.1)
Purchase of other investments (18.0) (16.3)
Capital expenditures (2.4) (8.7)
-------- ---------
Net cash used in investing activities (282.2) (123.5)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds 602.2 697.3
Withdrawals from contractholder deposit
funds (391.9) (418.1)
Change in trust instruments supported by
funding obligations 27.3 -
Change in short-term debt 3.1 (136.5)
Proceeds from issuance of common stock - 0.5
Treasury stock purchased at cost (30.5) (121.4)
Treasury stock reissued at cost 10.9 -
-------- --------
Net cash provided by financing activities 221.1 21.8
-------- --------
Net change in cash and cash equivalents (164.1) (63.7)
Net change in cash held in the Closed Block 24.6 8.5
Cash and cash equivalents, beginning of period 442.2 550.3
-------- --------
Cash and cash equivalents, end of period $ 302.7 $ 495.1
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 7
<PAGE>
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"); its wholly-
owned life insurance subsidiary, Allmerica Financial Life Insurance and
Annuity Company ("AFLIAC"); non-insurance subsidiaries (principally
brokerage and investment advisory services); Allmerica Asset Management,
Inc. ("AAM", a wholly-owned non-insurance subsidiary of AFC); Allmerica
Property & Casualty Companies, Inc. ("Allmerica P&C", a wholly-owned non-
insurance subsidiary of AAM); The Hanover Insurance Company ("Hanover", a
wholly-owned subsidiary of Allmerica P&C); Citizens Corporation (a wholly-
owned subsidiary of Hanover); and Citizens Insurance Company of America
("Citizens", a wholly-owned subsidiary of Citizens Corporation). The
Closed Block assets and liabilities and its results of operations are
presented in the consolidated financial statements as single line items.
Unless specifically stated, all disclosures contained herein supporting the
consolidated financial statements exclude the Closed Block related amounts.
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, 2000, 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
1999 Annual Report to Shareholders, as filed on Form 10-K with the
Securities and Exchange Commission.
2. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") 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 an entity recognize all derivatives as
either assets or liabilities at fair value in the statement of financial
position, and establishes special accounting for the following three types
of hedges: fair value hedges, cash flow hedges, and hedges of foreign
currency exposures. This statement is effective for fiscal years beginning
after June 15, 2000. The Company is currently assessing the impact of the
adoption of Statement No. 133.
3. 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 premium 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, including
$13.8 million of after tax losses generated after the June 30, 1999
measurement date. In March of 2000, the Company transferred its EBS
business to Great-West Life and Annuity Insurance Company of Denver and
received consideration of $22.0 million, based on renewal rights for
existing policies. Additional consideration may be received in 2001, based
on premium in force as of March, 2001. However, existing policy obligations
remain with the Company.
As permitted by APB Opinion No. 30, the Consolidated Balance Sheets have not
been segregated between continuing and discontinued operations. At March 31,
2000, the discontinued segment had assets of approximately $560.9 million
consisting primarily of invested assets, premiums and fees receivable, and
reinsurance recoverables, and liabilities of approximately $501.8 million
consisting primarily of policy liabilities. Revenues for the discontinued
operations were $77.7 million and $97.8 million for the quarters ended March
31, 2000 and 1999, respectively.
Page 8
<PAGE>
4. Significant Transactions
As of March, 31, 2000, the Company has repurchased approximately $361.6
million, or approximately 6.7 million shares of its common stock under
programs authorized by the Board of Directors (the "Board"). As of March 31,
2000, The Board had authorized total stock repurchases of $500.0 million,
leaving approximately $138.4 million available to the Company for future
repurchases.
Effective January 1, 1999, the Company entered into a Whole Account Aggregate
Excess of Loss reinsurance agreement. The reinsurance agreement provided
accident year coverage for the three years 1999 to 2001 for the Company's
property and casualty business, and was subject to cancellation or
commutation annually at the Company's option. The program covered losses and
allocated loss adjustment expenses ("LAE"), including those incurred but not
yet reported, in excess of a specified whole account loss and allocated LAE
ratio. The annual and aggregate coverage limits for losses and allocated
LAE are $150.0 million and $300.0 million, respectively. The effect of
this agreement on results of operations in each reporting period is based
on losses and allocated LAE ceded, reduced by a sliding scale premium of
50-67.5% depending on the size of the loss, and increased by a ceding
commission of 20% of ceded premium. In addition, net investment income is
reduced for amounts credited to the reinsurer. As a result of this
agreement, the Company recognized a net benefit of $15.9 million for the
year ended December 31, 1999, based on annual estimates of losses and
allocated loss adjustment expenses for accident year 1999. There has been
no material effect on operating results in 2000. In accordance with the
provisions of this contract, the Company has exercised its option to cancel
this contract effective January 1, 2000. No significant benefit or loss was
recognized in the first quarter of 2000. The effect of this agreement on the
results of operations in future periods is not currently determinable, as it
will be based both on future losses and allocated LAE for accident year 1999.
5. Federal Income Taxes
Federal income tax expense for the three months ended March 31, 2000 and
1999, 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.
6. Other Comprehensive Income
The following table provides a reconciliation of gross unrealized gains
(losses) to the net balance shown in the Statement of Comprehensive Income:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions) 2000 1999
<S> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding losses arising during period
(net of taxes (benefit) of $1.0 million and
$(26.2) million in 2000 and 1999) $ (11.2) $ (11.3)
Less: reclassification adjustment for (losses)
gains included in net income (net of (benefit)
taxes of $(13.0) million and $30.2 million in
2000 and 1999) (37.1) 93.9
------- -------
Other comprehensive income (loss) $ 25.9 $ (105.2)
======= =======
</TABLE>
Page 9
<PAGE>
7. Closed Block
Included in other income in the Consolidated Statements of Income in the
first three months of 2000 and 1999 is a net pre-tax contribution from the
Closed Block of $3.2 million and $4.6 million, respectively. Summarized
financial information of the Closed Block is as follows:
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
(In millions) 2000 1999
<S> <C> <C>
ASSETS
Fixed maturities-at fair value (amortized
cost of $406.3 and $387.4) $ 390.9 $ 372.9
Mortgage loans 135.3 136.3
Policy loans 197.6 201.1
Cash and cash equivalents - 22.6
Accrued investment income 14.4 14.0
Deferred policy acquisition costs 12.0 13.1
Other assets 15.0 12.3
------- -------
Total assets $ 765.2 $ 772.3
======= =======
LIABILITIES
Policy liabilities and accruals $ 825.7 $ 835.2
Other liabilities 7.3 6.9
------- -------
Total liabilities $ 833.0 $ 842.1
======= =======
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Ended
March 31,
(In millions) 2000 1999
<S> <C> <C>
REVENUES
Premiums $ 26.0 $ 27.2
Net investment income 13.2 13.1
Net realized investment (losses) gains (0.3) 0.8
------- -------
Total revenues 38.9 41.1
------- -------
BENEFITS AND EXPENSES
Policy benefits 34.8 35.5
Policy acquisition expenses 0.6 0.5
Other operating expenses 0.3 0.5
------- -------
Total benefits and expenses 35.7 36.5
------- -------
Contribution from the Closed Block $ 3.2 $ 4.6
======= =======
</TABLE>
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.
8. 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 10
<PAGE>
The Risk Management Segment manages its products through three distribution
channels identified as Standard Markets, Sponsored Markets, and Specialty
Markets. Standard Markets consists of the aggregate operating results for
the three channels previously characterized as Hanover North, Hanover South
and Citizens Midwest. 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 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 business nationwide. This channel focuses on
niche classes of risks and leverages specific underwriting processes.
During the second quarter of 1999, the Company approved a plan to exit its
group life and health business, consisting of its EBS business, its AGU
business and its reinsurance pool business. Results of operations from this
business, relating to both the current and the prior periods, have been
segregated and reported as a component of discontinued operations in the
Consolidated Statements of Income. Operating results from this business were
previously reported in the Sponsored Markets and Specialty Markets
distribution channels. Prior to 1999, results of the group life and health
business were included in the Corporate Risk Management Services segment,
while all other Risk Management business was reflected in the Property and
Casualty segment.
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 distributed via retail channels as well as group
retirement products, such as defined benefit and 401(k) plans and tax-
sheltered annuities distributed to institutions. Through its Allmerica Asset
Management segment, the Company offers its customers the option of investing
in Guaranteed Investment Contracts ("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 a with a fixed or variable interest
rates 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. Income in the Allmerica Asset Management segment is generated by
interest margins earned on the Company's GICs, as well as investment advisory
fees earned on assets under management.
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, Corporate Technology,
Corporate Finance, Human Resources and the Legal department.
Management evaluates the results of the aforementioned segments based on a
pre-tax and 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, which excludes these items, enhances its
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 11
<PAGE>
Summarized below is financial information with respect to business segments
for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions) 2000 1999
<S> <C> <C>
Segment revenues:
Risk Management $ 557.5 $ 521.3
------- -------
Asset Accumulation:
Allmerica Financial Services 228.3 204.7
Allmerica Asset Management 29.3 34.3
------- -------
Subtotal 257.6 239.0
------- -------
Corporate 1.0 1.2
Intersegment revenues (1.1) (1.4)
------- -------
Total segment revenues including Closed Block 815.0 760.1
Adjustments to segment revenues:
Adjustment for Closed Block (36.0) (35.7)
Net realized (losses) gains (46.8) 131.8
------- -------
Total revenues $ 732.2 $ 856.2
======= =======
Segment income (loss) before federal income taxes
and minority interest:
Risk Management $ 43.1 $ 29.8
Asset Accumulation:
Allmerica Financial Services 54.4 48.9
Allmerica Asset Management 5.1 5.7
------- -------
Subtotal 59.5 54.6
------- -------
Corporate (14.5) (16.0)
------- -------
Segment income before federal income taxes and
minority interest 88.1 68.4
Adjustments to segment income:
Net realized investment (losses) gains, net of
amortization (46.4) 134.1
------- -------
Income from continuing operations before
federal income taxes and minority interest $ 41.7 $ 202.5
======= =======
</TABLE>
<TABLE>
<CAPTION>
Identifiable Assets Deferred Acquisition
Costs
(Unaudited) (Unaudited)
March 31, December 31, March 31, December 31,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Risk Management $ 5,924.7 $ 5,869.0 $ 176.4 $ 173.3
-------- -------- -------- --------
Asset Accumulation
Allmerica Financial
Services 24,250.2 23,435.7 1,265.5 1,213.1
Allmerica Asset Management 1,635.6 1,387.6 0.3 0.4
-------- -------- -------- --------
Subtotal 25,885.8 24,823.3 1,265.8 1,213.5
Corporate 43.6 77.3 - -
-------- -------- -------- -------
Total $31,854.1 $30,769.6 $ 1,442.2 $ 1,386.8
======== ======== ======== ========
</TABLE>
Page 12
<PAGE>
9. Earnings Per Share
The following table provides share information used in the calculation of
the Company's basic and diluted earnings per share:
<TABLE>
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions, except per share data) 2000 1999
<S> <C> <C>
Basic shares used in the calculation of
earnings per share 53.9 57.3
Dilutive effect of securities:
Employee stock options 0.2 0.3
Non-vested stock grants 0.2 0.1
----- -----
Diluted shares used in the calculation
of earnings per share 54.3 57.7
===== =====
Per share effect of dilutive securities on
income from continuing operations $ - $ 0.02
===== =====
Per share effect of dilutive securities on
net income $ - $ 0.02
===== =====
</TABLE>
10. 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 13
<PAGE>
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 1999 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 AFC; First
Allmerica Financial Life Insurance Company ("FAFLIC"); its wholly-owned life
insurance subsidiary, Allmerica Financial Life Insurance and Annuity Company
("AFLIAC"); Allmerica Asset Management, Inc. ("AAM," a wholly-owned non-
insurance subsidiary of AFC); Allmerica Property & Casualty Companies, Inc.
("Allmerica P&C," a wholly-owned non-insurance subsidiary of AAM); The
Hanover Insurance Company ("Hanover," a wholly-owned subsidiary of Allmerica
P&C); Citizens Corporation (a wholly-owned non-insurance subsidiary of
Hanover); Citizens Insurance Company of America ("Citizens," a wholly-owned
subsidiary of Citizens Corporation) 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. A summary of the Company's reportable segments is
included below.
The Risk Management Segment manages its products through three distribution
channels identified as Standard Markets, Sponsored Markets, and Specialty
Markets. Standard Markets consists of the aggregate operating results for
the three channels previously characterized as Hanover North, Hanover South
and Citizens Midwest. 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 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 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 distributed via retail channels as well as group
retirement products, such as defined benefit and 401(k) plans and tax-
sheltered annuities distributed to institutions. Through its Allmerica Asset
Management segment, the Company offers its customers the option of investing
in Guaranteed Investment Contracts ("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 business 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.
Page 14
<PAGE>
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, Corporate Technology,
Corporate Finance, Human Resources and the Legal department.
Results of Operations
Consolidated Overview
Quarter Ended March 31, 2000 Compared to Quarter Ended March 31, 1999
The Company's consolidated net income for the first quarter decreased $123.9
million, or 80.4%, to $30.2 million, compared to the same period in 1999.
The reduction in net income resulted from net realized investment losses,
net of taxes, of $36.2 million in the first quarter of 2000, compared to
net realized investment gains, net of taxes, of $99.5 million in the same
period of the prior year, partially offset by increase in segment income,
discussed below. Net income 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,
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 its 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.
For purposes of assessing each segment's contribution to adjusted net
income, management evaluates the results of these segments on a pre-tax and
minority interest basis. The following table reflects each segment's
contribution to adjusted net income and reconciliation to consolidated net
income as adjusted for these items.
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions) 2000 1999
<S> <C> <C>
Segment income (loss) before federal
income taxes and minority interest:
Risk Management $ 43.1 $ 29.8
------ ------
Asset Accumulation
Allmerica Financial Services 54.4 48.9
Allmerica Asset Management 5.1 5.7
------ ------
Subtotal 59.5 54.6
Corporate (14.5) (16.0)
------- ------
Segment income before federal income
taxes and minority interest 88.1 68.4
Federal income taxes on segment income (17.7) (13.1)
Minority interest on preferred dividends (4.0) (4.0)
------ ------
Adjusted net income 66.4 51.3
Adjustments (net of taxes, minority interest
and amortization, as applicable):
Net realized investment (losses) gains (36.2) 99.5
------ ------
Income from continuing operations 30.2 150.8
Discontinued operations:
Income from operations of discontinued group
life and health business (net of applicable
taxes) - 3.3
------ ------
Net income $ 30.2 $ 154.1
====== ======
</TABLE>
Page 15
<PAGE>
The Company's segment income before taxes and minority interest increased
$19.7 million, or 28.8%, to $88.1 million in the first quarter of 2000.
This increase is attributable to increased income of $13.3 million from the
Risk Management segment, increased income from the Asset Accumulation group
of $4.9 million, and a decreased loss of $1.5 million in the Corporate
segment. The increase in the Risk Management segment was primarily
attributable to decreased catastrophe losses of $28.5 million, partially
offset by the absence of a 1999 favorable impact of $19.9 million related to
the whole account aggregate excess of loss reinsurance treaty ("aggregate
excess of loss reinsurance treaty") entered into in the first quarter of
1999. In addition, other operating expenses decreased $2.7 million, net of
a $5.1 million favorable impact from the aforementioned aggregate excess of
loss treaty. In accordance with the provisions of this contract, the Company
exercised its option to cancel this contract effective January 1, 2000.
Allmerica Financial Services increased $5.5 million, principally due to
higher asset-based fee income driven by growth in the variable annuity and
variable universal life product lines, net of related expenses. The
operating loss in the Corporate segment decreased primarily due to lower
corporate overhead costs. These items were partially offset by a decrease in
the Allmerica Asset Management segment income of $0.6 million principally due
to decreassed interest margins on GICs,partially offset by growth in income
from assets under management.
The effective tax rate for segment income was 20.1% for the first quarter
of 2000 compared to 19.2% for the first quarter of 1999. The increase in
the tax rate was principally driven by a decrease in tax exempt investment
income.
Net realized losses on investments, after taxes, were $36.2 million in the
first quarter of 2000, resulting 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 portfolios in order to increase yields.
In addition, the Company recognized $7.7 million in pre-tax realized losses
due to impairments of fixed maturities.During the first quarter of 1999, net
realized gains on investments, after taxes, and minority interest of $99.3
million resulted primarily from $101.9 million of net realized gains from
sales of $310.0 million of equity securities. This was partially offset by
net realized losses on fixed maturities of $9.1 million, including losses of
$16.8 million from impairments.
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:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions) 2000 1999
<S> <C> <C>
Revenues
Net premiums earned $ 497.0 $ 457.6
Net investment income 55.2 58.4
Other income 5.3 5.3
------ ------
Total operating revenue 557.5 521.3
Losses and operating expenses
Policy benefits, claims, losses
and loss adjustment expenses <FN1> 375.7 353.7
Policy acquisition expenses 92.1 88.5
Other operating expenses 46.6 49.3
------ ------
Total losses and operating expenses 514.4 491.5
------ ------
Segment income $ 43.1 $ 29.8
====== ======
<FN>
<FN1>
Includes policyholders' dividends of $2.7 million and $4.2 million for
the quarters ended March 31, 2000 and 1999, respectively.
</FN>
Page 16
<PAGE>
Three Months Ended March 31, 2000 Compared to Three Months Ended
March 31, 1999
Premium
Risk Management's net premiums earned increased $39.4 million, or 8.6%, to
$497.0 million during the first quarter of 2000. First quarter 1999 results
reflected a $25.4 million decrease in net premiums earned, resulting from
cessions under the aggregate excess of loss reinsurance treaty. Excluding
the impact of the reinsurance treaty, net premiums earned increased $14.0
million, or 2.9%. This is primarily attributable to increases of $5.8
million, or 12.8%, $3.3 million, or 7.0%, and $2.9 million, or 4.1% in the
workers' compensation, commercial automobile, and commercial multiple peril
lines, respectively. The increase in the workers' compensation line is the
result of an increase of 4.4% in policies in force since March 31, 1999 and
a 3.6% rate increase over prior year. In addition, commercial automobile
rates increased 3.3% over prior year and policies in force increased 3.0%
since March 31, 1999. The increase in the commercial multiple peril line is
primarily the result of an increase of 4.1% in policies in force since March
31, 1999. Also, homeowners' earned premium increased $2.3 million, or 3.6%,
resulting primarily from a 3.3% rate increase in the state of Michigan since
March 31, 1999. Partially offsetting these increases is a $1.2 million, or
.5%, decrease in personal automobile earned premiums as a result of a 7.3%
rate decrease in the state of Michigan offset by an 8.0% increase in
policies in forces in the Northeast since March 31, 1999.
Segment Income
Risk Management's segment income increased $13.3 million, or 44.6%, to
$43.1 million in the first quarter of 2000. A net benefit of $19.9 million
is included in 1999 segment income as a result of the aggregate excess of
loss reinsurance treaty. Excluding the impact from this treaty, the total
improvement of $33.2 million in segment income is primarily attributable to
a $28.5 million decrease in catastrophe losses to $15.2 million for the first
quarter of 2000, compared to $43.7 million for the same period in 1999. In
addition, other operating expenses decreased $2.7 million, net of a $5.1
million favorable impact from the aforementioned aggregate excess of loss
treaty. This decrease is primarily the result of continued efficiencies
gained through consolidation of underwriting processes. Partially offsetting
these favorable items is a $3.2 million decrease in net investment income to
$55.2 million, primarily due to a decrease in average invested assets.
The following table summarizes the results of operations for the distribution
channels of the Risk Management segment. Operating results for the
distribution channels represent statutory underwriting profit (loss).
Statutory underwriting results differ from GAAP underwriting results
primarily due to the deferral and amortization of certain expenses. Segment
income represents the aggregate of statutory underwriting results, GAAP net
investment income, other income and expenses, and other statutory to GAAP
adjustments.
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended March 31, 2000
Standard Sponsored Specialty
(In millions) Markets Markets Markets Other Total
<S> <C> <C> <C> <C> <C>
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
========
Statutory net
premiums written $ 369.2 $ 151.6 $ 6.4 $ 0.3 $ 527.5
------------------------------------------------
Statutory combined
ratio <FN1> 103.7 96.6 120.3 N/M 102.5
<FN>
<FN1>
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.
</FN>
</TABLE>
Page 17
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended March 31, 2000
Standard Sponsored Specialty
(In millions) Markets Markets Markets Other Total
<S> <C> <C> <C> <C> <C>
Statutory underwriting
(loss) $ (22.7) $ (5.1) $ (0.1) $ (1.1) $ (29.0)
----------------------------------------
Reconciliation to
segment income:
Net investment income 58.4
Other income and
expenses, net 1.9
Other Statutory
to GAAP adjustments (1.5)
--------
Segment income $ 29.8
Statutory net
premiums written $ 338.1 $ 127.7 $ 11.4 $ 0.4 $ 477.6
------------------------------------------------
Statutory combined
ratio <FN1> 105.4 102.9 108.5 N/M 105.1
<FN>
<FN1>
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.
</FN>
N/M - Not meaningful
</TABLE>
Standard Markets
Standard Markets' net premiums written increased $31.1 million, or 9.2%, to
$369.2 million for the first quarter of 2000. First quarter 1999 results
reflected a $12.9 million decrease in net premiums written, resulting from
cessions under the aforementioned aggregate excess of loss agreement.
Excluding the impact from this treaty, net premiums written increased $18.2
million, or 5.2%, resulting from increases of $5.8 million, or 12.4%, $4.7
million, or 6.7%, and $4.2 million, or 8.4%, in the commercial automobile,
commercial multiple peril, and workers' compensation lines, respectively.
The increase in the commercial automobile line is primarily the result of a
9.0% rate increase in the state of Michigan and an increase of 3.2% in
policies in force since March 31, 1999. In addition, commercial multiple
peril and workers' compensation policies in force increased 4.7% and 3.2%,
respectively, over prior year. Rate increases of 17.2% and 2.6% in the
states of Illinois and Michigan, respectively, also contributed to increased
workers' compensation net premiums written in the first quarter 2000. Also,
net premiums written increased $2.9 million, or 9.4%, and $0.7 million, or
0.5%, for the first quarter of 2000 in the homeowners' and personal
automobile lines, respectively. The increase in the homeowners' line is the
result of a 3.3% rate increase in the state of Michigan and a 2.1% increase
in policies in force in the Northeast since March 31, 1999. Personal
automobile net premiumss written increased primarily as a result of a 1.0%
rate increase in the state of Massachusetts over the same period in 1999.
Standard Markets' underwriting results improved $4.4 million, or 19.4%, to
an underwriting loss of $18.3 million for the first quarter of 2000. A net
benefit of $10.3 million is included in 1999 underwriting results relating to
the aggregate excess of loss reinsurance treaty. Excluding the impact from
this treaty, the total improvement of $14.7 million in underwriting results
is primarily attributable to a $9.8 million decrease in catastrophe losses
to $14.7 million for the first quarter of 2000, compared to $24.5 million
for the same period in 1999. In addition, an increase in favorable
development on prior years' loss reserves in the commercial automobile line,
and improved current year claims severity in the personal automobile line
contributed to the improvement in underwriting results. Partially
offsetting these favorable items is an increase in current year claims'
frequency in the workers' compensation line.
Sponsored Markets
Sponsored Markets' net premiums written increased $23.9 million, or 18.7%,
to $151.6 million for the first quarter of 2000. First quarter 1999 results
reflected a $12.3 million decrease in net premiums written, resulting from
cessions under the aforementioned aggregate excess of loss agreement.
Excluding the impact of this treaty, net premiums written increased $11.6
million, or 8.3%, primarily attributable to an $8.0 million, or 6.6%,
increase in the personal automobile line. This is primarily the result of
an increase of 3.4% in policies in force over the same period in 1999 and
the aforementioned rate increase in Massachusetts. In addition, homeowners'
net premiums written increased $1.8 million, primarily attributable to a
4.6% increase in policies in force and the aforementioned rate increase in
Michigan.
Page 18
<PAGE>
Sponsored Markets' underwriting results improved $7.1 million to an
underwriting profit of $2.0 million for the first quarter of 2000. A net
benefit of $9.6 million is included in 1999 underwriting results as a result
of the aggregate excess of loss reinsurance treaty. Excluding the impact
from this treaty, the total improvement of $16.7 million in underwriting
results is primarily attributable to an $18.7 million decrease in catastrophe
losses to $0.5 million in the first quarter of 2000, compared to $19.2
million for the same period in 1999. Partially offsetting the decrease in
catastrophe losses is an increase in non-catastrophe current year claims'
severity in the homeowners' line.
Specialty Markets
Specialty Markets' net premiums written decreased $5.0 million, or 43.9%, to
$6.4 million for the first quarter of 2000. This decrease is primarily
attributable to an increase in ceded premiums written as a result of greater
utilization of reinsurance. In addition, commercial multiple peril
policies in force experienced a 10.7% reduction since March 31, 1999. The
Company continually assesses the profitability of each individual program
and exits programs that do not meet established guidelines.
Specialty Markets' underwriting results deteriorated $1.2 million to an
underwriting loss of $1.3 million for the first quarter of 2000. The
deterioration in underwriting results is primarily the result of an increase
in current year claims' frequency in the commercial automobile line.
Investment Results
Net investment income before tax was $55.2 million and $58.4 million in the
first quarter of 2000 and 1999, respectively. This primarily reflects a
reduction in average invested assets of $359.9 million, or 8.9%, to $3,697.8
million in 2000, compared to $4,057.7 million in 1999. This reduction in
average invested assets is due to transfers of cash and securities of $350.0
million to the corporate segment during the second quarter of 1999. Average
pre-tax yields on debt securities increased to 6.7% in 2000, compared to
6.6% for 1999.
Reserve for Losses and Loss Adjustment Expenses
The Risk Management segment maintains reserves for its property & casualty
products to provide for the Company's 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 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 year such changes are determined to be needed
and recorded.
Page 19
<PAGE>
The table below provides a reconciliation of the beginning and ending
reserve for unpaid losses and LAE as follows:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions) 2000 1999
<S> <C> <C>
Reserve for losses and LAE, beginning of period $ 2,615.9 $ 2,597.3
Incurred losses and LAE, net of reinsurance
recoverable:
Provision for insured events of current year 416.7 397.0
Decrease in provision for insured events of
prior years (43.7) (46.7)
-------- --------
Total incurred losses and LAE 373.0 350.3
-------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events
of current year 119.5 139.3
Losses and LAE attributable to insured events
of prior years 246.7 229.5
-------- --------
Total payments 366.2 368.8
-------- --------
Change in reinsurance recoverable on unpaid
losses 2.0 34.6
-------- --------
Reserve for losses and LAE, end of period $ 2,624.7 $ 2,613.4
======== ========
</TABLE>
As part of an ongoing process, the reserves have been re-estimated for all
prior accident years and were decreased by $43.7 million and $46.7 million
for the first three months ended March 31, 2000 and 1999, respectively,
reflecting favorable development on reserves for both losses and loss
adjustment expenses.
Favorable development on prior years' loss reserves was $29.0 million and
$27.8 million for the three months ended March 31, 2000 and 1999,
respectively. This increase of $1.2 million is primarily due to improved
personal automobile results in the Northeast and commercial automobile
results in Michigan. Favorable development on prior year's loss adjustment
expense reserves was $14.7 million and $18.9 million for the first quarters
in 2000 and 1999, respectively. This favorable development in both periods
is primarily attributable to claims process improvement initiatives taken
by the Company over the past three years.
This favorable development reflects the Company's reserving philosophy
consistently applied over these periods. Conditions and trends that have
affected development of the loss and LAE reserves in the past may not
necessarily occur in the future.
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, 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.
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.
Reinsurance
The Risk Management segment maintains a reinsurance program designed to
protect against large or unusual losses and allocated LAE activity. This
includes excess of loss reinsurance and catastrophe reinsurance. The
Company determines the appropriate amount of reinsurance based on the
Company's evaluation of the risks accepted and analyses prepared by
consultants and reinsurers and on market conditions including the
availability and pricing of reinsurance. Reinsurance contracts do not
relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company.
The Company also believes that the terms of its reinsurance contracts are
consistent
Page 20
<PAGE>
with industry practice in that they contain standard terms with respect to
lines of business covered, limit and retention, arbitration and
occurrence. Based on its review of its reinsurers' financial statements and
reputations in the reinsurance marketplace, the Company believes that its
reinsurers are financially sound.
Catastrophe reinsurance serves to protect the ceding insurer from
significant aggregate losses arising from a single event such as windstorm,
hail, hurricane, tornado, riot or other extraordinary events. In 1999, the
Company retained $45.0 million of loss per occurrence, 10% of all aggregate
loss amounts in excess of $45.0 million up to $230.0 million and all amounts
in excess of $230.0 million under its catastrophe reinsurance program.
Effective January 1, 2000, the Company retains $45.0 million of loss per
hurricane occurrence and $25.0 million of loss per occurrence for all other
exposures, 10% of all aggregate loss amounts in excess of $45.0 million, or
$25.0 million for non-hurricane losses, up to $65.0 million, 20% of all
aggregate loss amounts in excess of $65.0 million up to $230.0 million and
all amounts in excess of $230.0 million under its catastrophe per occurrence
reinsurance program. Additionally, effective January 1, 2000, the Company
purchased a property catastrophe aggregate treaty which provides for 80% of
$50.0 million in the annual aggregate excess of $60.0 million in the annual
for catastrophe losses as defined by the Company. The Company's retention
will be calculated cumulatively, in the aggregate, on a quarterly basis with
the aggregate losses comprised of all catastrophe losses that exceed $0.5
million each and every loss occurrence. The maximum contribution from any
one-loss occurrence for the purposes of calculating the aggregate retention
will be $25.0 million.
Under the Company's casualty reinsurance program, the reinsurers are
responsible for 43% of the amount of each loss in excess of $0.5 million per
occurrence up to $0.5 million and 100% of the amount of each loss in excess
of $1.0 million per occurrence up to $30.5 million for general liability and
workers' compensation. Additionally, this reinsurance covers workers'
compensation losses in excess of $30.5 million to $60.5 million per
occurrence. Amounts in excess of $60.5 million, in the workers'
compensation line, are retained 100% by the Company, while amounts in excess
of $30.5 million, in the general liability line, are retained 100% by the
Company.
Effective January 1, 1999, the Company entered into a Whole Account
Aggregate Excess of Loss reinsurance. The reinsurance agreement provided
accident year coverage for the three years 1999 to 2001 for the Company's
property and casualty business, and is subject to cancellation or
commutation annually at the Company's option. The program covered losses and
allocated loss adjustment expenses ("LAE"), including those incurred but not
yet reported, in excess of a specified whole account loss and allocated LAE
ratio. The annual and aggregate coverage limits for losses and allocated
LAE were $150.0 million and $300.0 million, respectively. The effect of
this agreement on results of operations in each reporting period was based
on losses and allocated LAE ceded, reduced by a sliding scale premium of
50-67.5% depending on the size of the loss, and increased by a ceding
commission of 20% of ceded premium. In addition, net investment income is
reduced for amounts credited to the reinsurer. As a result of this
agreement, the Company recognized a net benefit of $15.9 million for the
year ended December 31, 1999, based on annual estimates of losses and
allocated loss adjustment expenses for accident year 1999. There has been
no material effect on operating results in 2000. In accordance with the
provisions of this contract, the Company has exercised its option to cancel
this contract effective January 1, 2000. No significant benefit or loss was
recognized in the first quarter of 2000. The effect of this agreement on
the results of operations in future periods is not currently determinable,
as it will be based both on future losses and allocated LAE for accident
year 1999.
The Company, in the Risk Management segment, is subject to concentration of
risk with respect to reinsurance ceded to various residual market mechanisms.
As a condition to the ability to conduct certain business in various states,
the Company is required to participate in various residual market mechanisms
and pooling arrangements which provide various insurance coverages to
individuals or other entities that are otherwise unable to purchase such
coverage voluntarily provided by private insurers. These market mechanisms
and pooling arrangement include the Massachusetts Commonwealth Automobile
Reinsurers (CAR) and the Michigan Catastrophic Claims Association (MCCA).
Page 21
<PAGE>
Asset Accumulation
Allmerica Financial Services
The following table summarizes the results of operations, including the
Closed Block, for the Allmerica Financial Services segment for the periods
indicated.
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions) 2000 1999
<S> <C> <C>
Segment revenues
Premiums $ 26.5 $ 27.9
Fees 102.5 82.9
Investment and other income 99.3 93.9
------ ------
Total segment revenues 228.3 204.7
Policy benefits, claims and losses 90.7 98.4
Policy acquisition and other operating expenses 83.2 57.4
------ ------
Segment income $ 54.4 $ 48.9
====== ======
</TABLE>
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999
Segment income increased $5.5 million, or 11.2%, to $54.4 million in the
first quarter of 2000. This increase is primarily attributable to higher
asset-based fee income driven by growth in the variable annuity and variable
universal life product lines, partially offset by higher policy acquisition
and other operating expenses.
Segment revenues increased $23.6 million, or 11.5%, in 2000 primarily due to
increased fees and other income. Fee income from annuities and individual
variable universal life policies increased $18.4 million, or 30.8%, in the
first quarter of 2000 primarily due to market appreciation and additional
deposits. Market appreciation generated approximately $10.6 million of this
growth, while new deposits and surrender charges generated approximately
$4.0 million and $3.8 million, respectively. The growth in annuity deposits
resulted from the introduction of a "bonus" product in the fourth quarter of
1999, which provides cash back to the policyholder in the form of a credit
applied to the policyholder's account value. Sales of bonus annuities, which
totaled $339.5 million in the first quarter of 2000, were partially offset by
a decrease in traditional annuity sales at two specific third party mutual
fund advisors within the broker-dealer and financial planner distribution
channels. In addition, investment and other income increased $5.4 million
primarily due to higher investment management fees and brokerage income
resulting from appreciation and growth in variable product assets under
management. These increases were partially offset by a $3.6 million decline
in net investment income principally due to lower mortgage loan and
partnership income. Additionally, net investment income declined due to a
reduction in average invested assets resulting from transfers to the separate
accounts in the annuity and group retirement product lines, as well as
cancellations of certain accounts in the group retirement business.
Policy benefits, claims and losses decreased $7.7 million, or 7.8%, to $90.7
million in the first quarter of 2000. This decrease is primarily
attributable to the absence of a $5.4 million mortality reserve established
in the variable annuity line of business during the first quarter of 1999.
In addition, lower policy benefits resulted from a reduction in policies in
force in the universal life product line, as well as decreased interest
credited due to the aforementioned transfers to the separate accounts and
cancellations in the group retirement business.
Policy acquisition and other operating expenses increased $25.8 million, or
44.9%, in the first quarter of 2000. This increase primarily reflects the
absence of a one-time increase to the deferred acquisition cost asset of
$13.5 million in 1999 resulting from the implementation of an enhanced
valuation system for the annuity line of business. Also, the increase in
policy acquisition and other operating expenses reflects growth in the
individual variable annuity, variable universal life, and brokerage and
investment management product lines. Policy acquisition costs in 2000
include additional amortization of approximately $3.5 million related to
increased surrenders.
Page 22
<PAGE>
Statutory Premiums and Deposits
The following table sets forth statutory premiums and deposits by product
for the Allmerica Financial Services segment.
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
March 31,
(In millions) 2000 1999
<S> <C> <C>
Insurance:
Traditional life $ 29.8 $ 31.4
Universal life 17.9 16.7
Variable universal life 51.2 45.3
Individual health 0.1 0.1
Group variable universal life 11.5 10.4
-------- --------
Total insurance 110.5 103.9
-------- --------
Annuities:
Separate account annuities 678.9 498.6
General account annuities 138.7 210.3
Retirement investment accounts 3.5 5.9
-------- --------
Total individual annuities 821.1 714.8
Group annuities 168.6 82.1
-------- --------
Total annuities 989.7 796.9
-------- --------
Total premiums and deposits $ 1,100.2 $ 900.8
======== ========
</TABLE>
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999
For the three months ended March 31, 2000, total premiums and deposits
increased $199.4 million, or 22.1%, to $1,100.2 million. This increase is
primarily due to higher separate account and group annuity deposits,
partially offset by a decline in general account annuity deposits. The
growth in individual separate account annuity deposits results from the
aforementioned introduction of a bonus product in the fourth quarter of
1999, partially offset by a decrease in traditional annuity sales at two
specific third party mutual fund advisors within the broker-dealer and
financial planner distribution channels. The bonus annuity product is
primarily distributed through third party mutual fund advisors and the
broker-dealer distribution channels. In addition, group annuity deposits
increased in the first quarter of 2000 due to new sales and additional
business from existing contracts. These increases were partially offset by
lower deposits from general account annuities due to the decreased
utilization of an annuity program introduced in 1998, which provided for a
limited time, enhanced crediting rates on deposits made into the Company's
general account and transferred ratably over a period of time into the
Company's separate accounts.
Allmerica Asset Management
The following table summarizes the results of operations for the Allmerica
Asset Management segment for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions) 2000 1999
<S> <C> <C>
Interest margins on GICs
Net investment income $ 26.4 $ 31.4
Interest credited 22.4 26.6
------ ------
Net interest margin 4.0 4.8
------ ------
Other income and expenses
External fees and other income 1.6 1.4
Internal fees and other income 1.3 1.5
Other operating expenses 1.8 2.0
------ ------
Segment income $ 5.1 $ 5.7
====== ======
</TABLE>
Page 23
<PAGE>
Three Months Ended March 31, 2000 compared to Three Months Ended March 31,
1999
Segment income decreased $0.6 million, or 10.5%, to $5.1 million in the first
quarter of 2000. This decline primarily reflects decreased interest margins
on GICs, partially offset by growth in income from assets under management as
a result of increased business from existing money market and other external
fixed income fund clients. Interest margins on GICs decreased $0.8 million
primarily due to short-term funding agreement withdrawals during the fourth
quarter of 1999. These withdrawals reflected uncertainties in the market
resulting in greater redemptions for the industry overall. Management
expects income from the GIC product line to be unfavorably impacted in
future periods due to withdrawals experienced during the fourth quarter of
1999 and a diminished market for short-term funding agreement products.
Corporate
The following table summarizes the results of operations for the Corporate
segment for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions) 2000 1999
<S> <C> <C>
Segment revenues
Net investment income $ 1.0 $ 1.2
Interest expense 3.8 3.8
Other operating expenses 11.7 13.4
------ ------
Segment loss $ (14.5) $ (16.0)
====== ======
</TABLE>
Three Months Ended March 31, 2000 compared to Three Months Ended March 31,
1999
Segment loss decreased $1.5 million, or 9.4%, to $14.5 million in the first
quarter of 2000 primarily due to lower corporate overhead costs, partially
offset by a reduction in net investment income. Other operating expenses
consist primarily of corporate overhead expenses, which reflect costs not
attributable to a particular segment, such as those generated by certain
officers and directors, Corporate Technology, Corporate Finance, Human
Resources and the Legal department. Other operating expenses declined $1.7
million, primarily due to lower fringe benefit and Corporate Finance costs.
The reduction in net investment income of $0.2 million primarily reflects
lower average invested assets resulting from investment sales used to fund
the Company's stock repurchase program.
Interest expense for both periods relates solely to the interest paid on the
Senior Debentures of the Company.
Investment Portfolio
The Company had investment assets diversified across several asset classes,
as follows:
<TABLE>
<CAPTION>
(Unaudited)
March 31, 2000 December 31, 1999
<FN1> <FN1>
Carrying % of Total Carrying % of Total
(Dollars in millions) Value Carrying Value Value Carrying Value
<S> <C> <C> <C> <C>
Fixed maturities <FN2> $ 7,602.7 82.9% $ 7,306.7 80.6%
Equity securities <FN2> 77.7 0.8 83.2 0.9
Mortgages 642.0 7.0 657.5 7.3
Policy loans 372.5 4.1 371.6 4.1
Cash and cash equivalents 300.7 3.3 464.8 5.1
Real estate and other
invested assets 176.6 1.9 180.0 2.0
-------- ------ -------- ------
Total $ 9,172.2 100.0% $ 9,063.8 100.0%
======== ====== ======== ======
<FN>
<FN1>
Includes Closed Block invested assets with a carrying value of $721.8
million and $732.9 million at March 31, 2000 and December 31, 1999,
respectively.
<FN2> The Company carries the fixed maturities and equity securities in its
investment portfolio at market value.
</FN>
</TABLE>
Page 24
<PAGE>
Total investment assets increased $108.4 million, or 1.2%, to $9.2 billion
during the first quarter of 2000. This increase resulted primarily from
increased fixed maturities of $296.0 million, partially offset by decreases
of $164.1 million of cash and cash equivalents and $15.5 million of mortgage
loans. The increase in fixed maturities is principally due to purchases made
to support new long term funding agreement deposits. The decrease in cash
and cash equivalents is due to reduced cash flow from operations and the
repurchase of AFC common stock under the stock repurchase program. In
addition, the decrease in mortgages is principally due to loan repayments.
The Company anticipates that this trend will continue, as it has
discontinued originating new mortgages.
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 85.2% and 84.4% of the Company's total fixed maturity
portfolio at March 31, 2000 and December 31, 1999, respectively. The average
yield on debt securities was 7.3% and 7.1% for the three months ended March
31, 2000 and 1999, 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.
Provision for federal income taxes before minority interest and discontinued
operations was $7.5 million during the first quarter of 2000 compared to
$47.7 million during the same period in 1999. These provisions resulted in
consolidated effective federal tax rates of 18.0% and 23.6%, respectively.
The decrease in the rate is primarily due to capital losses in 2000 versus
capital gains in 1999 and an increase in the proportion of tax-exempt
interest income to the pre-tax income in 2000. Although total tax-exempt
interest income decreased to $29.9 million in 2000 versus $33.5 million in
1999, its percentage of anticipated pre-tax income increased as a result of
the aforementioned capital losses.
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 2000,
AFC did not receive significant dividend payments from its insurance
subsidiaries.
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 used in operating activities was $103.0 million during the first
quarter of 2000, compared to cash provided by operating activities of $38.0
million for the same period of 1999. The increased use of cash year over year
is primarily the result of the cancellation and subsequent redemption of
approximately $126.0 million in pension contracts. In addition,
approximately $28.0 million in accrued commissions were paid on the Company's
property and casualty products during the first quarter of 2000. Partially
offsetting these uses of cash was the receipt of approximately $11.0 million
by the Company for income tax refunds.
Net cash used in investing activities was $282.2 million during the first
three months of 2000, compared to $123.5 million during the same period in
1999. The current year use of cash was primarily caused by increased
purchases of fixed maturities resulting from GIC product sales. The change
over the prior year is due primarily to relatively flat net proceeds from
purchases and sales of equity securities in the current quarter as compared
to net sales of $304.5 million for the same period in 1999.
Page 25
<PAGE>
Net cash provided by financing activities was $221.1 million during the first
three months of 2000, as compared to $21.8 million during the comparable
prior year period. The change in 2000 is due primarily to the absence of a
$150.0 million repayment of short term debt which occurred during the first
quarter of 1999, and a $90.0 million year over year reduction in cash used
for the Company's share repurchase program. These changes were partially
offset by a decrease in net funding agreement deposits of $41.6 million
during the first three months of 2000 as compared to the same period in 1999.
AFC has sufficient funds at the holding company or available through
dividends from FAFLIC and Allmerica P&C 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
administering a dividend program 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, 2000. The Company
intends 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, as designated base rate or the eurodollar rate plus applicable
margin. At March 31, 2000, no amounts were outstanding under this agreement.
The Company had $48.4 million of commercial paper borrowings outstanding at
March 31, 2000. AFC had no repurchase agreements outstanding as of
March 31, 2000.
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 10 "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.
Page 26
<PAGE>
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 2000 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, 1999.
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) higher service, administrative, or
general expense due to the need for additional advertising, marketing,
administrative or management information systems expenditures; (viii) loss
or retirement of key executives; (ix) increases in medical costs, including
increases in utilization, costs of medical services, pharmaceuticals,
durable medical equipment and other covered items; (x) termination of
provider contracts or renegotiations at less cost-effective rates or terms
of payment; (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, A.M. Best, and Duff & Phelps; (xiv) lower appreciation on and
decline in value of managed investments, resulting in reduced variable
products, assets and related fees; (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 and (xx) adverse results of regulatory audits related to
the Company's prior years' federal income tax filings.
Page 27
<PAGE>
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
EX - 27 Financial Data Schedule
(b) Reports on Form 8K
On February 3, 2000, Allmerica Financial Corporation announced its
financial results for the fourth quarter 1999. A copy of Allmerica
Financial Corporation's Fourth Quarter Statistical Supplement is attached to
the filing as Exhibit 99.1.
On March 21, 2000, Allmerica Financial Corporation announced that the
Company's board of directors has authorized the expenditure of up to an
additional $100 million to repurchase outstanding shares of its own common
stock in an ongoing stock repurchase program.
Page 28
<PAGE>
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 12, 2000
/S/ John F. O'Brien
------------------------------------------
John F. O'Brien
President and Chief Executive Officer
Dated May 12, 2000
/S/ Edward J. Parry III
------------------------------------------
Edward J. Parry III
Vice President and Chief Financial Officer
Page 29
<PAGE>
EXHIBIT INDEX
Exhibit Number Exhibit Page
27 Financial Data Schedule -
Page 30
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This Schedule contains summary financial information extracted from the
Consolidated Financial Statements of Allmerica Financial Corporation as of
March 31, 2000 and for the period then ended, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 7212
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 78
<MORTGAGE> 507
<REAL-ESTATE> 177
<TOTAL-INVEST> 8148
<CASH> 303
<RECOVER-REINSURE> 1277
<DEFERRED-ACQUISITION> 1442
<TOTAL-ASSETS> 31854
<POLICY-LOSSES> 2726
<UNEARNED-PREMIUMS> 921
<POLICY-OTHER> 2833
<POLICY-HOLDER-FUNDS> 2216
<NOTES-PAYABLE> 248
300
0
<COMMON> 1
<OTHER-SE> 2267
<TOTAL-LIABILITY-AND-EQUITY> 31854
498
<INVESTMENT-INCOME> 142
<INVESTMENT-GAINS> (47)
<OTHER-INCOME> 37
<BENEFITS> 453
<UNDERWRITING-AMORTIZATION> 117
<UNDERWRITING-OTHER> 120
<INCOME-PRETAX> 42
<INCOME-TAX> 8
<INCOME-CONTINUING> 30
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30
<EPS-BASIC> 0.56
<EPS-DILUTED> 0.56
<RESERVE-OPEN> 2616
<PROVISION-CURRENT> 417
<PROVISION-PRIOR> (44)
<PAYMENTS-CURRENT> 120
<PAYMENTS-PRIOR> 247
<RESERVE-CLOSE> 2624
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
