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: September 30, 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: 53,135,446 shares
of common stock outstanding, as of November 1, 2000.
36
Total Number of Pages Included in This Document
Exhibit Index is on Page 37
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 8-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-34
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 35
SIGNATURES 36
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
(In millions, except per share data) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES
Premiums $527.4 $499.9 $1,545.0 $1,452.9
Universal life and investment
product policy fees 110.9 91.4 316.1 262.9
Net investment income 152.3 157.3 441.2 469.8
Net realized investment (losses)
gains (30.7) (19.8) (97.9) 106.5
Other income 34.1 32.9 107.6 90.6
-------------- ------------------
Total revenues 794.0 761.7 2,312.0 2,382.7
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and
loss adjustment expenses 479.7 451.8 1,395.3 1,335.2
Policy acquisition expenses 107.8 111.9 339.9 316.5
Other operating expenses 126.9 120.5 375.2 358.2
Restructuring costs 0.0 0.0 20.3 0.0
-------------- ------------------
Total benefits, losses and expenses 714.4 684.2 2,130.7 2,009.9
-------------- ------------------
Income from continuing operations
before federal income taxes 79.6 77.5 181.3 372.8
-------------- ------------------
Federal income tax expense:
Current 6.7 9.5 1.5 82.7
Deferred 6.4 4.9 27.5 1.4
-------------- ------------------
Total federal income tax expense 13.1 14.4 29.0 84.1
-------------- ------------------
Income from continuing operations
before minority interest 66.5 63.1 152.3 288.7
Minority interest:
Distributions on mandatorily
redeemable preferred securities
of a subsidiary trust holding
solely junior subordinated
debentures of the Company (4.0) (4.0) (12.0) (12.0)
--------------- -------------------
Income from continuing operations 62.5 59.1 140.3 276.7
Loss from operations of discontinued
business (less applicable income
tax benefit of $8.4 for the quarter
ended September 30, 1999 and $10.1
for the nine months ended September
30, 1999) 0.0 (15.5) 0.0 (18.8)
Loss on disposal of group life and
health business, including provision
of $73.0 for operating losses during
phase-out period for the quarter and
nine months ended September 30, 1999
(less applicable income tax benefit
of $16.4) 0.0 (30.5) 0.0 (30.5)
--------------- -------------------
Net income $ 62.5 $ 13.1 $ 140.3 $ 227.4
=============== ===================
PER SHARE DATA
Basic
Income from continuing operations $ 1.18 $ 1.09 $ 2.62 $ 5.00
Loss from operations of discontinued
business (less applicable income
tax benefit of $0.15 for the quarter
ended September 30, 1999 and $0.18
for the nine months ended September
30, 1999) 0.00 (0.29) 0.00 (0.34)
Loss on disposal of group life and
health business, including provision
of $1.35 and $1.32 for operating
losses during phase-out period for
the quarter and nine months ended
September 30, 1999, (less applicable
income tax benefit of $0.30 for the
quarter and nine months ended
September 30, 1999) 0.00 (0.56) 0.00 (0.55)
--------------- ------------------
Net income $ 1.18 $ 0.24 $ 2.62 $ 4.11
=============== ==================
Weighted average shares outstanding 53.1 54.1 53.5 55.3
=============== ==================
Diluted
Income from continuing operations $ 1.16 $ 1.08 $ 2.59 $ 4.96
Loss from operations of discontinued
business (less applicable income tax
benefit of $0.15 for the quarter
ended September 30, 1999 and $0.18
for the nine months ended September
30, 1999) 0.00 (0.28) 0.00 (0.34)
Loss on disposal of group life and
health business, including provision
of $1.33 and $1.31 for operating
losses during phase-out period for
the quarter and nine months ended
September 30, 1999, (less applicable
income tax benefit of $0.30 and $0.29
for the quarter and nine months ended
September 30, 1999) 0.00 (0.56) 0.00 (0.55)
--------------- ------------------
Net income $ 1.16 $ 0.24 $ 2.59 $ 4.07
=============== ==================
Weighted average shares outstanding 53.9 54.7 54.1 55.8
=============== ==================
Dividends declared to shareholders $ 0.25 $ 0.25 $ 0.25 $ 0.25
=============== ==================
</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)
September 30, December 31,
(In millions, except per share data) 2000 1999
<S> <C> <C>
ASSETS
Investments:
Fixed maturities-at fair value (amortized
cost of $7,726.8 and $7,095.0) $ 7,644.4 $ 6,933.8
Equity securities-at fair value (cost of
$56.5 and $49.5) 82.2 83.2
Mortgage loans 489.9 521.2
Policy loans 185.3 170.5
Other long-term investments 195.2 180.0
--------- ---------
Total investments 8,597.0 7,888.7
--------- ---------
Cash and cash equivalents 305.5 442.2
Accrued investment income 134.4 134.7
Premiums, accounts and notes receivable, net 634.5 583.5
Reinsurance receivable on paid and unpaid
losses, benefits and unearned premiums 1,306.6 1,279.9
Deferred policy acquisition costs 1,556.2 1,386.8
Deferred federal income taxes 90.8 141.7
Other assets 573.7 510.2
Closed Block assets 776.0 772.3
Separate account assets 18,660.1 17,629.6
--------- ---------
Total assets $32,634.8 $30,769.6
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $ 2,894.6 $ 2,825.0
Outstanding claims, losses and loss
adjustment expenses 2,827.4 2,838.6
Unearned premiums 1,001.6 890.2
Contractholder deposit funds and other
policy liabilities 2,066.2 2,041.0
--------- ---------
Total policy liabilities and accruals 8,789.8 8,594.8
--------- ---------
Expenses and taxes payable 795.0 795.5
Reinsurance premiums payable 91.2 73.0
Trust instruments supported by funding
obligations 546.8 50.6
Short-term debt 53.9 45.0
Long-term debt 199.5 199.5
Closed Block liabilities 842.1 842.1
Separate account liabilities 18,659.2 17,628.9
--------- ---------
Total liabilities 29,977.5 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 0.0 0.0
Common stock, $0.01 par value,
300.0 million shares authorized,
60.4 million shares issued 0.6 0.6
Additional paid-in capital 1,764.1 1,770.5
Accumulated other comprehensive income (36.3) (75.3)
Retained earnings 1,009.1 882.2
Treasury stock at cost (7.1 million and
6.2 million shares) (380.2) (337.8)
---------- ----------
Total shareholders' equity 2,357.3 2,240.2
---------- ----------
Total liabilities and shareholders' equity $32,634.8 $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)
Nine Months Ended
September 30,
(In millions) 2000 1999
<S> <C> <C>
PREFERRED STOCK
Balance at beginning and end of period $ 0.0 $ 0.0
--------- ---------
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 1.3
Unearned compensation related to restricted
stock (7.0) 2.8
--------- ---------
Balance at end of period 1,764.1 1,772.9
--------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME
NET UNREALIZED APPRECIATION (DEPRECIATION) ON
INVESTMENTS
Balance at beginning of period (75.3) 180.5
Net appreciation (depreciation) on
available-for-sale securities 59.9 (368.4)
(Provision) benefit for deferred federal
income taxes (20.9) 139.3
--------- ---------
Other comprehensive gain (loss) 39.0 (229.1)
--------- ---------
Balance at end of period (36.3) (48.6)
--------- ---------
RETAINED EARNINGS
Balance at beginning of period 882.2 599.9
Net income 140.3 227.4
Dividends to shareholders (13.4) (13.5)
--------- ---------
Balance at end of period 1,009.1 813.8
--------- ---------
TREASURY STOCK
Balance at beginning of period (337.8) (91.2)
Shares purchased at cost (61.3) (250.2)
Shares reissued at cost 18.9 2.4
--------- ---------
Balance at end of period (380.2) (339.0)
--------- ---------
Total shareholders' equity $2,357.3 $2,199.7
========= =========
</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) Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net income $ 62.5 $ 13.1 $140.3 $227.4
Other comprehensive income:
Net appreciation (depreciation) on
available-for-sale securities 42.3 (94.4) 59.9 (368.4)
(Provision) benefit for deferred
federal income taxes (14.9) 43.5 (20.9) 139.3
------- ------ ------- -------
Other comprehensive income (loss) 27.4 (50.9) 39.0 (229.1)
------- ------ ------- -------
Comprehensive income (loss) $ 89.9 $(37.8) $179.3 $ (1.7)
======= ====== ======= =======
</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)
Nine Months Ended
September 30,
(In millions) 2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 140.3 $ 227.4
Adjustments to reconcile net income to net
cash provided by operating activities:
Net realized investment losses (gains) 102.6 (106.3)
Net amortization and depreciation 18.4 25.8
Loss on disposal of group life and health
business 0.0 30.5
Deferred federal income taxes 29.8 1.4
Change in deferred acquisition costs (179.2) (140.0)
Change in premiums and notes receivable,
net of reinsurance payable (32.5) (92.1)
Change in accrued investment income (0.2) 14.0
Change in policy liabilities and accruals, net 150.4 157.8
Change in reinsurance receivable (26.5) (69.0)
Change in expenses and taxes payable 2.8 (50.5)
Separate account activity, net (0.2) 5.4
Other, net (8.2) 10.9
--------- ---------
Net cash provided by operating activities 197.5 15.3
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities 2,321.2 2,281.1
Proceeds from disposals of equity securities 11.8 376.9
Proceeds from disposals of other investments 31.5 27.3
Proceeds from mortgages matured or collected 83.0 86.5
Purchase of available-for-sale fixed
maturities (3,056.7) (2,065.9)
Purchase of equity securities (16.1) (71.5)
Purchase of other investments (118.2) (113.8)
Purchase of company owned life insurance (64.9) 0.0
Capital expenditures (8.4) (24.0)
Other, net (0.1) 0.0
--------- ---------
Net cash (used in) provided by
investing activities (816.9) 496.6
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds 588.1 1,368.0
Withdrawals from contractholder deposit
funds (561.1) (1,014.8)
Change in trust instruments supported by
funding obligations 496.2 0.0
Change in short-term debt 8.9 (177.5)
Proceeds from issuance of common stock 0.6 1.3
Treasury stock purchased at cost (58.9) (250.2)
Treasury stock reissued at cost 18.9 2.4
Other, net (1.1) (1.1)
--------- ---------
Net cash provided by (used in)
financing activities 491.6 (71.9)
--------- ---------
Net change in cash and cash equivalents (127.8) 440.0
Net change in cash held in the Closed Block (8.9) 9.0
Cash and cash equivalents, beginning of period 442.2 550.3
--------- ---------
Cash and cash equivalents, end of period $ 305.5 $ 999.3
========= =========
</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 non-insurance 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 nine months ended September 30, 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 March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an interpretation of APB
Opinion No. 25" ("FIN 44" or "the Interpretation"). FIN 44 clarifies the
application of APB Opinion No. 25 regarding the definition of employee, the
criteria for determining a noncompensatory plan, the accounting for changes
to the terms of a previously fixed stock option or award, the accounting for
an exchange of stock compensation awards in a business combination, and other
stock compensation related issues. FIN 44 became effective July 1, 2000,
with respect to new awards, modifications to outstanding awards, and changes
in grantee status that occur on or after that date. In addition, the
Interpretation covers certain events occurring between December 16, 1998
and the July effective date, as well as certain other events occurring
between January 13, 2000 and the July effective date. To the extent that
applicable events occurred in those periods, the effects of applying the
Interpretation are recognized on a prospective basis beginning July 1,
2000. The adoption of FIN 44 did not have a material impact on the
Company's financial position or results of operations.
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 all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on the type of hedge transaction. For fair value hedge
transactions in which the Company is hedging changes in an asset's,
liability's or firm commitments's fair value, changes in the fair value of
the derivative instruments will generally be offset in the income statement
by changes in the hedged item's fair value. For cash flow hedge
transactions, in which the Company is hedging the variability of cash flows
related to a variable rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in
other comprehensive income. The gains and losses on the derivative
instrument that are reported in other comprehensive income will be
reclassified into earnings in the periods in which earnings are impacted by
the variability of the cash flows of the hedged item. To the extent any
hedges are determined to be ineffecive, all or a portion of the change in
value of the derivative will be recognized currently in earnings. This
statement is effective for fiscal years beginning after June 15, 2000. The
Company has not yet determined the impact that the adoption of Statement No.
133 will have on the Company's results of operations or its financial
position.
Page 8
<PAGE>
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 premiums in the reinsurance pool business, subject to
certain contractual obligations. Prior to 1999, these businesses comprised
substantially all of the former Corporate Risk Management Services segment.
Accordingly, the operating results of the discontinued segment, including
its reinsurance pool business, have been reported in the Consolidated
Statements of Income as discontinued operations in accordance with
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB Opinion No. 30"). In the third quarter of 1999, the
operating results from the discontinued segment were adjusted to reflect the
recording of additional reserves related to accident claims from prior years.
The Company also recorded a $30.5 million loss, net of taxes, on the disposal
of this segment, consisting of after tax losses from the run-off of the group
life and health business of approximately $47.4 million, partially offset by
net proceeds from the sale of the EBS business of approximately $16.9
million. Subsequent to a measurement date of June 30, 1999, approximately
$27.5 million of the aforementioned $47.4 million loss has been generated
from the operations of the discontinued business.
In March of 2000, the Company transferred its EBS business to Great-West
Life and Annuity Insurance Company of Denver and received consideration of
approximately $22 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, the Company retained policy liabilities
estimated at $173.5 million at September 30, 2000 related to this business.
As permitted by APB Opinion No. 30, the Consolidated Balance Sheets have not
been segregated between continuing and discontinued operations. At September
30, 2000, the discontinued segment had assets of approximately $505.1 million
consisting primarily of invested assets, premiums and fees receivable, and
reinsurance recoverables, and liabilities of approximately $419.8 million
consisting primarily of policy liabilities. Revenues for the discontinued
operations were $39.0 million and $91.9 million for the quarters ended
September 30, 2000 and 1999, respectively, and $174.7 million and $279.0
million for the nine months ended September 30, 2000 and 1999, respectively.
4. Significant Transactions
As of September 30, 2000, the Company has repurchased approximately $391.8
million, or approximately 7.3 million shares, of its common stock under
programs authorized by the Board of Directors (the "Board"). The Company
repurchased approximately 1.2 million shares at cost of approximately $58.9
million in 2000 while share repurchases were approximately 4.5 million at a
cost of approximately $250.2 million in 1999. As of September 30, 2000, the
Board had authorized total stock repurchases of $500.0 million, leaving
approximately $108.2 million available to the Company for future
repurchases.
During the second quarter of 2000, the Company adopted a formal company-wide
restructuring plan. This plan is the result of a corporate initiative that
began in the fall of 1999, intended to reduce expenses and enhance revenues.
As a result of the Company's restructuring plan, it recognized a pre-tax
charge of $21.0 million during the second quarter of 2000 as reflected in
restructuring costs in the Consolidated Statements of Income. Approximately
$4.6 million of this charge relates to severance and other employee
related costs resulting from the elimination of approximately 360 positions,
of which 160 have been eliminated as of September 30, 2000. All levels of
employees, from staff to senior management, were affected by the
restructuring. In addition, approximately $16.4 million of this charge
relates to other restructuring costs, consisting of one-time project costs,
lease cancellations and the present value of idle leased space. As of
September 30, 2000, the Company has made payments of approximately $12.5
million related to this restructuring plan, of which approximately $2.0
million relates to severance and other employee related costs.
On October 29, 1998, the Company announced that it had adopted a formal
restructuring plan for its Risk Management segment. As a result of this
restructuring initiative, the Company recognized a pre-tax loss of $9.0
million in 1998. This loss was reduced by $1.9 million and $0.7 million
during the fourth quarter of 1999 and the second quarter of 2000,
respectively. The $1.9 million reduction resulted from the reinstatement of
66 positions, whereas the $0.7 million reduction resulted from anticipated
idle lease space subsequently utilized. Payments of approximately $0.5
million, $4.8 million and $0.1 million have been made by the Company in 2000,
1999 and 1998, respectively.
Page 9
<PAGE>
5. Federal Income Taxes
Federal income tax expense for the nine months ended September 30, 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 Statements of Comprehensive Income:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Nine Months Ended
September 30 September 30
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period (net of income
taxes (benefit) of $4.4 million and
$(48.2) million for the quarters
ended September 30, 2000 and 1999 and
$(12.5) million and $(109.2) million
for the nine months ended September
30, 2000 and 1999) $10.9 $(67.0) $(36.0) $(156.0)
Less: reclassification adjustment
for (losses) gains included in net
income (net of income taxes (benefit)
of $(10.5) million and $(4.7) million
for the quarters ended September 30,
2000 and 1999 and $(33.4) million and
$30.1 million for the nine months
ended September 30, 2000 and 1999) (16.5) (16.1) (75.0) 73.1
------- ------- ------- --------
Other comprehensive income (loss) $ 27.4 $(50.9) $ 39.0 $(229.1)
======= ======= ======= ========
</TABLE>
7. Closed Block
Included in other income in the Consolidated Statements of Income is a net
pre-tax (loss) contribution from the Closed Block of $(1.1) million and $3.7
million for the third quarter and nine months ended September 30, 2000,
respectively, compared to $3.3 million and $10.4 million for the third
quarter and nine months ended September 30, 1999, respectively. Summarized
financial information of the Closed Block is as follows:
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
(In millions) 2000 1999
<S> <C> <C>
ASSETS
Fixed maturities-at fair value
(amortized cost of $381.9 and $387.4) $ 371.4 $ 372.9
Mortgage loans 148.9 136.3
Policy loans 195.2 201.1
Cash and cash equivalents 31.5 22.6
Accrued investment income 14.5 14.0
Deferred policy acquisition costs 11.4 13.1
Other assets 3.1 12.3
-------- ---------
Total assets $ 776.0 $ 772.3
======== =========
LIABILITIES
Policy liabilities and accruals $ 826.5 $ 835.2
Other liabilities 15.6 6.9
-------- ---------
Total liabilities $ 842.1 $ 842.1
======== =========
</TABLE>
Page 10
<PAGE>
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Nine Months Ended
September 30 September 30
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 7.7 $ 8.0 $42.0 $43.6
Net investment income 13.1 13.9 40.1 40.5
Net realized investment losses (1.1) (0.7) (4.7) (0.2)
------ ------ ------ ------
Total revenues 19.7 21.2 77.4 83.9
------ ------ ------ ------
BENEFITS AND EXPENSES
Policy benefits 20.2 17.2 71.9 71.6
Policy acquisition expenses 0.5 0.6 1.5 1.7
Other operating expenses 0.1 0.1 0.3 0.2
------ ------ ------ ------
Total benefits and expenses 20.8 17.9 73.7 73.5
------ ------ ------ ------
(Loss) contribution from the
Closed Block $(1.1) $ 3.3 $ 3.7 $10.4
====== ====== ====== ======
</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.
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 property and casualty products to members
of affinity groups and other organizations. This distribution channel also
focuses on worksite distribution, which offers discounted property and
casualty (automobile and homeowners) insurance through employer
sponsored programs. Specialty Markets offers specialty or program property
and casualty business nationwide. This channel focuses on niche classes of
risks and leverages specific underwriting processes.
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 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.
Page 11
<PAGE>
The Asset Accumulation group includes two segments: Allmerica Financial
Services and Allmerica Asset Management. The Allmerica Financial Services
segment includes variable annuities, variable universal life and traditional
life insurance products, as well as group retirement products, such as
defined benefit and 401(k) plans and tax-sheltered annuities. Through its
Allmerica Asset Management segment, the Company offers its customers the
option of investing in 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 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. 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, technology, finance,
human resources and legal.
Management evaluates the results of the aforementioned segments based on a
pre-tax and pre-minority interest basis. Segment income is determined by
adjusting net income for net realized investment gains and losses, net gains
and losses on disposals of businesses, discontinued operations,
extraordinary items, the cumulative effect of accounting changes and certain
other items which management believes are not indicative of overall
operating trends. While these items may be significant components in
understanding and assessing the Company's financial performance, management
believes that the presentation of segment income, which excludes these
items, enhances understanding of the Company's results of operations by
highlighting net income attributable to the normal, recurring operations of
the business. However, segment income should not be construed as a
substitute for net income determined in accordance with generally
accepted accounting principles.
Page 12
<PAGE>
Summarized below is financial information with respect to business segments
for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Segment revenues:
Risk Management $588.4 $558.4 $1,725.3 $1,634.2
------ ------ -------- --------
Asset Accumulation
Allmerica Financial Services 216.2 200.2 656.7 598.8
Allmerica Asset Management 41.0 41.5 105.2 116.3
------ ------ -------- --------
Subtotal 257.2 241.7 761.9 715.1
------ ------ -------- --------
Corporate 2.2 1.3 4.9 4.9
Intersegment revenues (1.2) (1.3) (3.8) (4.3)
------ ------ -------- --------
Total segment revenues including
Closed Block 846.6 800.1 2,488.3 2,349.9
Adjustments to segment revenues:
Adjustment for Closed Block (21.9) (18.6) (78.4) (73.7)
Net realized (losses) gains (30.7) (19.8) (97.9) 106.5
------ ------ -------- --------
Total revenues $794.0 $761.7 $2,312.0 $2,382.7
====== ====== ======== ========
Segment income (loss) before federal
income taxes and minority interest:
Risk Management $ 59.4 $ 49.5 $ 156.4 $ 134.6
------ ------ -------- --------
Asset Accumulation
Allmerica Financial Services 56.7 54.7 166.6 151.3
Allmerica Asset Management 5.8 5.7 15.5 18.2
------ ------ -------- --------
Subtotal 62.5 60.4 182.1 169.5
------ ------ -------- --------
Corporate (13.7) (13.7) (40.4) (43.2)
------ ------ -------- --------
Segment income before federal income
taxes and minority interest 108.2 96.2 298.1 260.9
Adjustments to segment income:
Net realized investment (losses) gains,
net of amortization (28.6) (18.7) (96.5) 111.9
Restructuring costs 0.0 0.0 (20.3) 0.0
------ ------ -------- --------
Income from continuing operations
before federal income taxes and
minority interest $ 79.6 $ 77.5 $ 181.3 $ 372.8
====== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Identifiable Assets Deferred Acquisition
Costs
(Unaudited) (Unaudited)
September 30, December 31, September 30, December 31,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Risk Management $ 6,055.5 $ 5,869.0 $ 188.3 $ 173.3
---------- ---------- ---------- ----------
Asset Accumulation
Allmerica Financial
Services 24,269.9 23,435.7 1,367.7 1,213.1
Allmerica Asset
Management 2,193.7 1,387.6 0.2 0.4
---------- ---------- ---------- ----------
Subtotal 26,463.6 24,823.3 1,367.9 1,213.5
Corporate 115.7 77.3 0.0 0.0
---------- ---------- ---------- ----------
Total $ 32,634.8 $ 30,769.6 $ 1,556.2 $ 1,386.8
========== ========== ========== ==========
</TABLE>
Page 13
<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) (Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
(In millions, except per share data) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Basic shares used in the calculation of
earnings per share 53.1 54.1 53.5 55.3
Dilutive effect of securities:
Employee stock options 0.5 0.4 0.3 0.3
Non-vested stock grants 0.3 0.2 0.3 0.2
----- ----- ----- -----
Diluted shares used in the calculation
of earnings per share 53.9 54.7 54.1 55.8
===== ===== ===== =====
Per share effect of dilutive securities
on income from continuing operations $0.02 $0.01 $0.03 $0.04
===== ===== ===== =====
Per share effect of dilutive securities
on net income $0.02 $0.00 $0.03 $0.04
===== ===== ===== =====
</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 14
<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 property and casualty products to members of
affinity groups and other organizations. This distribution channel also
focuses on worksite distribution, which offers discounted property and
casualty (automobile and homeowners) insurance through employer sponsored
programs. Specialty Markets offers specialty or program property and
casualty business nationwide. This channel focuses on niche classes of
risks and leverages specific underwriting processes.
The Asset Accumulation group includes two segments: Allmerica Financial
Services and Allmerica Asset Management. The Allmerica Financial Services
segment includes variable annuities, variable universal life and traditional
life insurance products, as well as group retirement products, such as
defined benefit and 401(k) plans and tax-sheltered annuities. Through its
Allmerica Asset Management segment, the Company offers its customers the
option of investing in 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.
In addition to the three operating segments, the Company has a Corporate
segment, which consists primarily of cash, investments, corporate debt,
Capital Securities and corporate overhead expenses. Corporate overhead
expenses reflect costs not attributable to a particular segment, such as
those generated by certain officers and directors, technology, finance,
human resources and legal.
Page 15
<PAGE>
Results of Operations
Consolidated Overview
Consolidated net income includes the results of each segment of the Company,
which management evaluates on a pre-tax and pre-minority interest basis.
In addition, net income also includes certain items which management
believes are not indicative of overall operating trends, such as net
realized investment gains and losses, net gains and losses on disposals of
businesses, discontinued operations, extraordinary items, the cumulative
effect of accounting changes and certain other items. While these items
may be significant components in understanding and assessing the Company's
financial performance, management believes that the presentation of
"Adjusted Net Income", which excludes these items, enhances
understanding of the Company's results of operations by highlighting net
income attributable to the normal, recurring operations of the business.
However, adjusted net income should not be construed as a substitute
for net income determined in accordance with generally accepted
accounting principles.
Net income for the third quarter increased $49.4 million, or 377.1%, to 62.5
million, compared to $13.1 million for the same period in 1999, primarily due
to the absence in 2000 of $46.0 million after tax losses resulting from the
discontinuation of the Company's group life and health business in 1999.
Net income for the first nine months of 2000 decreased $87.1 million, or
38.3%, to $140.3 million, compared to $227.4 million for the first nine
months of 1999. The reduction in net income resulted primarily from a
$143.9 million decline in net realized investment gains and $13.2 million
of restructuring charges in 2000. These items were partially offset by
the aforementioned discontinuation of the Company's group life and health
business and an increase in adjusted net income.
The following table reflects adjusted net income and a reconciliation to
consolidated net income. Adjusted net income consists of segment income
(loss), federal income taxes on segment income and minority interest on
preferred dividends.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Segment income (loss) before federal
income taxes and minority interest:
Risk Management $ 59.4 $ 49.5 $156.4 $134.6
------ ------ ------ -------
Asset Accumulation
Allmerica Financial Services 56.7 54.7 166.6 151.3
Allmerica Asset Management 5.8 5.7 15.5 18.2
------ ------ ------ -------
Subtotal 62.5 60.4 182.1 169.5
Corporate (13.7) (13.7) (40.4) (43.2)
------ ------ ------ -------
Segment income before federal income
taxes and minority interest 108.2 96.2 298.1 260.9
Federal income taxes on segment income (24.3) (16.4) (65.3) (48.8)
Minority interest on preferred dividends (4.0) (4.0) (12.0) (12.0)
------ ------ ------ -------
Adjusted net income 79.9 75.8 220.8 200.1
Adjustments (net of taxes, minority
interest and amortization, as
applicable):
Net realized investment (losses) gains (17.4) (16.7) (67.3) 76.6
Restructuring costs 0.0 0.0 (13.2) 0.0
------ ------ ------- -------
Income from continuing operations 62.5 59.1 140.3 276.7
Discontinued operations:
Loss from operations of discontinued
group life and health business (net
of applicable taxes) 0.0 (15.5) 0.0 (18.8)
Loss on disposal of group life and
health business (net of applicable
taxes) 0.0 (30.5) 0.0 (30.5)
------ ------- ------ -------
Net income $ 62.5 $ 13.1 $140.3 $227.4
====== ======= ====== =======
</TABLE>
Page 16
<PAGE>
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999
The Company's segment income before taxes and minority interest increased
$12.0 million, or 12.5%, to $108.2 million in the third quarter of 2000.
This increase is attributable to increased income from Risk Management,
Allmerica Financial Services and Allmerica Asset Management of $9.9 million,
$2.0 million and $0.1 million, respectively. Risk Management's segment
income increased primarily due to growth of net premiums earned of
approximately $13.0 million, principally attributable to commercial lines
rate increases and to improved loss adjustment, policy acquisition and
other operating expenses totaling $14.6 million. In addition, decreased
catastrophe losses and net activity related to the Company's aggregate
excess of loss reinsurance treaty, further discussed in the Risk Management
Reinsurance section, favorably impacted segment income by $4.2 million and
$2.6 million, respectively. These favorable items were partially offset by
a $27.4 million decrease in favorable development on prior years' reserves.
The increase in the Allmerica Financial Services segment was principally
due to higher asset-based fee income driven by market appreciation and
additional deposits in the variable product lines, partially offset by
higher policy benefits, and policy acquisition and other operating
expenses.
The effective tax rate for segment income was 22.5% for the third quarter of
2000 compared to 17.0% for the third quarter of 1999. The increase in the
tax rate was driven primarily by an increase in property and casualty
underwriting income and by a decrease in tax-exempt investment income.
Net realized losses on investments, after taxes, were $17.4 million in the
third quarter of 2000, resulting primarily from the recognition of after tax
realized losses of $13.9 million related to sales of approximately $600
million of fixed maturities. In addition, the Company recognized $6.3
million in after tax realized losses due to impairments of fixed maturities.
During the third quarter of 1999, net realized losses on investments after
taxes of $16.7 million resulted primarily from net realized losses of $11.0
million and $5.9 million on sales of fixed maturities and equity securities,
respectively.
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 business and its
accident and health assumed reinsurance pool business. Prior to 1999, these
businesses comprised substantially all of the former Corporate Risk
Management Services segment. Accordingly, the operating results of the
discontinued segment have been reported in the Consolidated Statements of
Income as discontinued operations in accordance with Accounting Principles
Board Opinion No. 30, "Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". 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. On October 6, 1999,
the Company entered into an agreement with Great-West Life and Annuity
Insurance Company of Denver, which provided for the sale of the Company's
EBS business effective March 1, 2000. The Company has recorded a $30.5
million loss, net of taxes, on the disposal of its group life and health
business.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September
30, 1999
The Company's segment income before taxes and minority interest increased
$37.2 million, or 14.3%, to $298.1 million in the first nine months of 2000.
This increase is attributable to increased income of $21.8 million from the
Risk Management segment, $12.6 million from the Asset Accumulation group and
a decreased loss of $2.8 million in the Corporate segment. The increase in
the Risk Management segment is primarily attributable to growth of net
premiums earned of approximately $44.0 million principally due to
commercial lines rate increases and to a $24.1 million decrease in
catastrophe losses. In addition, policy acquisition and other operating
expenses decreased $14.4 million, excluding the effects of the
aforementioned aggregate excess of loss treaty. Partially offsetting these
favorable items is a $54.1 million decrease in favorable development on
prior years' reserves. The increase in the Allmerica Financial
Services segment of $15.3 million is primarily attributable to higher
asset-based fee income driven by market appreciation and additional deposits
in the variable product lines, partially offset by higher policy
acquisition and other operating 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 of $2.7 million principally due to decreased
earnings on GICs. This decline resulted from short-term funding agreement
withdrawals in the fourth quarter of 1999 and a shift to lower margin long-
term funding agreements in 2000.
The effective tax rate for segment income was 21.9% for the first nine months
of 2000 compared to 18.7% for the first nine months of 1999. The increase in
the tax rate was driven primarily by an increase in property and casualty
underwriting income and by a decrease in tax-exempt investment income.
Page 17
<PAGE>
Net realized losses on investments after taxes were $67.3 million in the
firstnine months of 2000, primarily attributable to after tax realized
losses of $57.6 million resulting from the sale of approximately $1.7
billion fixed income securities. In addition, the Company recognized $21.0
million in after tax realized losses due to impairments of fixed maturities
During the first nine months of 1999, net realized gains on investments
after taxes of $76.6 million resulted primarily from net realized gains on
equity securities and partnership investments of $93.2 million and $4.0
million, respectively, partially offset by $22.2 million of after-tax
realized losses from impairments recognized on fixed maturities.
During the second quarter of 2000, the Company recognized a one-time
after-tax restructuring charge of $13.2 million. This charge is the
result of a formal company-wide restructuring plan, intended to reduce
expenses and enhance revenues.
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) (Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Segment revenues
Net premiums earned $527.2 $499.6 $1,543.8 $1,451.8
Net investment income 55.2 54.3 164.8 167.8
Other income 6.0 4.5 16.7 14.6
------ ------ -------- --------
Total segment revenues 588.4 558.4 1,725.3 1,634.2
Losses and operating expenses
Policy benefits, claims, losses and
loss adjustment expenses <FN1> 390.9 364.2 1,150.2 1,069.7
Policy acquisition expenses 93.4 94.6 279.4 276.2
Other operating expenses 44.7 50.1 139.3 153.7
------ ------ -------- --------
Total losses and operating expenses 529.0 508.9 1,568.9 1,499.6
------ ------ -------- --------
Segment income $ 59.4 $ 49.5 $ 156.4 $ 134.6
====== ====== ======== ========
<FN>
<FN1>
Includes policyholders' dividends of $4.9 million and $2.0 million for the
quarters ended September 30, 2000 and 1999, respectively, and $11.3 million
and $8.1 million for the nine months ended September 30, 2000 and 1999,
respectively.
</FN>
</TABLE>
Page 18
<PAGE>
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999
Premium
Risk Management's net premiums earned increased $27.6 million, or 5.5%, to
$527.2 million during the quarter ended September 30, 2000. This is
primarily attributable to increases of $9.8 million, or 4.3%, $7.5 million,
or 14.9%, $6.5 million, or 10.4%, and $5.8 million, or 11.9%, in the personal
automobile, commercial automobile, homeowners, and workers' compensation
lines, respectively. The increase in personal automobile net premiums earned
is primarily the result of a 4.9% increase in policies in force and a 1.0%
Massachusetts rate increase since September 30, 1999. The increase in the
commercial automobile line is the result of an overall rate increase of
7.5% over prior year. In addition, homeowners' rates increased 4.0% over
prior year and policies in force increased 2.6% since September 30, 1999.
The increase in the workers' compensation line is primarily the result of a
7.7% rate increase over the prior year. Partially offsetting these
increases is $5.3 million of ceded premiums under the aforementioned
aggregate excess of loss reinsurance treaty in 2000.
Segment Income
Risk Management's segment income increased $9.9 million, or 20.0%, to $59.4
million for the quarter ended September 30, 2000. The improvement in segment
income is primarily attributable to net premiums earned growth of
approximately $13.0 million primarily as a result of commercial lines rate
increases. In addition, loss adjustment expenses decreased $9.1 million and
policy acquisition and other operating expenses decreased $5.5 million for
the quarter ended September 30, 2000. These decreases are primarily
the result of continued efficiencies gained through consolidation of claims
and underwriting processes. Underwriting results were also favorably
impacted by improved current year claims activity in the commercial multiple
peril and personal automobile lines and a $4.2 million decrease in
catastrophe losses to $16.0 million for the third quarter of 2000.
Partially offsetting these favorable items is a $27.4 million decrease in
favorable development on prior years' loss and loss adjustment expense
reserves primarily in the commercial multiple peril and personal automobile
lines. Results were also favorably impacted by $2.6 million due to the
aforementioned aggregate excess of loss reinsurance treaty.
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>
<CAPTION>
(Unaudited)
Quarter Ended September 30, 2000
Standard Sponsored Specialty
(In millions, except ratios) Markets Markets Markets Other Total
<S> <C> <C> <C> <C> <C>
Statutory underwriting
profit (loss) $ 0.0 $ 6.3 $ (4.9) $ (3.6) $ (2.2)
-----------------------------------------
Reconciliation to segment
income:
Net investment income 55.2
Other income and
expenses, net 3.3
Other Statutory to GAAP
adjustments 3.1
------
Segment income $59.4
======
Statutory net premiums
written $388.0 $161.8 $ 10.6 $ 1.1 $561.5
------------------------------------------------
Statutory combined ratio
<FN1> 98.6 93.6 149.2 N/M 98.8
------------------------------------------------
<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>
N/M - Not meaningful
Page 19
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
Quarter Ended September 30, 1999
Standard Sponsored Specialty
(In millions, except ratios) Markets Markets Markets Other Total
<S> <C> <C> <C> <C> <C>
Statutory underwriting
(loss) profit $(3.6) $(7.7) $(3.3) $ 1.8 $(12.8)
---------------------------------------
Reconciliation to segment
income:
Net investment income 54.3
Other income and
expenses, net 0.9
Other Statutory to GAAP
adjustments 7.1
-------
Segment income $ 49.5
=======
Statutory net premiums
written $357.5 $153.5 $ 9.6 $ 3.0 $ 523.6
-----------------------------------------------
Statutory combined ratio
<FN1> 99.9 103.2 132.2 N/M 101.3
-----------------------------------------------
<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>
N/M - Not meaningful
Standard Markets
Standard Markets' net premiums written increased $30.5 million, or 8.5%, to
$388.0 million for the quarter ended September 30, 2000. This improvement
is primarily attributable to increases of $14.8 million, or 12.7%, $5.2
million, or 7.2%, $5.1 million, or 12.1%, and $3.8 million, or 7.6%, in the
personal automobile, commercial multiple peril, homeowners, and commercial
automobile lines, respectively. The increase in the personal automobile line
is primarily the result of an 11.8% increase in policies in force in the
Northeast since September 30, 1999 and a 1.0% rate increase in
Massachusetts. These favorable items are partially offset by a 7.6%
decrease in policies in force in the Midwest over the prior year. The
increase in commercial multiple peril net premiums written is primarily due
to rate increases of 16.0% and 5.4% in Michigan and New York, respectively,
and a 2.3% increase in policies in force since September 30, 1999. In
addition, homeowners' rates increased 7.2% in Michigan over the prior year
and policies in force increased 1.8% since September 30, 1999. The increase
in commercial automobile net premiums written is primarily the result of rate
increases of 7.5%, 2.0%, and 13.8% in Michigan, Massachusetts, and New York,
respectively, partially offset by a 2.3% decrease in policies in force since
September 30, 1999. Partially offsetting these increases is $3.6 million of
ceded premiums under the aggregate excess of loss reinsurance treaty in 2000.
Standard Markets' underwriting results improved $3.6 million to breakeven for
the quarter ended September 30, 2000 compared to a $3.6 million underwriting
loss in the same period in 1999. This is primarily attributable to a $5.4
million decrease in underwriting expenses for the third quarter of 2000 as a
result of reductions in employee related expenses and efficiencies gained
through process consolidations. In addition, catastrophe losses decreased
$3.6 million to $9.2 million for the third quarter of 2000. Results were
also favorably impacted by $2.7 million as a result of the aforementioned
aggregate excess of loss reinsurance treaty. Partially offsetting these
favorable items is a decrease in favorable development on prior years' loss
reserves primarily in the commercial multiple peril line and increased
current year claims frequency and severity in the workers' compensation,
homeowners, and commercial automobile lines over the same period in 1999.
Sponsored Markets
Sponsored Markets' net premiums written increased $8.3 million, or 5.4%, to
$161.8 million for the quarter ended September 30, 2000. This increase is
primarily attributable to a $7.9 million, or 6.9%, increase in the personal
automobile line resulting from a 3.9% increase in policies in force over the
same period in 1999 and the aforementioned Massachusetts rate increase. In
addition, homeowners' net premiums written increased $3.7 million, or 10.9%,
primarily attributable to a 7.2% Michigan rate increase and a 3.5% increase
in policies in force since September 30, 1999. Partially offsetting these
increases is $1.7 million of ceded premiums under the aggregate excess of
loss reinsurance treaty in 2000.
Page 20
<PAGE>
Sponsored Markets' underwriting results improved $14.0 million to an
underwriting profit of $6.3 million for the quarter ended September 30,
2000. The improvement in underwriting results is primarily attributable
to a $10.5 million decrease in loss adjustment expenses. This is the
result of a decrease in legal fees and employee related expenses in third
quarter 2000. In addition, underwriting expenses decreased $2.8 million
for the third quarter of 2000. Results were also favorably impacted by $1.0
million due to the aforementioned aggregate excess of loss reinsurance
treaty. Partially offsetting these favorable items is an increase in
current year claims activity in the homeowners line.
Specialty Markets
Specialty Markets' net premiums written increased $1.0 million, or 10.4%, to
$10.6 million for the quarter ended September 30, 2000. This increase is
primarily attributable to a $1.8 million increase in the workers'
compensation line, primarily resulting from an increase of 18.6% in policies
in force over the same period in 1999. This increase is partially offset by
increased ceded premiums due to greater utilization of reinsurance in the
other commercial liability line. The Company continually assesses the
profitability of each individual program and seeks to exit programs that do
not meet established Company underwriting guidelines.
Specialty Markets' underwriting results deteriorated $1.6 million to an
underwriting loss of $4.9 million for the quarter ended September 30, 2000.
The deterioration in underwriting results is primarily the result of
an increase in current year claims frequency in the commercial automobile
line compared to the same period in 1999.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
Premium
Risk Management's net premiums earned increased $92.0 million, or 6.3%, to
$1,543.8 million for the nine months ended September 30, 2000. Results
reflected ceded premiums of $5.3 million and $21.9 million under the
aggregate excess of loss reinsurance treaty for 2000 and 1999, respectively.
Excluding the impact of this treaty, net premiums earned increased $75.4
million, or 5.1%. This is primarily attributable to increases of $18.8
million, or 13.1%, $18.0 million, or 12.4%, and $16.4 million, or 2.4%, in
the workers' compensation, commercial automobile, and personal automobile
lines, respectively. The increase in the workers' compensation line is the
result of 27.9% and 7.5% rate increases over prior year in the states of
Maine and Michigan, respectively. The increase in commercial automobile net
premiums earned is primarily the result of the aforementioned Michigan,
Massachusetts, and New York rate increases since September 30, 1999. The
increase in the personal automobile line is primarily the result of a 4.9%
increase in policies in force since September 30, 1999 and a 1.0%
Massachusetts rate increase over prior year. Commercial multiple peril net
premiums earned increased as well, by $11.6 million, or 5.4%, attributable
to a 16.0% Michigan rate increase and a 2.3% increase in policies in force
since September 30, 1999. In addition, homeowners' earned premium increased
$11.1 million, or 5.8%, resulting primarily from a 7.2% rate increase in
Michigan and a 2.6% increase in policies in force since September 30, 1999.
Segment Income
Risk Management's segment income increased $21.8 million, or 16.2%, to $156.4
million for the nine months ended September 30, 2000. Net benefits of $2.6
and $16.9 million are included in segment income as a result of the aggregate
excess of loss reinsurance treaty in 2000 and 1999, respectively. Excluding
the impact from this treaty, the total improvement of $36.1 million in
segment income is primarily attributable to net premiums earned growth of
approximately $44.0 million primarily as a result of commercial lines
rate increases. In addition, catastrophe losses decreased $24.1 million to
$49.0 million for the nine months ended September 30, 2000, compared to
$73.1 million for the same period in 1999. Policy acquisition and
other operating expenses decreased $14.4 million, excluding $1.1 million
and $4.3 million favorable impacts in 2000 and 1999, respectively, 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
$54.1 million decrease in favorable development on prior years' loss and
loss adjustment expense reserves primarily in the commercial multiple peril
and personal automobile lines.
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.
Page 21
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended September 30, 2000
Standard Sponsored Specialty
(In millions, except ratios) Markets Markets Markets Other Total
<S> <C> <C> <C> <C> <C>
Statutory underwriting
(loss) profit $ (32.8) $ 8.7 $ (4.7) $(6.8) $ (35.6)
---------------------------------------
Reconciliation to segment
income:
Net investment income 164.8
Other income and
expenses, net 8.7
Other Statutory to GAAP
adjustments 18.5
--------
Segment income $ 156.4
========
Statutory net premiums
written $1,150.2 $464.5 $ 28.9 $ 3.8 $1,647.4
------------------------------------------------
Statutory combined ratio
<FN1> 101.3 96.4 114.8 N/M 100.5
------------------------------------------------
<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>
N/M - Not meaningful
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended September 30, 1999
Standard Sponsored Specialty
(In millions, except ratios) Markets Markets Markets Other Total
<S> <C> <C> <C> <C> <C>
Statutory underwriting
(loss) profit $ (27.5) $(15.3) $ (3.4) $0.7 $ (45.5)
---------------------------------------
Reconciliation to segment
income:
Net investment income 167.8
Other income and
expenses, net 4.2
Other Statutory to GAAP
adjustments 8.1
---------
Segment income $ 134.6
=========
Statutory net premiums
written $1,051.5 $419.6 $ 31.0 $3.3 $1,505.4
------------------------------------------------
Statutory combined ratio
<FN1> 101.6 102.1 115.1 N/M 102.0
------------------------------------------------
<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>
N/M - Not meaningful
Standard Markets
Standard Markets' net premiums written increased $98.7 million, or 9.4%, to
$1,150.2 million for the nine months ended September 30, 2000. Results
reflected ceded premiums of $3.6 million and $9.3 million under the aggregate
excess of loss reinsurance treaty for 2000 and 1999, respectively. Excluding
the impact from this treaty, net premiums written increased $93.0 million, or
8.8%, resulting from increases of $26.5 million, or 7.4%, $20.2 million, or
9.5%, $19.7 million, or 13.5%, and $9.6 million, or 8.4%, in the personal
automobile, commercial multiple peril, commercial automobile, and homeowners
lines, respectively. The increase in the personal automobile line is
primarily the result of a 6.0% policies in force increase and a 1.0% rate
increase in Massachusetts since September 30, 1999. In addition, the
commercial multiple peril line experienced a 16.0% rate increase in Michigan
and policies in force increased 2.3% since September 30, 1999. The increase
in commercial automobile net premiums written is primarily the result of rate
increases of 7.5%, 2.0%, and 13.8% in Michigan, Massachusetts, and New York,
respectively, partially offset by a 2.3% decrease in policies in force since
September 30, 1999. Homeowners' net premiums written increased as a result
of a 7.2% rate increase in Michigan and a 1.8% increase in policies in force
over the prior year. Also, net premiums written increased $8.9 million, or
5.9%, for the nine months ended September 30, 2000 in the workers'
compensation line. This increase is primarily the result of 27.9% and 7.5%
rate increases in Maine and Michigan, respectively, since September 30, 1999.
Page 22
<PAGE>
Standard Markets' underwriting results deteriorated $5.3 million, or 19.3%,
to an underwriting loss of $32.8 million for the nine months ended September
30, 2000. Net benefits of $2.7 million and $7.5 million are included in
underwriting results relating to the aggregate excess of loss reinsurance
treaty in 2000 and 1999, respectively. Excluding the impact from this
treaty, the total deterioration of $0.5 million in underwriting results is
primarily attributable to a decrease in favorable development on prior
years' loss reserves in the commercial multiple peril and personal
automobile lines and increased claims activity in the workers' compensation
line. Partially offsetting these unfavorable items are a decrease in
underwriting expenses over prior year and improved current year claims
frequency in the commercial multiple peril line. In addition, catastrophe
losses decreased $9.8 million to $32.0 million for the nine months ended
September 30, 2000, compared to $41.8 million for the same period in 1999.
Sponsored Markets
Sponsored Markets' net premiums written increased $44.9 million, or 10.7%,
To $464.5 million for the nine months ended September 30, 2000. Results
reflected ceded premiums of $1.7 million and $12.6 million under the
aggregate excess of loss reinsurance treaty for 2000 and 1999,
respectively. Excluding the impact of this treaty, net premiums written
increased $34.0 million, or 7.9%, primarily attributable to a $25.2 million,
or 7.4%, increase in the personal automobile line. This is primarily the
result of a 3.9% increase in policies in force over the same period in 1999
and the aforementioned 1.0% rate increase in Massachusetts. In addition,
homeowners' net premiums written increased $8.7 million, or 10.5%,
primarily attributable to the aforementioned 7.2% Michigan rate increase
and a 3.5% increase in policies in force since September 30, 1999.
Sponsored Markets' underwriting results improved $24.0 million to an
underwriting profit of $8.7 million for the nine months ended September 30,
2000. Net benefits of $1.0 million and $9.9 million are included in
underwriting results as a result of the aggregate excess of loss reinsurance
treaty in 2000 and 1999, respectively. Excluding the impact from this
treaty, the total improvement of $32.9 million in underwriting results is
primarily attributable to a $14.1 million decrease in catastrophe losses to
$17.0 million for the nine months ended September 30, 2000, compared to $31.1
million for the same period in 1999. In addition, a $9.7 million decrease in
loss adjustment expenses resulting from a decrease in legal fees and
employee related expenses in 2000 contributed to this improvement. Also,
underwriting expenses decreased $7.4 million as the result of reductions in
employee related expenses and efficiencies gained through process
consolidations. Improved current year claims severity in the homeowners
line also contributed to underwriting results for the nine months ended
September 30, 2000. Partially offsetting these favorable items is a decrease
in favorable development on prior years' loss reserves in the personal
automobile line.
Specialty Markets
Specialty Markets' net premiums written decreased $2.1 million, or 6.8%, to
$28.9 million for the nine months ended September 30, 2000. This decrease is
primarily attributable to a 5.6% decrease in policies in force since
September 30, 1999. In addition, an increase in ceded premiums resulting
from greater utilization of reinsurance in the other commercial liability
line contributed to the decrease in net premiums written. The Company
continually assesses the profitability of each individual program and seeks
to exit programs that do not meet established Company underwriting
guidelines.
Specialty Markets' underwriting results deteriorated $1.3 million to an
underwriting loss of $4.7 million for the nine months ended September 30,
2000. The deterioration in underwriting results is primarily the result
of an increase in current year claims activity in the commercial automobile
line.
Investment Results
Net investment income before tax was $164.8 million and $167.8 million for
the nine months ended September 30, 2000 and 1999, respectively. This
primarily reflects a reduction in average invested assets of $195.4 million,
or 5.1%, to $3,643.7 million in 2000, compared to $3,839.1 million in 1999;
partially offset by higher yields. This reduction in average invested assets
is due to transfers of cash and securities of $108.0 million and $350.0
million to the corporate segment during the second quarter of 2000 and 1999,
respectively. Average pre-tax yields on debt securities increased to 6.8%
in 2000 compared to 6.6% in 1999.
Page 23
<PAGE>
Reserve for Losses and Loss Adjustment Expenses
The Risk Management segment maintains reserves for its property and casualty
products to provide for the Company's ultimate liability for losses and loss
adjustment expenses ("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 period such changes are determined to be needed
and recorded.
The table below provides a reconciliation of the beginning and ending reserve
for unpaid losses and LAE as follows:
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
(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 1,224.8 1,208.3
Decrease in provision for insured events
of prior years (87.5) (141.9)
--------- ---------
Total incurred losses and LAE 1,137.3 1,066.4
--------- ---------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events
of current year 589.1 587.2
Losses and LAE attributable to insured events
of prior years 561.7 517.2
--------- ---------
Total payments 1,150.8 1,104.4
--------- ---------
Change in reinsurance recoverable on unpaid
losses 44.5 62.2
--------- ---------
Reserve for losses and LAE, end of period $2,646.9 $2,621.5
========= =========
</TABLE>
As part of an ongoing process, the reserves have been re-estimated for all
prior accident years and were decreased by $87.5 million and $141.9 million
for the nine months ended September 30, 2000 and 1999, respectively,
reflecting favorable development on reserves for both losses and LAE.
Favorable development on prior years' loss reserves was $39.6 million and
$76.8 million for the nine months ended September 30, 2000 and 1999,
respectively. This decrease of $37.2 million is primarily due to decreased
personal automobile favorable development in the Northeast and deterioration
in prior accident years in the commercial multiple peril line. Favorable
development on prior years' LAE reserves was $47.9 million and $65.1 million
for the nine months ended September 30, 2000 and 1999, respectively.
The favorable development in both periods is primarily attributable to
claims process improvement initiatives taken by the Company over the past
two years.
Page 24
<PAGE>
Reserves established for current year losses and LAE consider the factors
that resulted in the recent favorable development of prior years' loss and
LAE reserves. Accordingly, current year reserves are modestly lower,
relative to those initially established for similar exposures in prior
years and the Company expects continued reductions in the amount of
favorable development in future years.
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 believes that the terms of its reinsurance contracts
are consistent 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. Effective
January 1, 2000, the Company modified its catastrophe program. Under this
new program, AFC 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. 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. Additionally, effective January 1, 2000,
the Company purchased a property catastrophe aggregate treaty which provides
for annual aggregate coverage totaling 80% of $50.0 million in excess of
$60.0 million for catastrophe losses. 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 loss occurrence. The maximum contribution from the Company
for 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.
Page 25
<PAGE>
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. In accordance with the
provisions of this contract, the Company exercised its option to cancel
this contract effective January 1, 2000. The program covered losses and
allocated 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 no benefit
for the third quarter of 1999, a net benefit of $16.9 million for the nine
months ended September 30, 1999, and a net benefit of $15.9 million for the
year ended December 31, 1999, based on annual estimates of losses and
allocated LAE for accident year 1999. A net benefit of $2.6 million has
been recognized in the first nine months of 2000 related to accident year
1999. 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
coverage to individuals or other entities that are otherwise unable to
purchase such coverage. These market mechanisms and pooling arrangement
include the Massachusetts Commonwealth Automobile Reinsurers and the
Michigan Catastrophic Claims Association.
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) (Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Segment revenues
Premiums $ 7.9 $ 8.3 $ 43.2 $ 44.7
Fees 110.9 91.4 316.1 262.9
Investment and other income 97.4 100.5 297.4 291.2
------ ------ ------ ------
Total segment revenues 216.2 200.2 656.7 598.8
Policy benefits, claims and losses 80.6 71.2 241.3 245.4
Policy acquisition and other
operating expenses 78.9 74.3 248.8 202.1
------ ------ ------ ------
Segment income $ 56.7 $ 54.7 $166.6 $151.3
====== ====== ====== ======
</TABLE>
Page 26
<PAGE>
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999
Segment income increased $2.0 million, or 3.7%, to $56.7 million during the
third quarter of 2000. This reflects higher asset-based fee income driven by
market appreciation and additional deposits in the variable annuity and
variable universal life product lines, offset by higher policy benefits and
policy acquisition and other operating expenses. Excluding the effect of
several unusual items during each year, segment income in 2000 was
essentially unchanged from the prior year.
Segment revenues increased $16.0 million, or 8.0%, in the third quarter of
2000 primarily due to increased fees and other income. Fee income from
variable annuity and individual variable universal life policies increased
$13.3 million, or 19.3%, in the third quarter of 2000 due to market
appreciation and additional deposits. Market appreciation generated
approximately $6.8 million of this growth, while new deposits generated
approximately $6.3 million. The growth in annuity deposits resulted from
the introduction of a "bonus" product in the fourth quarter of 1999. Sales
of bonus annuities totaled $329.4 million in the third quarter of 2000.
Fees from the universal life product line increased $4.8 million, or 28.4%,
in the third quarter of 2000, primarily due to changes in certain actuarial
assumptions.
Investment and other income decreased $3.1 million, or 3.1%, primarily 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 from cancellations of certain accounts in the group retirement
business. This decrease was partially offset by higher brokerage income
due to an increase in trading volume in mutual fund and general securities
transactions and to increased investment management fees resulting from
appreciation and additional deposits in variable product assets under
management.
Policy benefits, claims and losses increased $9.4 million, or 13.2%, to $80.6
million in the third quarter of 2000. This increase is due primarily to a
strengthening of universal life and Closed Block reserves in the current
period which resulted in an increase in policy benefits of approximately
$5.5 million. The increase is also attributable to less favorable mortality
experience, primarily in the Closed Block. These increases were partially
offset by lower participation in an annuity program introduced in 1998, which
provided for a limited time, enhanced crediting rates on general account
deposits. In addition, there was a reduction in interest credited on group
retirement products due to cancellations of certain accounts and asset
transfers to the separate accounts.
Policy acquisition and other operating expenses increased $4.6 million, or
6.2%, in the third quarter of 2000. Other operating expenses increased $6.3
million primarily from ongoing growth in the variable annuity and individual
variable universal life product lines and increases in technology and
distribution costs. Also, brokerage commissions and administrative expenses
increased due to the aforementioned growth in trading volumes for mutual fund
and general securities transactions. This increase was partially offset by
a $1.7 million decline in policy acquisition expenses. Included in policy
acquisition expenses were several unusual items, particularly approximately
$33.8 million of reduced expenses related to a change in certain life
products actuarial assumptions and an increase in policy acquisition expenses
of approximately $25.0 million in the annuity line of business, resulting
from an increase in assumed lapse rates. In 1999, policy acquisition
expenses reflected a $3.3 million benefit from the refinement of an
enhanced valuation system for the annuity line of business.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
Segment income increased $15.3 million, or 10.1%, to $166.6 million in the
first nine months of 2000. This increase is primarily attributable to
higher asset-based fee income driven by market appreciation and additional
deposits in the variable product lines, partially offset by higher policy
acquisition and other operating expenses.
Segment revenues increased $57.9 million, or 9.7%, in 2000 primarily due to
increased fees and other income. Fee income from variable annuities and
individual variable universal life policies increased $45.4 million, or
23.3%, in the first nine months of 2000, primarily due to market appreciation
and additional deposits. Market appreciation generated approximately $24.3
million of this growth, while new deposits generated approximately $20.8
million. The growth in annuity deposits resulted from the aforementioned
introduction of a "bonus" product in the fourth quarter of 1999. Sales of
bonus annuities, which totaled approximately $1.0 billion in the first nine
months of 2000, were partially offset by a $134.7 million decrease in
traditional annuity sales at third party mutual fund advisors within the
broker-dealer and financial planner distribution channels. Fees from the
universal life product line increased $3.4 million, or 6.6% in 2000, due to
the aforementioned changes in certain actuarial assumptions.
Page 27
<PAGE>
Investment and other income increased $6.2 million, or 2.1%, in 2000. This
increase is primarily due to higher brokerage income of $15.1 million
attributable to an increase in mutual fund and general securities
transaction volumes and to increased investment management fees of $6.7
million resulting from appreciation and additional deposits in variable
product assets under management. These increases were partially offset by a
$15.9 million decline in net investment income primarily due to decreased
average invested assets resulting from transfers to the separate accounts
in the annuity and group retirement product lines.
Policy benefits, claims and losses decreased $4.1 million, or 1.7%, to
$241.3 million in the first nine months of 2000. This decrease is due
principally to the absence of a $5.4 million mortality reserve established
in the variable annuity lines of business during the first quarter of 1999
and lower participation in the aforementioned enhanced crediting rate
annuity program. Also contributing to this decrease is reduced interest
credited on group retirement products due to the aforementioned
cancellations of certain accounts and transfers to the separate accounts.
These reductions were partially offset by the aforementioned strengthening
of universal life and Closed Block reserves which resulted in approximately
a $5.5 million increase in the period, as well as less favorable mortality
experience primarily in the Closed Block.
Policy acquisition and other operating expenses increased $46.7 million, or
23.1%, in the first nine months of 2000. Other operating expenses increased
$26.2 million, primarily due to ongoing growth in the variable annuity and
individual variable universal life product lines, and increases in
technology and distribution costs. Also, brokerage commissions and
administrative expenses increased due to the aforementioned growth in
trading volumes for mutual fund and general securities transactions.
Policy acquisition expenses increased $20.5 million, primarily due to
continued growth in the annuity line of business. Included in policy
acquisition expenses were the aforementioned assumption changes in the
universal life, variable universal life and annuity product lines.
In 1999, there was a one-time increase to the deferred acquisition cost
asset of $13.5 million, resulting from the implementation of an enhanced
valuation system for annuities.
Statutory Premiums and Deposits
The following table sets forth statutory premiums and deposits by product
for the Allmerica Financial Services segment.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Insurance:
Traditional life $ 13.3 $ 13.8 $ 57.0 $ 62.5
Universal life 0.7 21.5 44.1 54.1
Variable universal life 51.0 45.7 153.7 134.8
Individual health 0.1 0.1 0.2 0.2
Group variable universal life 13.7 13.0 43.8 30.6
------- ------- -------- --------
Total insurance 88.8 94.1 298.8 282.2
------- ------- -------- --------
Annuities:
Individual annuities:
Separate account annuities 617.7 429.9 1,973.1 1,439.0
General account annuities 123.5 201.5 387.6 663.3
Retirement investment accounts 2.1 4.0 8.2 13.5
------- ------- -------- --------
Total individual annuities 743.3 635.4 2,368.9 2,115.8
Group annuities 119.2 107.9 378.5 302.2
------- ------- -------- --------
Total annuities 862.5 743.3 2,747.4 2,418.0
------- ------- -------- --------
Total premiums and deposits $ 951.3 $ 837.4 $3,046.2 $2,700.2
======= ======= ======== ========
</TABLE>
Page 28
<PAGE>
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999
Total premiums and deposits increased $113.9 million, or 13.6%, to $951.3
million. These increases are primarily due to higher separate account
annuity deposits, partially offset by a decline in general account deposits.
The growth in individual separate account annuity deposits results from the
introduction of a bonus product in the fourth quarter of 1999. The bonus
annuity product is distributed through third party mutual fund advisors and
the broker-dealer distribution channels. These increases were partially
offset by lower deposits from general account annuities due to the
decreased utilization of the aforementioned annuity program with enhanced
crediting rates.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
For the nine months ended September 30, 2000, total premiums and deposits
increased $346.0 million, or 12.8%, to $3,046.2 million. These increases are
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
introduction of the aforementioned bonus product, partially offset by a
decrease in traditional annuity sales at third party mutual fund advisors.
In addition, group annuity deposits increased 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 the aforementioned annuity program with
enhanced crediting rates.
Allmerica Asset Management
The following table summarizes the results of operations for the Allmerica
Asset Management segment for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Interest margins on GICs
Net investment income $ 38.1 $ 38.7 $ 96.6 $ 107.0
Interest credited 33.4 33.6 84.3 91.7
------- ------- ------- --------
Net interest margin 4.7 5.1 12.3 15.3
------- ------- ------- --------
Other income (expenses)
External fees and other income 1.7 1.4 4.8 4.4
Internal fees and other income 1.2 1.4 3.8 4.9
Other operating expenses (1.8) (2.2) (5.4) (6.4)
------- ------- ------- --------
Segment income $ 5.8 $ 5.7 $ 15.5 $ 18.2
======= ======= ======= ========
</TABLE>
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999
Segment income increased $0.1 million, or 1.8%, to $5.8 million during the
third quarter of 2000. This increase is primarily due to higher fee income
related to external clients and decreased operating expenses. Income from
assets under management grew in the third quarter of 2000 as a result of
increased business from new and existing money market and other external
fixed income fund clients. These increases were partially offset by a
decrease in earnings on GICs resulting from short-term funding agreement
withdrawals during the fourth quarter of 1999 and a shift to lower margin
long-term funding agreements in 2000. The 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.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
Segment income decreased $2.7 million, or 14.8%, to $15.5 million in the
first nine months of 2000. This decline primarily reflects decreased
earnings on GICs. Earnings on GICs decreased $3.0 million primarily due
to the aforementioned short-term funding agreement withdrawals during the
fourth quarter of 1999 and a shift to lower margin long-term funding
agreements in 2000.
Page 29
<PAGE>
Corporate
The following table summarizes the results of operations for the Corporate
segment for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Segment revenues
Net investment income $ 2.2 $ 1.3 $ 4.9 $ 4.9
Interest expense 3.8 3.9 11.4 11.5
Other operating expenses 12.1 11.1 33.9 36.6
------- ------- ------- -------
Segment loss $(13.7) $(13.7) $(40.4) $(43.2)
======= ======= ======= =======
</TABLE>
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999
Segment loss was consistent in the third quarter of 2000 as higher other
operating expenses were offset by an increase in net investment income and a
decrease in interest expense. Other operating expenses increased $1.0
million, primarily due to the timing of employee related expenses and other
corporate overhead costs. Investment income increased $0.9 million during
the third quarter of 2000 due to higher average invested assets. Average
invested assets increased due to fewer sales of securities used to fund the
Company's stock repurchase program and the absence in 2000 of a $125.0
million capital contribution made to FAFLIC from AFC.
Interest expense for both periods relates primarily to the interest paid on
the Senior Debentures of the Company.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
Segment loss decreased $2.8 million, or 6.5%, to $40.4 million in the first
nine months of 2000 primarily due to lower facilities, finance, and other
corporate overhead costs.
Interest expense for both periods relates primarily 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)
September 30, 2000<FN1> December 31, 1999<FN1>
Carrying % of Total Carrying % of Total
(Dollars in millions) Value Carrying Value Value Carrying Value
<S> <C> <C> <C> <C>
Fixed maturities<FN2> $8,015.8 83.1% $7,306.7 80.6%
Equity securities<FN2> 82.2 0.9 83.2 0.9
Mortgage loans 638.8 6.6 657.5 7.3
Policy loans 380.5 3.9 371.6 4.1
Cash and cash
equivalents 337.0 3.5 464.8 5.1
Other long-term
investments 195.2 2.0 180.0 2.0
-------- ------ -------- ------
Total $9,649.5 100.0% $9,063.8 100.0%
======== ====== ======== ======
<FN>
<FN1> Includes Closed Block invested assets with a carrying value of $747.0
million and $732.9 million at September 30, 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>
Total investment assets increased $585.7 million, or 6.5%, to $9.6 billion
during the first nine months of 2000. This increase resulted primarily from
increased fixed maturities of $709.1 million, partially offset by decreases of
$127.8 million in cash and cash equivalents. The increase in fixed maturities
is principally due to the investment of funds received from the sale of the
Company's new long-term funding agreements. The decrease in cash and cash
equivalents is primarily due to the repurchase of AFC common stock under the
stock repurchase program and to the timing of investment purchases.
Page 30
<PAGE>
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 87.2% and 84.4% of the Company's total fixed maturity
portfolio at September 30, 2000 and December 31, 1999, respectively. The
average yield on fixed maturities was 7.4% and 7.2% for the nine months ended
September 30, 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.
Market Risk and Risk Management Policies
Foreign Currency Sensitivity
A portion of the Company's investments consists of securities denominated in
foreign currencies. A portion of the Company's liabilities consists of trust
obligations backed by funding agreements denominated in foreign currencies.
The Company's operating results are exposed to changes in exchange rates
between the U.S. dollar and the Swiss Franc, Japanese Yen, British Pound and
Euro. From time to time, the Company may also have exposure to other foreign
currencies. To mitigate the short-term effect of changes in currency
exchange rates, the Company regularly hedges by entering into foreign
exchange swap contracts to hedge its net foreign currency exposure.
The following table for the nine months ended September 30, 2000 provides
information about the Company's derivative financial instruments and other
financial instruments, used for purposes other than trading, by functional
currency and presents fair value information in U.S. dollar equivalents. The
table summarizes information on instruments that are sensitive to foreign
currency exchange rates, including securities denominated in foreign
currencies, and foreign currency forward exchange agreements. For foreign
currency denominated securities with contractual maturities, the table
presents principal cash flows, related weighted-average interest rates by
contractual maturities, and applicable current forward foreign currency
exchange rates. For foreign currency forward exchange agreements, the table
presents the notional amounts and weighted-average exchange rates by expected
(contractual) maturity dates. These notional amounts are used to calculate
the contractual payments to be exchanged under the contracts.
Page 31
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended Fair
September 30, 2000 There Value
(Currencies in millions) 2000 2001 2002 2003 2004 after Total 9/30/2000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Interest Securities
Denominated in Foreign Currencies:
Fixed interest rate securities
denominated in Swiss Francs 10.0 0.0 0.0 0.0 0.0 0.0 10.0 $ 6.7
Current forward foreign exchange
rate 0.5798 0.0 0.0 0.0 0.0 0.0 0.5798
Fixed interest rate securities
denominated in British Pounds 0.0 0.0 0.0 0.0 0.0 9.5 9.5 $ 18.3
Current forward foreign exchange
rate 0.0 0.0 0.0 0.0 0.0 1.4754 1.4754
Currency Swap Agreements Related to
Fixed Interest Securities:
Pay Swiss Francs
Notional amount in foreign currency 10.0 0.0 0.0 0.0 0.0 0.0 10.0 $ (0.7)
Average contract rate 0.6645 0.0 0.0 0.0 0.0 0.0 0.6645
Current forward foreign exchange
rate 0.5798 0.0 0.0 0.0 0.0 0.0 0.5798
Pay British Pounds
Notional amount in foreign currency 0.0 0.0 0.0 0.0 0.0 9.5 9.5 $ (1.3)
Average contract rate 0.0 0.0 0.0 0.0 0.0 1.9800 1.9800
Current forward foreign exchange
rate 0.0 0.0 0.0 0.0 0.0 1.4754 1.4754
Liabilities Denominated in Foreign
Currencies:
Trust instruments supported by
funding obligations denominated
in Euros 0.0 150.0 0.0 0.0 0.0 262.3 412.3 $371.7
Current forward foreign exchange
rate 0.0 0.8827 0.0 0.0 0.0 0.8827 0.8827
Trust instruments supported by
funding obligations denominated
in Yen 0.0 0.0 0.0 0.0 0.0 7,500.0 7,500.0 $ 69.5
Current forward foreign exchange
rate 0.0 0.0 0.0 0.0 0.0 0.0092 0.0092
Trust instruments supported by
funding obligations denominated
in Swiss Francs 0.0 0.0 0.0 0.0 0.0 70.0 70.0 $ 40.9
Current forward foreign exchange
rate 0.0 0.0 0.0 0.0 0.0 0.5798 0.5798
Trust instruments supported by
funding obligations denominated
in British Pounds 0.0 0.0 0.0 30.0 0.0 0.0 30.0 $ 44.5
Current forward foreign exchange
rate 0.0 0.0 0.0 1.4754 0.0 0.0 1.4754
Currency Swap Agreements Related to
Trust Obligations:
Pay Euros
Notional amount in foreign currency 0.0 150.0 0.0 0.0 0.0 262.3 412.3 $(48.4)
Average contract rate 0.0 0.9596 0.0 0.0 0.0 0.9514 0.9544
Current forward foreign exchange
rate 0.0 0.8827 0.0 0.0 0.0 0.8827 0.8827
Pay Yen
Notional amount in foreign currency 0.0 0.0 0.0 0.0 0.0 7,500.0 7,500.0 $ (2.4)
Average contract rate 0.0 0.0 0.0 0.0 0.0 0.0094 0.0094
Current forward foreign exchange
rate 0.0 0.0 0.0 0.0 0.0 0.0092 0.0092
Pay Swiss Francs
Notional amount in foreign currency 0.0 0.0 0.0 0.0 0.0 70.0 70.0 $ (1.6)
Average contract rate 0.0 0.0 0.0 0.0 0.0 0.5964 0.5964
Current forward foreign exchange
rate 0.0 0.0 0.0 0.0 0.0 0.5798 0.5798
Pay British Pounds
Notional amount in foreign currency 0.0 0.0 0.0 30.0 0.0 0.0 30.0 $ (1.5)
Average contract rate 0.0 0.0 0.0 1.5000 0.0 0.0 1.5000
Current forward foreign exchange
rate 0.0 0.0 0.0 1.4754 0.0 0.0 1.4754
</TABLE>
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.
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999
Provision for federal income taxes before minority interest and discontinued
operations was $13.1 million during the third quarter of 2000 compared to
$14.4 million during the same period in 1999. These provisions resulted in
consolidated effective federal tax rates of 16.5% and 18.6% for the quarters
ended September 30, 2000 and 1999, respectively. The decrease in the rate is
primarily due to increased realized losses in the third quarter of 2000 and
to an increase in the proportion of tax-exempt interest income to pre-tax
income. Although total tax-exempt interest income declined in the third
quarter of 2000 as compared to the third quarter of 1999, its percentage of
anticipated pre-tax income increased as a result of the aforementioned
realized losses.
Page 32
<PAGE>
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
The provision for federal income taxes before minority interest and
discontinued operations was $29.0 million during the first nine months of
2000 compared to $84.1 million during the same period in 1999. These
provisions resulted in consolidated effective federal tax rates of 16.0% and
22.6% for the nine months ended September 30, 2000 and 1999, respectively.
The decrease in the rate is primarily due to realized losses in the first
nine months of 2000 as compared to gains in the same period of 1999 and to
an increase in the proportion of tax-exempt interest income to pre-tax
income. Although total tax-exempt interest income decreased in the first
nine months of 2000, its percentage of anticipated pre-tax income increased
as a result of the aforementioned realized 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 nine months of
2000, AFC received $108.0 million of dividends from its property and
casualty businesses. Additional dividends from the Company's insurance
subsidiaries in 2000 would be considered "extraordinary" and would
require prior approval from the respective state regulators.
Sources of cash for the Company's insurance subsidiaries are from premiums
and fees collected, investment income and maturing investments. Primary cash
outflows are paid benefits, claims, losses and loss adjustment expenses,
policy acquisition expenses, other underwriting expenses and investment
purchases. Cash outflows related to benefits, claims, losses and loss
adjustment expenses can be variable because of uncertainties surrounding
settlement dates for liabilities for unpaid losses and because of the
potential for large losses either individually or in the aggregate. The
Company periodically adjusts its investment policy to respond to changes in
short-term and long-term cash requirements.
Net cash provided by operating activities was $197.5 million during the first
nine months of 2000, compared to cash provided by operating activities of
$15.3 million for the same period of 1999. The increase in 2000 is primarily
the result of approximately $75.0 million of decreased federal income tax
payments in the current period, as well as an increase in premium collections
in the property and casualty business. The increase was partially offset by
payments related to the Company's aforementioned new bonus annuity product.
Net cash used in investing activities was $816.9 million during the first
nine months of 2000, compared to cash provided by investing activities of
$496.6 million during the same period in 1999. This $1.3 billion increase in
cash used is primarily due to a $950.7 million year over year increase in
purchases of fixed maturities, the absence in 2000 of $310.0 million of
equity securities sales that occurred in January 1999, and the purchase of
company owned life insurance totaling $64.9 million.
Net cash provided by financing activities was $491.6 million during the first
nine months of 2000, compared to cash used in financing activities of $71.9
million during the same period in 1999. The change is primarily due to a
$191.3 million year over year reduction in cash used for the Company's share
repurchase program, an increase in net funding agreement deposits, including
trust instruments supported by funding obligations, of $170.0 million during
the first nine months of 2000, and the absence of a $150.0 million repayment
of short-term debt which occurred during the first quarter of 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. On
July 25, 2000, the Board of Directors declared an annual dividend of $0.25
per share on the issued and outstanding common stock of the Company, payable
November 15, 2000 to shareholders of record at the close of business
November 1, 2000. 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.
Page 33
<PAGE>
Based on current trends, the Company expects to continue to generate
sufficient positive operating cash to meet all short-term and long-term cash
requirements. The Company maintains a high degree of liquidity within the
investment portfolio in fixed maturity investments, common stock and short-
term investments. AFC has $150.0 million available under a committed
syndicated credit agreement, which expires on May 28, 2001. Borrowings under
this agreement are unsecured and incur interest at a rate per annum equal to,
at the Company's option, a designated base rate or the eurodollar rate plus
applicable margin. At September 30, 2000, no amounts were outstanding under
this agreement. The Company had $53.9 million of commercial paper borrowings
outstanding at September 30, 2000. AFC had no repurchase agreements
outstanding as of September 30, 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.
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) difficulties in recruiting new career agents,
wholesalers and new partnership relations to support the sale of variable
products; (viii) higher service, administrative, or general expense due to
the need for additional advertising, marketing, administrative or management
information systems expenditures; (ix) loss or retirement of key executives;
(x) increases in medical costs, including increases in utilization, costs of
medical services, pharmaceuticals, durable medical equipment and other
covered items; (xi) termination of provider contracts or renegotiations at
less cost-effective rates or terms of payment; (xii) changes in the
Company's liquidity due to changes in asset and liability matching;
(xiii) restrictions on insurance underwriting, based on genetic testing and
other criteria; (xiv) adverse changes in the ratings obtained from
independent rating agencies, such as Moody's, Standard and Poor's, and A.M.
Best, (xv) lower appreciation on or decline in value of the Company's
managed investments or the investment markets in general, resulting in
reduced variable products sales, assets and related fees and increased
surrenders; (xvi) possible claims relating to sales practices for insurance
products; (xvii) failure of a reinsurer of the Company's policies to pay
its liabilities under reinsurance contracts; (xviii) earlier than expected
withdrawals from the Company's general account annuities, GICs (including
funding agreements), and other insurance products; (xix) changes in the mix
of assets comprising the Company's investment portfolio and the fluctuation
of the market value of such assets; (xx) losses resulting from the Company's
participation in certain reinsurance pools; (xxi) adverse results of
regulatory audits related to the Company's prior years' federal income tax
filings, and (xxii) losses due to foreign currency fluctuations.
Page 34
<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 July 27, 2000, Allmerica Financial Corporation announced its financial
results for the six months ended June 30, 2000.
Page 35
<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 November 13, 2000 /s/ John F. O'Brien
-----------------------------
John F. O'Brien
President and Chief Executive
Officer
Dated November 13, 2000 /s/ Edward J. Parry III
-----------------------------
Edward J. Parry III
Vice President and Chief
Financial Officer
Page 36
<PAGE>
EXHIBIT INDEX
Exhibit Number Exhibit
27 Financial Data Schedule
