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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1999
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, 01653
Massachusetts (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (508) 855-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class of securities Name of Exchange on which Registered
--------------------------------- ------------------------------------
Common Stock, $.01 par value, together
with Stock Purchase Rights New York Stock Exchange
7 5/8% Senior Debentures due 2025 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on the closing sales price of March 22, 2000 the aggregate market
value of the voting and non-voting stock held by nonaffiliates of the
registrant was $2,477,327,537.
The number of shares outstanding of the registrant's common stock, $.01 par
value, was 53,545,299 shares outstanding as of March 22, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Allmerica Financial Corporation's Annual Report to Shareholders
for 1999 are incorporated by reference in Parts I, II, and IV. Portions of
Allmerica Financial Corporation's Proxy Statement of Annual Meeting of
Shareholders to be held May 16, 2000 are incorporated by reference in Part
III.
Total number of pages, including cover page: 45
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PART I
ITEM I
BUSINESS
Organization
Allmerica Financial Corporation ("AFC" or the "Company") is a non-insurance
holding company organized as a Delaware corporation in 1995. The consolidated
financial statements of AFC 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); and Citizens
Insurance Company of America ("Citizens", a wholly-owned subsidiary of
Citizens Corporation).
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 business, its Affinity Group Underwriters business and its accident
and health assumed reinsurance pool business ("reinsurance pool business").
During the third quarter of 1998, the Company ceased writing new premium in
the reinsurance pool business, subject to certain contractual obligations.
Prior to 1999, these businesses comprised substantially all of the former
Corporate Risk Management Services segment. Accordingly, the operating results
of the discontinued segment, including its reinsurance pool business, have
been reported in the Consolidated Statements of Income as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions."
Information with respect to the Company's discontinued operations is
included in "Discontinued Operations" on pages 35-36 in Management's
Discussion and Analysis of Financial Condition and Results of Operations and
in Note 2 on page 58 of the Notes to the Consolidated Financial Statements
included in the 1999 Annual Report to Shareholders, the applicable portions of
which are incorporated herein by reference.
Financial Information About 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.
In addition to the three operating segments, the Company also has a Corporate
segment, which consists primarily of cash, investments, Corporate debt and
Capital Securities.
Information with respect to each of the Company's segments is included in
"Results of Operations" on pages 22-35 in Management's Discussion and Analysis
of Financial Condition and Results of Operations and in Note 16 on pages 73-75
of the Notes to the Consolidated Financial Statements included in the 1999
Annual Report to Shareholders, the applicable portions of which are
incorporated herein by reference.
Description of Business by Segment
Following is a discussion of each of the Company's operating segments.
Risk Management
General
The Company's Risk Management segment consists primarily of its property and
casualty operations, which are generated through The Hanover Insurance Company
and Citizens Insurance Company of America. For the
2
year ended December 31, 1999, the Risk Management segment accounted for
approximately $2,189.4 million, or 71.7%, of consolidated segment revenues and
approximately $199.6 million, or 54.0%, of consolidated segment income before
taxes and minority interest. The Company primarily underwrites personal and
commercial property and casualty insurance through regional specialized
distribution channels utilizing the Company's independent agent network
primarily in the Northeast, Midwest and Southeast United States. The Allmerica
Voluntary Benefits distribution channel focuses on worksite distribution,
offering discounted property and casualty products through employer sponsored
programs, and affinity group property and casualty business. Special niche
property and casualty products in selected markets are offered through the
Allmerica Specialty distribution channel. The Company, in its Risk Management
segment, continues to have a strong regional focus and places heavy emphasis
on underwriting profitability and loss reserve adequacy. As of December 31,
1998, according to A.M. Best, the Risk Management segment of AFC ranks as the
25th largest property and casualty insurance group in the United States based
on net premiums written.
The Company strives to maintain a clear focus on the core disciplines of
underwriting, pricing, claims adjusting, marketing and sales. In particular,
the Risk Management segment seeks to achieve and maintain underwriting
profitability in each of its major product lines. The Company's overall
strategy is to improve profitability through operating efficiencies and to
pursue measured growth in profitable markets.
The industry's profitability can be affected significantly by price
competition, volatile and unpredictable developments such as extreme weather
conditions and natural disasters, legal developments affecting insurer
liability and the size of jury awards, fluctuations in interest rates and
other factors that may affect investment returns and other general economic
conditions and trends, such as inflationary pressures that may affect the
adequacy of reserves.
In 1999, the Risk Management segment completed efforts to consolidate
processing centers from 14 regional branches to 3 regional business centers.
These regional business centers are located in Atlanta, Georgia; Howell,
Michigan; and Worcester, Massachusetts. The Company will continue to maintain
its local market presence through branch sales and underwriting offices
located throughout the country. In addition to the consolidation of offices,
the Risk Management segment began deploying imaging and workflow technology in
the business centers which are expected to provide greater efficiencies and
enable expense reductions. This technology allows the field agents direct
access to underwriting documentation and policy information, which management
believes will result in increased service levels and reduced policy quote-to-
issue cycle time. In addition, the Company continues to expand its use of
agency-Company interface technology, which enables agents to electronically
submit personal lines policies for review and rating by the Company. The
Company believes that these investments in technology will result in capacity
for enhanced customer service by reducing the time required to approve and
make policies effective.
Lines of Business
The Company underwrites personal and commercial property and casualty
insurance coverage. The personal lines principally include personal automobile
and homeowners' coverage. The commercial lines principally include workers'
compensation, commercial automobile and commercial multiple peril coverage.
Personal automobile coverage insures individuals against losses incurred
from personal bodily injury, bodily injury to third parties, property damage
to an insured's vehicle, and property damage to other vehicles and other
property.
Homeowners coverage insures individuals for losses to their residences and
personal property, such as those caused by fire, wind, hail, water damage
(except for flooding), theft and vandalism, and against third party liability
claims.
Commercial automobile coverage insures businesses against losses incurred
from personal bodily injury, bodily injury to third parties, property damage
to an insured's vehicle, and property damage to other vehicles and other
property.
3
Workers' compensation coverage insures employers against employee medical
and indemnity claims resulting from injuries related to work. Workers'
compensation policies are often written in conjunction with other commercial
policies.
Commercial multiple peril coverage insures businesses against third party
liability from accidents occurring on their premises or arising out of their
operations, such as injuries sustained from products sold. It also insures
business property for damage, such as that caused by fire, wind, hail, water
damage (except for flooding), theft and vandalism.
Customers, Marketing and Distribution
The Company is licensed to sell property and casualty insurance in all fifty
states in the United States, as well as the District of Columbia. As of
December 31, 1999, approximately 39% of AFC's property and casualty written
premium is generated in the state of Michigan. The Company's other primary
markets include Massachusetts, New York, New Jersey, Maine and Indiana.
The Company markets property and casualty products through its regional
distribution channels: Hanover North, Hanover South, and Citizens Midwest. The
Company also markets employer and group sponsored property and casualty
products through the Allmerica Voluntary Benefits distribution channel.
Additionally, the Company sells special niche property and casualty products
through the Allmerica Specialty distribution channel.
The regional distribution channels predominantly market property and
casualty insurance products through more than 2,500 independent insurance
agencies and seek to establish long-term relationships with larger, well-
established agencies. In selecting agencies for new appointments, the Company
considers the following criteria: a record of profitability and financial
stability, an experienced and professional staff, a marketing plan for future
growth and a succession plan for management. Once appointed, each agency's
performance is carefully monitored.
Independent agents provide specialized knowledge of property and casualty
products, local market conditions and targeted customer characteristics. Since
the Company offers property and casualty insurance products predominately
through independent agents, fostering a close, supportive relationship with
each agency is critical to the continued growth of the business. The Company,
in the Risk Management segment, compensates agents based on profitability, in
addition to regular commission. This practice motivates its agents to write
policies for customers with above-average profit characteristics. By offering
its independent agents a consistent source of products demanded by the agents'
customers, the Company believes that an increasing number of its agents will
rely on it as their principal supplier of insurance products. The Risk
Management segment sponsors an Agents Advisory Council as a forum to enhance
relationships between AFC and its agents. The Council seeks to work together
with the Company to provide products and services that help clients better
manage the risks they face and to coordinate marketing efforts, support
implementation of the Company's strategies, and enhance local market presence.
In Michigan, the Company's position as a principal provider with many of its
agencies is evidenced by its high average premiums written per agency of
approximately $1.4 million in 1999.
Over the past few years, the Company has begun to exploit the benefits of
worksite marketing as a distribution channel for personal property and
casualty lines through its Allmerica Voluntary Benefits channel. This
distribution channel offers discounted insurance products that are
individually written to employees and members of organizations which have
established a marketing agreement with the Company, as well as franchise
programs that are tailored for members of associations and organizations,
including programs for senior citizens. For instance, the Company has
developed and marketed groups in both the personal and commercial segments
that are tailored for members of associations, financial institutions and
employers in Michigan, Indiana and Ohio. The organizations may choose to make
the programs available to their members or employees based on an evaluation of
rates, service and regulation, but each risk is individually underwritten and
each customer is issued a separate policy. Associations and organizations
receive no payment for making franchise programs available to their members or
employees. As of December 31, 1999, approximately $413.0 million of written
premiums in
4
the Voluntary Benefits distribution channel related to the Midwest, accounting
for over 40% of the Company's total property and casualty premium volume in
the region. Management believes that advantages of competitive pricing,
effective consumer awareness campaigns targeted at sponsoring organizations,
the convenience of payroll deducted premiums and word of mouth advertising
will contribute to the effectiveness of worksite and affinity sales through
this channel, as well as provide for lower distribution expenses. The Company,
through the Risk Management segment, is also exploring sales through banks and
electronic commerce. Additionally, the Company expects to be well positioned
to integrate other insurance products offered by its other subsidiaries in
order to maximize corporate worksite marketing relationships.
AFC pursues measured growth in existing markets through local management
operations that apply extensive knowledge of markets to offer competitive
products and services as well as through the establishment of long-term
relationships with larger, well-established agencies. The Company believes
that the selection of markets in which to pursue profitable growth is
dependent upon maintaining its local market presence to enhance underwriting
results and identify favorable markets. Although its administrative functions
are centralized in its headquarters, the Company is committed to maintaining
the local market presence afforded by its seventeen branch sales and
underwriting offices. These offices provide knowledge of local regulatory and
competitive conditions, and have developed close relationships with the
independent agents.
During 1999, AFC introduced a new businessowner policy ("BOP") product
called the Dimension 2000+ Businessowner Policy, which is designed to replace
the traditional BOP product for certain classes of customers. This new product
is targeted toward small business, providing broadened coverage and enabling
ease of conducting business. Dimension 2000+ utilizes a point-of-sale system
providing full quote-to-issue capabilities, which create efficiencies in
processing. The product is scheduled for full deployment in 2000.
The Company, in the Risk Management segment, is not dependent upon a single
customer or a few customers, for which the loss of any one or more would have
an adverse effect upon the segment's insurance operations.
Residual Markets and Pooling Arrangements
As a condition of its license to do business in various states, the Company
is required to participate in mandatory property and casualty shared market
mechanisms or pooling arrangements which provide various insurance coverages
to individuals or other entities that otherwise are unable to purchase such
coverage voluntarily provided by private insurers. For example, since most
states compel the purchase of a minimal level of automobile liability
insurance, states have developed shared market mechanisms to provide the
required coverages and in many cases, optional coverages, to those drivers
who, because of their driving records or other factors, cannot find insurers
who will write them voluntarily. The Company's participation in such shared
markets or pooling mechanisms is generally proportional to the Risk Management
segment's direct writings for the type of coverage written by the specific
pooling mechanism in the applicable state. The Company incurred an
underwriting loss from participation in such mechanisms, mandatory pools and
underwriting associations of $13.7 million, $11.6 million and $12.9 million in
1999, 1998 and 1997, respectively, relating primarily to coverages for
personal and commercial automobile, personal and commercial property, and
workers' compensation. The increase in the underwriting loss since 1998 is
primarily related to Hanover's participation in the Massachusetts Commonwealth
Automobile Reinsurers ("CAR") pool which is consistent with an increase in the
participation ratio and higher actual loss activity experienced in the overall
Massachusetts automobile market.
Assigned Risk Plans
Assigned risk plans are the most common type of shared market mechanism.
Many states, including Massachusetts, Illinois, New Jersey and New York
operate assigned risk plans. The plan assigns applications from drivers who
are unable to obtain insurance in the voluntary market to insurers licensed in
the applicant's state. Each insurer is required to accept a specific
percentage of applications based on its market share of voluntary business in
the state. Once an application has been assigned to an insurer, the insurer
issues a policy under its own name and retains premiums and pays losses as if
the policy was voluntarily written.
5
Reinsurance Facilities and Pools
Reinsurance facilities are currently in operation in various states that
require an insurer to write all applications submitted by an agent. As a
result, an insurer could be writing policies for applicants with a higher risk
of loss than it would normally accept. The reinsurance facility allows the
insurer to cede this high risk business to the reinsurance facility, thus
sharing the underwriting experience with all other insurers in the state. If a
claim is paid on a policy issued in this market, the facility will reimburse
the insurer. Typically, reinsurance facilities operate at a deficit, which is
then recouped by levying assessments against the same insurers.
A type of reinsurance mechanism that exists in New Jersey, The New Jersey
Unsatisfied Claim and Judgment Fund ("NJUCJF"), covers no-fault first party
medical losses of retentions in excess of $75,000 up to $175,000. All
automobile insurers in this state are required to participate in the
reinsurance mechanism. Insurers are reimbursed for their covered losses in
excess of the threshold. Funding for this fund comes from assessments against
automobile insurers based upon their proportionate market share of the state's
automobile liability insurance market. The NJUCJF currently has an unfunded
liability for future payment years. It calculates assessments against insurers
on the basis of a two-year cash flow analysis.
As a servicing carrier in Massachusetts, the Company cedes a significant
portion of its private passenger and commercial automobile premiums to the
Massachusetts Commonwealth Automobile Reinsurers ("CAR"). Net premiums earned
and losses and loss adjustment expenses ("LAE") ceded to CAR were $42.8
million and $42.6 million in 1999, $34.3 million and $38.1 million in 1998,
and $32.3 million and $28.2 million in 1997. At December 31, 1999, CAR
represented 10% or more of the Company's reinsurance business.
The Company ceded to the Michigan Catastrophic Claims Association ("MCCA")
premiums earned and losses and loss adjustment expenses of $3.7 million and
$75.3 million in 1999, $3.7 million and $18.0 million in 1998, and $9.8
million and $(0.8) million in 1997. At December 31, 1999, the MCCA represented
10% or more of the Company's reinsurance business.
On June 2, 1998, the Company recorded a $124.2 million one-time reduction of
direct and ceded written premiums as a result of a return of excess surplus
from the MCCA. This transaction is not reflected in the ceded premium and loss
amounts above and had no impact on the total net premiums recorded by the
Company in 1998.
At December 31, 1999 and 1998, the Company, in the Risk Management segment,
had reinsurance recoverable on paid and unpaid losses from CAR of $44.6
million and $41.0 million, respectively, and from MCCA of $285.6 million and
$250.4 million, respectively. Management believes that in the current
regulatory climate, the Company, in the Risk Management segment, is unlikely
to incur any material loss or become unable to pay claims as a result of
nonpayment of amounts owed to it by CAR, because CAR is a mandated pool
supported by all insurance companies licensed to write automobile insurance in
the Commonwealth of Massachusetts. In addition, with respect to MCCA (i) it is
currently in a surplus position, (ii) the payment obligations of the MCCA are
extended over many years, resulting in relatively small current payment
obligations in terms of MCCA total assets, (iii) all amounts owed to the
Company by the MCCA have been paid when due, and (iv) the MCCA is supported by
assessments permitted by statute.
Reference is made to Note 18 on pages 75 and 76 and Note 22 on page 78 of
the Notes to Consolidated Financial Statements of the 1999 Annual Report to
Shareholders, the applicable portions of which are incorporated herein by
reference.
Joint Underwriting Associations
A joint underwriting association ("JUA") is similar to a reinsurance pool.
Generally, a JUA allows an insurer to share with other insurers the
underwriting experience of drivers that reflect a higher risk of loss than the
insurer would normally accept. Under a JUA, a limited number of insurers are
designated as "servicing
6
carriers." The servicing carrier is responsible for collecting premiums and
paying claims for the policies issued in the JUA, and such insurers receive a
fee for these administrative services. The underwriting results of the
servicing carrier are then shared with all insurers in the state. Like
reinsurance facilities, JUA's typically operate at a deficit, and fund that
deficit by levying assessments on insurers.
Other Mechanisms
The principal shared market mechanisms for property insurance are the Fair
Access to Insurance Requirements Plans ("FAIR Plans"), the formation of which
was required by the federal government as a condition to an insurer's ability
to obtain federal riot reinsurance coverage following the riots and civil
disorder that occurred during the 1960's. These plans, created as mechanisms
similar to automobile assigned risk plans, were designed to increase the
availability of property insurance in urban areas. The federal government
reinsures those insurers participating in FAIR Plans against excess losses
sustained from riots and civil disorders. The individual state FAIR Plans are
created pursuant to statute or regulation. The property shared market
mechanisms provide basic fire insurance and extended coverage protection for
dwellings and certain commercial properties that could not be insured in the
voluntary market. A few states also include a basic homeowners form of
coverage in their shared market mechanism. Approximately 30 states have FAIR
Plans including Massachusetts, New York and New Jersey.
With respect to commercial automobile coverage, another pooling mechanism, a
Commercial Auto Insurance Plan ("CAIP"), uses a limited number of servicing
carriers to handle assignments from other insurers. The CAIP servicing carrier
is paid a fee by the insurer who otherwise would be assigned the
responsibility of handling the commercial automobile policy and paying claims.
Approximately 40 states have CAIP mechanisms, including Connecticut, Illinois,
New Hampshire, Maine, New Jersey and Rhode Island.
Competition
The property and casualty industry is highly competitive among national
agency companies, direct writers, and regional and local insurers on the basis
of both price and service. National agency companies sell insurance through
independent agents and usually concentrate on commercial lines of property and
casualty insurance. Direct writers, including those with exclusive agent
representation, dominate the personal lines of property and casualty insurance
and operate on a national, regional or single state basis. Regional and local
companies sell through independent agents in one or several states in the same
region and usually compete in both personal and commercial lines. The Company,
through its regional distribution channels, markets through independent agents
and, therefore, competes with other independent agency companies for business
in each of the agencies representing them.
In Massachusetts, the Company faces competition in personal lines primarily
from direct writers and regional and local companies. In its commercial lines,
the Company faces competition primarily from national agency companies and
regional and local companies. Due to the number of companies in AFC's
principal property and casualty insurance marketplace, management believes
that its emphasis on maintaining a local presence in its markets, through the
use of the regional distribution channels, coupled with investments in
operating and client technologies, will enable it to compete effectively.
During the past few years, the competitive environment in Massachusetts has
increased substantially. Approximately 22% of AFC's personal automobile
business is written in this state. Effective for both January 1, 2000 and
January 1, 1999, Massachusetts's personal automobile rates increased 0.7% as
mandated by the Massachusetts Division of Insurance. Effective January 1,
1998, Massachusetts's personal automobile rates decreased 4.0% as mandated by
the Massachusetts Division of Insurance. The Massachusetts Division of
Insurance allows for sponsoring organizations to receive discounts on their
auto insurance premiums. Currently, the Company offers more than 150 group
programs throughout the state, including a large group plan in the state with
approximately 425,000 eligible members. In 1999, the Company offered a 7%
discount on automobile insurance for its safest drivers. In 2000, the discount
for safe drivers will be 6%. As a result, policyholders have the ability to
reduce their insurance premiums by approximately 10% by combining "safe
driver" and "group"
7
discounts. Management has implemented these discounts in an effort to retain
the Risk Management segment's market share in Massachusetts. These discounts,
together with any future mandated rate decreases, may unfavorably impact
premium growth in Massachusetts.
In Michigan, the Company competes in personal lines with a number of
national direct writers and regional and local companies. According to A.M.
Best, as of December 31, 1998, the Company is the largest writer of property
and casualty insurance in Michigan through independent agents based upon
direct written premiums. Almost half of the Company's Michigan business is in
the personal automobile line. In Michigan personal lines, AFC ranked fourth
with 8% of the market. AFC's principal personal lines competition is from Auto
Club of Michigan and State Farm Group. The personal lines market has seen
intense competition in recent years, with many of the Company's competitors
committing to market share growth resulting in pricing competition in the
automobile and homeowners lines. During 1999, the Company's reduced auto rates
by approximately 11% as a result of this competitive environment.
In Michigan, AFC's commercial lines competition is principally from national
agency companies, and regional and local companies. AFC is the largest
commercial lines writer in Michigan with 7% of the market share. The
commercial industry has been in a profitability downturn over the past several
years primarily due to price competition. Premium rate levels are related to
the availability of insurance coverage, which varies according to the level of
capacity in the industry. The current commercial lines market is extremely
competitive due to the increasing number of competitors, which continues to
cause lower prices. This highly competitive commercial lines market has
constrained the Risk Management segment's growth in commercial lines premium
as a result of AFC's commitment to and focus on underwriting profitability,
and a refusal to write business at prices the Company views as inadequate. In
Michigan, the Company's workers' compensation line is the largest commercial
line in terms of premiums written. Over the past few years, competition has
caused the Company to reduce workers' compensation rates five times; 6.4%,
8.7%, 1.9%, 3.3%, and 3.3% effective June 1, 1996, March 1, 1997, January 1,
1998, July 1, 1998, and February 1, 1999, respectively.
Because there is no one dominant competitor in any of the markets in which
the Risk Management segment competes, management believes there is opportunity
for future growth.
Underwriting
Pricing
The manner in which the Company prices products takes into consideration the
expected frequency and severity of losses, the costs of providing the
necessary coverage (including the cost of administering policy benefits, sales
and other administrative and overhead costs) and a margin for profit.
The Company, in the Risk Management segment, seeks to achieve a target
combined ratio in each of its product lines regardless of market conditions.
This strategy will better enable the Company to achieve measured growth and
consistent profitability on a continuing basis. The Company concentrates on
its established major product lines, and accordingly, does not typically
pursue the development of products with relatively unpredictable risk
profiles. In addition, the Company utilizes its extensive knowledge of local
markets, including knowledge of regulatory requirements, to achieve superior
underwriting results. AFC relies on information provided by its local agents
and on the knowledge of its staff in the local branch offices. Since the Risk
Management segment maintains a strong regional focus and a significant market
share in a number of states, the Company can apply its extensive knowledge and
experience in making underwriting and rate setting decisions.
Claims
The Company employs experienced claims adjusters, appraisers, medical
specialists, managers and attorneys in order to manage its claims. The
Company, in the Risk Management segment, has field claims
8
adjusters strategically located throughout its operating territories. All
claims staff members work closely with the agents to settle claims rapidly and
cost-effectively.
Claims office adjusting staff are supported by general adjusters on large
property losses, automobile and heavy equipment damage appraisers on
automobile material damage losses and medical specialists whose principal
concentration is in workers' compensation and no-fault automobile injury
cases. In addition, the claims offices are supported by staff attorneys who
specialize in litigation defense and claim settlements. The Risk Management
segment also has special units which investigate suspected insurance fraud and
abuse.
The Company, in the Risk Management segment, utilizes claims processing
technology which allows smaller and more routine claims to be processed at
centralized locations. Approximately 70% of the Company's personal lines
claims are currently being processed at these locations, which has helped to
increase efficiency and reduce operating costs.
The Risk Management segment has a program under which participating agents
have settlement authority for many property loss claims. Based upon the
program's experience, the Company believes that this program contributes to
lower LAE experience and to higher customer satisfaction ratings by permitting
the early and direct settlement of these small claims. Approximately 30.0% of
the number of total paid claims reported to the Midwest distribution channel
during 1999, 1998 and 1997, were settled under this program.
Property and casualty insurers are subject to claims arising out of
catastrophes which may have a significant impact on their results of
operations and financial condition. The Risk Management segment may experience
catastrophe losses in the future which could have a material adverse impact on
the Company. Catastrophes can be caused by various events including
hurricanes, earthquakes, tornadoes, wind, hail, fires and explosions, and the
incidence and severity of catastrophes are inherently unpredictable. Although
catastrophes can cause losses in a variety of property and casualty lines,
homeowners and business property insurance have in the past generated the vast
majority of catastrophe-related claims.
Reserve for Unpaid Losses and Loss Adjustment Expenses
Reference is made to "Reserve for Losses and Loss Adjustment Expenses" on
pages 30 and 31 of Management's Discussion and Analysis of Financial Condition
and Results of Operations of the 1999 Annual Report to Shareholders, which is
incorporated herein by reference.
The Company's actuaries, in the Risk Management segment, review the reserves
each quarter and certify the reserves annually as required for statutory
filings. Significant periods of time often elapse between the occurrence of an
insured loss, the reporting of the loss to the Company and the Company's
payment of that loss. To recognize liabilities for unpaid losses, the Company
establishes reserves as balance sheet liabilities representing estimates of
amounts needed to pay reported and unreported losses and LAE.
The Risk Management segment 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 Risk Management segment 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.
The Company, in the Risk Management segment, does not use discounting
techniques in establishing reserves for losses and LAE, nor has it
participated in any loss portfolio transfers or other similar transactions.
9
The following table reconciles reserves determined in accordance with
accounting principles and practices prescribed or permitted by insurance
statutory authorities ("Statutory Reserve") to reserves determined in
accordance with generally accepted accounting principles ("GAAP Reserve") at
December 31, as follows:
1999 1998 1997
-------- -------- --------
(In millions)
Statutory reserve for losses and LAE.......... $1,926.6 $2,011.7 $2,047.2
GAAP adjustments:
Reinsurance recoverable on unpaid losses.... 694.2 591.7 576.7
Other(*).................................... (2.1) (6.1) (8.5)
-------- -------- --------
GAAP reserve for losses and LAE............... $2,618.7 $2,597.3 $2,615.4
======== ======== ========
- --------
(*) Primarily represents other statutory liabilities reclassified as loss
adjustment expense reserves for GAAP reporting and purchase accounting
adjustments.
10
Analysis of Losses and Loss Adjustment Expenses Reserve Development
The following table sets forth the development of net reserves for unpaid
losses and LAE from 1989 through 1999 for the Company.
Year ended December 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(In, millions)
Net reserve for
losses and
LAE(1)......... $1,924.5 $2,005.5 $2,038.7 $2,117.2 $2,132.5 $2,109.3 $2,019.6 $1,936.9 $1,772.4 $1,550.6 $1,326.3
Cumulative
amount paid as
of(2):
One year later.. -- 638.0 643.0 732.1 627.6 614.3 566.9 564.3 569.0 561.5 521.1
Two years
later.......... -- -- 967.4 1,054.3 1,008.3 940.7 884.4 862.7 888.0 874.5 820.2
Three years
later.......... -- -- -- 1,235.0 1,217.8 1,172.8 1,078.1 1,068.4 1,077.1 1,074.3 1,009.3
Four years
later.......... -- -- -- -- 1,325.9 1,300.4 1,210.9 1,184.1 1,207.1 1,186.4 1,130.1
Five years
later.......... -- -- -- -- -- 1,369.9 1,289.5 1,267.5 1,279.4 1,265.4 1,192.7
Six years
later.......... -- -- -- -- -- -- 1,353.3 1,323.1 1,337.2 1,314.2 1,240.9
Seven years
later.......... -- -- -- -- -- -- -- 1,355.8 1,377.3 1,355.3 1,271.4
Eight years
later.......... -- -- -- -- -- -- -- -- 1,404.1 1,385.9 1,301.6
Nine years
later.......... -- -- -- -- -- -- -- -- -- 1,409.2 1,324.0
Ten years
later.......... -- -- -- -- -- -- -- -- -- -- 1,343.4
Net reserve re-
estimated as
of(3):
End of year..... 1,924.5 2,005.5 2,038.7 2,117.2 2,132.5 2,109.3 2,019.6 1,936.9 1,772.4 1,550.6 1,326.3
One year later.. -- 1,822.1 1,911.5 1,989.3 1,991.1 1,971.7 1,891.5 1,868.1 1,755.0 1,601.5 1,412.4
Two years
later.......... -- -- 1,796.8 1,902.8 1,874.3 1,859.4 1,767.4 1,762.8 1,717.7 1,601.9 1,449.0
Three years
later.......... -- -- -- 1,832.5 1,826.8 1,780.3 1,691.5 1,703.3 1,670.8 1,614.3 1,471.7
Four years
later.......... -- -- -- -- 1,780.7 1,766.2 1,676.3 1,658.9 1,654.1 1,597.6 1,484.7
Five years
later.......... -- -- -- -- -- 1,735.6 1,653.7 1,637.3 1,634.6 1,594.3 1,482.3
Six years
later.......... -- -- -- -- -- -- 1,630.3 1,650.5 1,630.6 1,588.7 1,486.9
Seven years
later.......... -- -- -- -- -- -- -- 1,627.2 1,644.2 1,593.1 1,488.4
Eight years
later.......... -- -- -- -- -- -- -- -- 1,626.1 1,621.9 1,552.1
Nine years
later.......... -- -- -- -- -- -- -- -- -- 1,593.4 1,524.7
Ten years
later.......... -- -- -- -- -- -- -- -- -- 1,499.1
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Deficiency)
Redundancy, net
(4,5).......... $ -- $ 183.4 $ 241.9 $ 284.7 $ 351.8 $ 373.7 $ 389.3 $ 309.7 $ 146.3 $ (42.8) $ (172.8)
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
- --------
(1) Sets forth the estimated net liability for unpaid losses and LAE recorded
at the balance sheet date for each of the indicated years; represents the
estimated amount of net losses and LAE for claims arising in the current
and all prior years that are unpaid at the balance sheet date, including
incurred but not reported ("IBNR") reserves.
(2) Cumulative loss and LAE payments made in succeeding years for losses
incurred prior to the balance sheet date.
(3) Re-estimated amount of the previously recorded liability based on
experience for each succeeding year; increased or decreased as payments
are made and more information becomes known about the severity of
remaining unpaid claims.
(4) Cumulative deficiency or redundancy at December 31, 1999 of the net
reserve amounts shown on the top line of the corresponding column. A
redundancy in reserves means the reserves established in prior years
exceeded actual losses and LAE or were reevaluated at less than the
original reserved amount. A deficiency in reserves means the reserves
established in prior years were less than actual losses and LAE or were
reevaluated at more than the original reserved amount.
(5) The following table sets forth the development of gross reserve for
unpaid losses and LAE from 1992 through 1999 for the Company:
11
Year Ended December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------- --------
(In millions)
Reserve for losses and
LAE:
Gross liability........ $2,618.7 $2,597.2 $2,615.4 $2,744.1 $2,896.0 $2,821.7 $2,717.3 $2,598.9
Reinsurance
recoverable........... 694.2 591.7 576.7 626.9 763.5 712.4 697.7 662.0
-------- -------- -------- -------- -------- -------- -------- --------
Net liability.......... $1,924.5 $2,005.5 $2,038.7 $2,117.2 $2,132.5 $2,109.3 $2,019.6 $1,936.9
======== ======== ======== ======== ======== ======== ======== ========
One year later:
Gross re-estimated
liability............. $2,432.9 $2,472.6 $2,541.9 $2,587.8 $2,593.5 $2,500.5 $2,460.5
Re-estimated
recoverable........... 610.8 561.1 552.6 596.7 621.8 609.0 592.4
-------- -------- -------- -------- -------- -------- --------
Net re-estimated
liability............. $1,822.1 $1,911.5 $1,989.3 $1,991.1 $1,971.7 $1,891.5 $1,868.1
======== ======== ======== ======== ======== ======== ========
Two years later:
Gross re-estimated
liability............. $2,379.3 $2,424.5 $2,427.7 $2,339.2 $2,333.3 $2,341.9
Re-estimated
recoverable........... 582.5 521.7 553.4 479.8 565.9 579.1
-------- -------- -------- -------- -------- --------
Net re-estimated
liability............. $1,796.8 $1,902.8 $1,874.3 $1,859.4 $1,767.4 $1,762.8
======== ======== ======== ======== ======== ========
Three years later:
Gross re-estimated
liability............. $2,395.3 $2,358.6 $2,227.0 $2,145.5 $2,257.3
Re-estimated
recoverable........... 562.8 531.8 446.7 454.0 554.0
-------- -------- -------- -------- --------
Net re-estimated
liability............. $1,832.5 $1,826.8 $1,780.3 $1,691.5 $1,703.3
======== ======== ======== ======== ========
Four years later:
Gross re-estimated
liability............. $2,359.5 $2,220.9 $2,102.0 $2,168.2
Re-estimated
recoverable........... 578.8 454.7 425.7 509.3
-------- -------- -------- --------
Net re-estimated
liability............. $1,780.7 $1,766.2 $1,676.3 $1,658.9
======== ======== ======== ========
Five years later:
Gross re-estimated
liability............. $2,215.2 $2,091.7 $2,027.3
Re-estimated
recoverable........... 479.6 438.0 390.0
-------- -------- --------
Net re-estimated
liability............. $1,735.6 $1,653.7 $1,637.3
======== ======== ========
Six years later:
Gross re-estimated
liability............. $2,096.6 $2,022.6
Re-estimated
recoverable........... 466.3 372.1
-------- --------
Net re-estimated
liability............. $1,630.3 $1,650.5
======== ========
Seven years later:
Gross re-estimated
liability............. $2,050.1
Re-estimated
recoverable........... 422.9
--------
Net re-estimated
liability............. $1,627.2
========
Reinsurance
The Company, in the Risk Management segment, maintains a reinsurance program
designed to protect against large or unusual losses and LAE activity. This
includes both excess of loss reinsurance and catastrophe reinsurance.
Catastrophe reinsurance serves to protect the ceding insurer from significant
aggregate losses arising from a single event such as windstorm, hail,
hurricane, tornado, riot or other extraordinary events. In addition the
Company, in the Risk Management segment, has reinsurance for casualty
business. 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.
Under the 1999 casualty reinsurance program, the reinsurers are responsible
for 100% of the amount of each loss in excess of $0.5 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 by the Company.
12
Effective July 1, 1999, the Company maintains a property reinsurance program
in which the reinsurers are responsible for 100% of each loss in excess of
$0.5 million per occurrence up to $19.5 million for inland marine and
commercial auto physical damage. All other property business is 100% covered
by reinsurers for each loss in excess of $1.5 million per occurrence up to
$18.5 million. Amounts in excess of $19.5 million for inland marine and
commercial auto physical damage are 100% retained by the Company while amounts
in excess of $18.5 million in all other property lines are retained by the
Company.
Under the Company's 1999 and 1998 catastrophe reinsurance program, AFC
retains $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. In 1998 and 1997, the Company, in the Risk
Management segment, recovered $3.0 million and $1.2 million, on its
catastrophe coverage, respectively. The Company did not have any catastrophe
coverage recoveries in 1999. Effective January 1, 2000, the Company modified
its catastrophe reinsurance 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. 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 as defined by
the Company. The Company's retention will be calculated cumulatively, in the
aggregate, on a quarterly basis with the aggregate losses comprised of all
catastrophe losses that exceed $0.5 million in 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.
Effective January 1, 1999, the Company entered into a whole account
aggregate excess of loss reinsurance agreement with a highly rated reinsurer.
The reinsurance agreement provides accident year coverage for the three years
1999 to 2001 for the Company's property and casualty business. The program
covers 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 limits for losses and allocated LAE are $150.0 million
and $300.0 million, respectively. In accordance with the provisions of this
contract, the Company has exercised its option to cancel this contract
effective January 1, 2000.
The Company, in the Risk Management segment, cedes to reinsurers a portion
of its risk and pays a fee based upon premiums received on all policies
subject to such 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.
The Company, in the Risk Management segment, is subject to concentration of
risk with respect to reinsurance ceded to various residual market mechanisms.
As a condition to the ability to conduct certain business in various states,
the Company is required to participate in various residual market mechanisms
and pooling arrangements which provide various insurance coverages to
individuals or other entities that are otherwise unable to purchase such
coverage voluntarily provided by private insurers. These market mechanisms and
pooling arrangements include CAR and MCCA.
Reference is made to "Reinsurance" in Note 18 on pages 75 and 76 of the
Notes to Consolidated Financial Statements of the 1999 Annual Report to
Shareholders, which is incorporated herein by reference.
Reference is also made to "Reinsurance Facilities and Pools" on page 6 of
this Form 10-K which is incorporated herein by reference.
13
Asset Accumulation
Allmerica Financial Services
General
The Allmerica Financial Services segment includes the individual financial
products and the group retirement products and services businesses of FAFLIC
and its wholly-owned subsidiary, AFLIAC, as well as the Company's registered
investment advisor and broker-dealer affiliates. Through this segment, the
Company is a leading provider of investment-oriented life insurance and
annuities to upper income individuals and small businesses throughout the
United States. These products are marketed through the Company's career agency
force of 690 agents, to mutual fund providers for their variable annuity
customers, and on a wholesale basis to financial planners and broker-dealers.
For the year ended December 31, 1999, the Allmerica Financial Services segment
accounted for $714.8 million, or 23.4%, of consolidated segment operating
revenues and $205.5 million, or 55.6%, of consolidated segment income before
taxes and minority interest.
The Company offers a diverse line of products tailored to its customer
market, including variable annuities, variable universal life, group
retirement plan products, retirement plan funding products and universal life.
The main components of the Company's current strategy in this segment are to:
(i) emphasize investment-oriented insurance products, particularly variable
annuities and variable universal life insurance, (ii) continue to develop
additional distribution channels, (iii) leverage the Company's technological
resources to support marketing and client service initiatives, (iv) improve
the productivity of the career agency distribution system and (v) implement a
targeted marketing approach emphasizing value-added service.
A significant distribution system in this segment is the career agent sales
force. Virtually all of the Company's career agents are registered broker-
dealer representatives, licensed to sell all of Allmerica Financial Services
investment products, as well as its insurance products. The Company has
implemented a performance-based compensation system which rewards agents and
agencies based upon sales of products which provide greater profits for the
Company. The Company has also instituted higher performance standards for
agency retention, and requires that such standards be achieved earlier, in
order to elevate the productivity of its agent sales force.
In addition to its agency distribution system, the Company has established
several other distribution channels, which have made significant contributions
to the overall growth of variable product sales in this segment. Products sold
through these additional channels include Allmerica Select life and annuity
products, which are distributed through independent broker-dealers and
financial planners, as well as annuity products sold through alliances with
mutual fund partners such as Zurich Kemper Investments ("Kemper"), Pioneer
Group ("Pioneer"), Delaware Group ("Delaware"), and Fulcrum Trust ("Fulcrum").
The Company's strategy is to continue to pursue additional distribution
channels and to seek to increase sales under its existing distribution
channels.
The Company has developed a number of new marketing and client service
initiatives in order to encourage sales of its products and improve customer
satisfaction. As part of its focus on the sale of investment-oriented
insurance products, the Company has emphasized a financial planning approach
utilizing face-to-face presentations and seminar programs to address different
client needs. In order to identify a favorable prospective client base, the
Company has developed a system utilizing advanced demographic screening and
telemarketing techniques. The Company also regularly delivers seminars focused
on retirement planning to these prospective clients. During 1999, the Company
delivered approximately 675 seminars nationally with a total of more than
20,000 attendees.
The Company has also utilized its technological resources to support its
marketing and client service initiatives in this segment. The Company has
developed automated portfolio re-balancing capabilities and graphical
quarterly report statements, which are used to establish and monitor the
desired mix of investments by individual contract and policyholders.
14
According to 1999 A.M Best's Policy Reports, the Company is among the twenty
largest writers of individual variable annuity contracts and individual
variable universal life insurance policies in the United States in 1998, based
on statutory premiums and deposits. Sales of variable products represented
approximately 95.9%, 98.0% and 95.7% of this segment's statutory premiums and
deposits in 1999, 1998 and 1997, respectively. Statutory premiums and
deposits, a common industry benchmark for sales achievement, totaled $3,609.5
million, $4,101.9 million and $3,188.8 million in 1999, 1998 and 1997,
respectively.
Currently, under the Internal Revenue Code, holders of certain life
insurance and annuity products are entitled to tax-favored treatment on these
products. For example, income tax payable by policyholders on investment
earnings under certain life insurance and annuity products is deferred during
the product's accumulation period and is payable, if at all, only when the
insurance or annuity benefits are actually paid or to be paid. Also, for
example, interest on loans up to $50,000 secured by the cash value of certain
insurance policies owned by businesses is eligible for deduction even though
investment earnings during the accumulation period are tax-deferred.
In the past, legislation has been proposed that would have curtailed the
tax-favored treatment of the life insurance and annuity products offered by
the Company. These proposals were not enacted; however, such proposals or
similar proposals are currently under consideration by Congress. If these or
similar proposals directed at limiting the tax-favored treatment of life
insurance policies and annuity contracts were enacted, market demand for such
products offered by the Company would be adversely affected. The Company
cannot predict the impact of such effects.
Products
The following table reflects premiums and deposits on a statutory accounting
practices ("SAP") basis, including universal life and investment-oriented
contract deposits, for the segment's major product lines, including the Closed
Block, for the years ended December 31, 1999, 1998 and 1997. Receipts from
various products are treated differently under GAAP and SAP. Under GAAP,
universal life, variable universal life and annuity deposits are not included
in revenues but are recorded directly to policyholder account balances.
1999 1998 1997
-------- -------- --------
(In millions)
Statutory Premiums and Deposits
Variable universal life........................ $ 187.0 $ 158.7 $ 148.8
Group variable universal life.................. 94.9 73.3 68.3
Separate account annuities..................... 1,922.2 2,583.6 2,169.1
General account annuities (1).................. 830.2 622.2 234.7
Retirement investment account annuities........ 16.4 20.1 21.8
Group annuities................................ 409.3 563.9 404.2
Universal life................................. 71.8 23.6 60.7
Traditional life............................... 77.4 55.9 58.4
Individual health.............................. 0.3 0.6 22.8
-------- -------- --------
Total statutory premiums and deposits............ $3,609.5 $4,101.9 $3,188.8
======== ======== ========
- --------
(1) The general account includes approximately $590.5 million in 1999 and
$373.0 million in 1998 of deposits made in association with an annuity
program which provides, for a limited time, enhanced crediting rates on
deposits made into the Company's general account and transferred ratably,
over a period of time, into the Company's separate accounts.
While the Company continues to offer certain traditional insurance products,
its current focus for new business in this segment is on the sale of variable
products.
15
Variable Products
The Company's variable products offered through this segment include
variable universal life insurance and variable annuities. The Company's
variable universal life insurance products combine the flexible terms of the
Company's universal life insurance policy with separate account investment
opportunities. The Company also offers a variable joint life product through
this segment. The Company's variable annuities offer the investment
opportunities of the Company's separate accounts and provide a vehicle for
tax-deferred savings. These products are sold pursuant to registration
statements under the Securities Act or exemptions from registration
thereunder.
The Company seeks to achieve product distinction with respect to its
variable products on the basis of quality and diversity of the separate
account investment options underlying these products. The Company's variable
universal life and annuity products offer a variety of account investment
options with choices ranging from money market funds to international equity
funds. The number of these investment options has increased from 69 in 1997 to
133 in 1999, including those underlying the products sold through alternative
distribution channels. For management of these separate accounts, the Company
supplements its in-house expertise in managing fixed income assets with the
equity management expertise of well-known mutual fund advisors, such as
Fidelity Investments, as well as other independent management firms who
specialize in the management of institutional assets. Additionally, the
Company utilizes the services of an experienced investment consultant to the
pension industry to assist it in the selection of these institutional managers
and in the ongoing monitoring of their performance.
Retirement Products
In addition to the above, the Company provides consulting and investment
services to defined benefit and defined contribution retirement plans of
corporate employers, as well as the sale of group annuities to corporate
pension plans. The Company also offers participant recordkeeping and
administrative services to defined benefit and defined contribution retirement
plans. Participants in defined contribution plans serviced by the Company have
the option to invest their contributions to the plan in the Company's general
account or choose from one of the Company's separate account investment
options. Currently, the Company provides administration and recordkeeping for
approximately 580 qualified pension and profit sharing plans, which have
assets totaling $1.8 billion, and cover approximately 62,000 participants. To
address the decrease in the market for defined benefit plans sponsored by
employers, the Company has focused on increasing sales of defined contribution
plans, targeting plans with less than 500 participants. Based on internal
studies, management believes the size of this market provides the greatest
opportunity in this line of business.
Traditional Products
The Company's primary insurance products contained in this segment are
traditional life insurance products, including whole life and universal life,
as well as fixed annuities and retirement plan funding products.
The Company's universal life insurance product is an interest-sensitive
product which offers flexibility in arranging the amount of insurance
coverage, the premium level and the premium payment period. The Company also
offers joint life products through this segment designed to meet estate
planning needs. These products offer flexible premiums and benefits and cover
two lives, with benefits paid at the first or second death, depending on the
policy. In addition, the Company offers a funding vehicle for pension plans of
small to medium-sized employers which provides both general account and
separate account investment options.
Distribution
A significant distribution channel for this segment is its national career
agency sales force of 690 agents, housed in 19 general agencies located in or
adjacent to most of the major metropolitan centers in the United States.
Virtually all of these agents are licensed both as insurance agents and
securities broker-dealers by the National Association of Securities Dealers
("NASD"), qualifying them to sell the full range of the Company's
16
products. The Company has focused on improving the productivity and reducing
the cost of its career agency system through performance-based compensation,
higher performance standards for agency retention and agency training
programs. The Company also regularly conducts comprehensive financial planning
seminars and face-to-face presentations to address different investment
objectives of clients. During 1999, total statutory premiums and deposits from
sales of variable annuities through the agency sales force totaled $930.1
million, compared to $871.3 million and $782.2 million in 1998 and 1997,
respectively.
The Company has established several distribution channels for this segment's
products utilizing independent broker-dealers and financial planners and
continues to pursue additional relationships in this marketplace. Through
these distribution channels, the Company has obtained access to over 470
distribution firms employing over 70,000 sales personnel. In addition,
establishment of these channels has enabled the Company to offer a broader
range of investment options through alliances with Kemper, Pioneer, Delaware,
and Fulcrum mutual funds. During 1999, total statutory premiums and deposits
from sales of variable annuities through additional distribution channels
totaled $1,822.3 million, compared to $2,334.5 million and $1,621.6 million in
1998 and 1997, respectively.
Additionally, the Company offers its group retirement products for sale
directly at the worksite through trained and licensed sales representatives.
In addition to the Home Office, the Company maintains seven regional sales and
service offices located in strategic financial markets. By using education and
personalized consulting to increase employee purchases, the Company seeks to
lower acquisition costs and increase employee participation levels.
Underwriting
Life insurance underwriting involves a determination of the type and amount
of risk which an insurer is willing to accept and the price charged to do so.
The Company's insurance underwriting standards for this segment attempt to
produce mortality results consistent with the assumptions used in product
pricing. Underwriting also determines the amount and type of reinsurance
levels appropriate for a particular risk profile and thereby allows
competitive risk selection. Underwriting rules and guidelines are based on the
mortality experience of the Company, as well as of the insurance industry and
the general population. The Company also uses a variety of medical tests to
evaluate certain policy applications, based on the size of the policy, the age
of the applicant and other factors.
The Company's product specifications are designed to prevent anti-selection.
Mortality assumptions are thoroughly communicated and monitored. The
underwriting department tracks the profitability indicators of business by
each general agent, including the mix of business, percentage of substandard
and declined cases and placement ratio. Ongoing internal underwriting audits,
conducted at multiple levels, monitor consistency of underwriting requirements
and philosophy. Routine independent underwriting audits conducted by its
reinsurers have supported the Company's underwriting policies and procedures.
Insurance Reserves
The Company has established liabilities for policyholders' account balances
and future policy benefits in the Consolidated Balance Sheets included in the
1999 Annual Report to Shareholders, the applicable portions of which are
incorporated herein by reference, to meet obligations on various policies and
contracts. Policyholders' account balances for universal life and investment-
type policies are equal to cumulative account balances: deposits plus credited
interest, less expense and mortality charges and withdrawals. Future policy
benefits for traditional products are computed on the basis of assumed
investment yields, mortality, persistency, morbidity and expenses (including a
margin for adverse deviation), which are established at the time of issuance
of a policy and generally vary by product, year of issue and policy duration.
17
Reinsurance
Consistent with the general practice in the life insurance industry, the
Company has reinsured portions of the coverage provided by this segment's
insurance products with other insurance companies. Insurance is ceded
principally to reduce net liability on individual risks, to provide protection
against large losses and to obtain a greater diversification of risk. Although
reinsurance does not legally discharge the ceding insurer from its primary
liability for the full amount of policies reinsured, it does make the
reinsurers liable to the insurer to the extent of the reinsurance ceded. The
Company maintains a gross reserve for reinsurance liabilities. The Company
ceded approximately 3.8% of this segment's total statutory life insurance
premiums in 1999.
With respect to life policies of the Allmerica Financial Services segment,
the Company has reinsurance agreements in place, established on an annual
term, for both automatic and facultative reinsurance. Under automatic
reinsurance. The Company's retention is currently $2.0 million per life. The
reinsurer is automatically bound for up to three times the Company's
retention, or $6.0 million, with certain restrictions that determine the
binding authority with the various reinsurers. For life policies greater than
$8.0 million, the Company obtains facultative reinsurance. Under facultative
reinsurance, the facultative reinsurer reviews all of the underwriting
information relating to the policies prior to issuing the reinsurance and
reinsures on a policy by policy basis. Depending on the nature of the risk and
the size of the policy, the facultative reinsurance could be provided by one
company or several. The Company sometimes facultatively reinsures certain
policies under $2.0 million which do not satisfy the Company's underwriting
guidelines.
The Company seeks to enter into reinsurance treaties with highly rated
reinsurers. All of the reinsurers utilized by this segment have received an
A.M. Best rating of "A- (Excellent)" or better (Best's Insurance Reports, 1998
edition). The Company believes that it has established appropriate reinsurance
coverage for this segment based upon its net retained insured liabilities
compared to its surplus. Based on its review of its reinsurers' financial
positions and reputations in the reinsurance marketplace, the Company believes
that its reinsurers are financially sound.
The Company also obtains catastrophe reinsurance for life insurance in this
segment through a catastrophe accident pool. The maximum pool reinsurance
available per company is $50.0 million and the maximum pool reinsurance
available for a single event is $125.0 million. Any amounts in excess of these
limits are the responsibility of the company suffering the loss. Each
participant in the pool pays a premium based on the share of claims paid by
the pool. The Company's share of pool losses is approximately 2.5%. There have
been three claims for which the Company's share was approximately $80,000
since the Company entered the pool on January 1, 1989. Approximately 125
companies currently participate in this pool.
Effective January 1, 1998, the Company entered into an agreement with a
highly rated reinsurer to reinsure the mortality risk on the universal life
and variable universal life lines of business. Management believes that this
agreement will continue to have an immaterial effect on the results of
operations and financial position of the Company. In addition, during 1997,
the Company entered into a 100% coinsurance agreement to reinsure
substantially all of its individual disability income business.
Competition
There is strong competition among insurance companies seeking clients for
the types of insurance, annuities and investment products sold by the Company
in this segment. As of December 31, 1999, there were approximately 1,600
companies that offer life insurance in the United States, most of which offer
one or more products similar to those offered by the Company. In some cases
these products are offered through similar marketing techniques. In addition,
the Company may face additional competition from banks and other financial
institutions should current regulatory restrictions on the sale of insurance
and securities by these institutions be repealed.
18
The Company believes that, based upon its extensive experience in the
market, the principal competitive factors affecting the sale of its life
insurance and related investment products are price, financial strength and
claims-paying ratings, size and strength of agency force, range of product
lines, product quality, reputation and name recognition, value-added service
and, with respect to variable insurance and annuity products, investment
management performance of the underlying separate accounts. Accordingly,
management believes that the Company's strong financial strength and claims-
paying ratings, the quality and diversity of the separate accounts underlying
its investment-based products, the NASD licensing of substantially all of its
agents and its reputation in the insurance industry enable it to compete
effectively in the markets in which it operates.
Allmerica Asset Management
General
Through the Allmerica Asset Management segment, the Company offers Stable
Value Products, such as Guaranteed Investment Contracts ("GICs"), to ERISA-
qualified retirement plans as well as other non-ERISA institutional buyers,
such as money market funds, corporate cash management programs and securities
lending collateral reinvestment programs. The Company primarily offers funding
agreements, also referred to as floating rate GICs, a specific type of GIC, to
these non-ERISA institutional buyers. In 1999, the Company established a
European Medium Term Note program, also referred to as Euro-GICs, for the
purpose of providing an additional market for the issuance of funding
agreements. In addition, this segment contains a Registered Investment
Advisor, which provides investment advisory services to affiliates and to
other institutions, such as insurance companies, retirement plans and mutual
funds.
For the year ended December 31, 1999, this segment accounted for
approximately $150.5 million, or 4.9%, of consolidated segment revenues, and
income of $23.5 million, or 6.4%, of consolidated segment income before taxes
and minority interest.
Products and Services
Stable Value Products
Three types of Stable Value Products are offered: the traditional GIC, the
synthetic GIC and the non-qualified GIC, often referred to as funding
agreements. The traditional GIC is issued to ERISA-qualified retirement plans,
and provides a fixed guaranteed interest rate and fixed maturity for each
contract. Some of the traditional GICs provide for a specific lump sum deposit
and no withdrawals prior to maturity. Other traditional GICs allow for window
deposits and/or benefit-sensitive withdrawals prior to maturity, for which the
Company builds an additional risk charge into the guaranteed interest rate.
The synthetic GIC is similar to the traditional GIC, except that the
underlying investments are generally held and managed by a third party, in
accordance with specific investment guidelines, and the Company periodically
resets the guaranteed interest rate for in-force funds, based on the actual
investment experience of the funds. The funding agreement is similar to the
traditional GIC, except that it is issued to non-ERISA institutional buyers,
such as money market funds, corporate cash management programs and securities
lending collateral reinvestment programs. This market tends to prefer short
duration instruments, so it is typical for the funding agreements sold in this
market to have short maturities and periodic interest rate resets, based on an
index such as LIBOR. Periodically, buyers prefer to invest in instruments with
longer maturities and either fixed or floating rate characteristics. The
Company is able to structure its funding agreements to accommodate these
buyers. Funding agreements sold through the Euro-GIC program tend to have
longer maturities, from 3-10 years, and may utilize either fixed or floating
interest rates, and be denominated in either United States or foreign
currencies.
During 1999, funding agreement sales were approximately $1.0 billion, as
compared to $1.1 billion and $250.0 million in 1998 and 1997, respectively.
During 1999 deposits of approximately $880.0 million were short maturity
floating rate products, while $153.0 million were longer maturity products,
including Euro-GIC sales of approximately $53.0 million. In addition,
traditional GIC sales totaled approximately $3.0 million, $0.3 million,
19
and $1.1 million in 1999, 1998, and 1997, respectively. There were no sales of
synthetic GICs in 1999, 1998, or 1997, and the notional amount of this
portfolio decreased to less than $4.0 million during 1999. The continued low
volume of traditional and synthetic GIC sales reflects the Company's decision
to sell these products only when the profit margins meet the Company's
standards. The Company expects to continue its sales of funding agreements in
2000.
Investment Advisory Services
Through its registered investment advisor, Allmerica Asset Management, Inc.,
the Company provides investment advisory services to affiliates and to other
institutions, including unaffiliated insurance companies, retirement plans,
foundations and mutual funds. At December 31, 1999, Allmerica Asset Management
had assets under management of approximately $13.3 billion, of which
approximately $2.1 billion represented assets managed for third party clients
(i.e. entities unaffiliated with the Company). Assets under management for
third party clients grew by approximately $700.0 million during 1999.
Distribution
The Company distributes Stable Value Products through brokers, investment
bankers, GIC investment managers and directly from the Home Office. Investment
advisory services are marketed directly.
Competition
Prior to 1995, all GIC sales consisted of traditional GICs. Around that
time, increased sensitivity to claims-paying ratings of GIC issuers, a
reduction in the amount of new funds allocated to the purchase of GICs in
general, and an increase in availability of non-traditional GIC alternatives,
resulted in an increasingly difficult market in which to sell traditional
GICs. At that time, the Company introduced its synthetic GIC, selling about
$110.0 million of this product in the first year. Since then, increased
competition in the synthetic GIC market has driven margins on new business
down to extremely low levels.
The Company introduced its funding agreement product in the latter part of
1997. There are approximately two dozen insurance companies that compete in
the funding agreement market. Funding agreements are one of a variety of
instruments being purchased by the buyers in this market, and the Company
views these other instruments as comprising the primary competition. Short-
term commercial paper issued by corporations is the most common of these
competing instruments. The primary factors affecting the ability to sell are
the yields offered, short term ratings (and to a lesser extent, claims paying
ratings) and product structure. With its expertise in asset/liability
management, the Company is able to offer yields that are very competitive with
comparably rated instruments, and a variety of product structures, while
earning an attractive return on capital, with low volatility. During the third
quarter of 1999, uncertainties in the short maturity floating rate funding
agreement market prompted a number of investors to terminate their funding
agreements with the Company and request the return of their funds. All
termination requests received by the Company were paid in a timely manner, and
no such requests have been received since the third quarter.
The Company introduced its Euro-GIC product in the latter part of 1999.
Currently, there are less than twelve insurance companies that compete in this
market. Euro-GICs are one of a variety of instruments being purchased by
institutional investors in a competitive European market. The Company
considers these other instruments as comprising the primary competition, of
which medium term notes issued by corporations are the most common form of
these competing instruments. The primary factors affecting the ability to sell
Euro-GICs are the yields offered, the credit ratings assigned to the program,
and the familiarity of the Company name among investors in Europe. As such,
the Company periodically sends representatives to Europe to meet with
potential investors and has established new relationships with several
investment banking firms who manage the distribution of this product.
20
Investment Portfolio
General
At December 31, 1999, the Company held $9.1 billion of investment assets,
including $732.9 million of investment assets in the Closed Block. These
investments are generally of high quality and broadly diversified across asset
classes and individual investment risks. The major categories of investment
assets are: fixed maturities, which includes both investment grade and below
investment grade public and private debt securities; equity securities;
mortgage loans, principally on commercial properties; real estate, which
consists primarily of investments in commercial properties; policy loans and
other long-term investments. The remainder of the investment assets is
comprised of cash and cash equivalents.
Management has an integrated approach to developing an investment strategy
for the Company that maximizes income, while incorporating overall asset
allocation, business segment objectives, and asset/liability management
tailored to specific insurance or investment product requirements. The
Company's integrated approach and the execution of the investment strategy are
founded upon a value orientation. The Company's investment professionals seek
to identify undervalued securities in the markets through extensive
fundamental research and credit analysis. Management believes this research-
driven, value orientation is a key to achieving the overall investment
objectives of producing superior rates of return, preserving capital and
meeting the financial goals of the Company's business segments.
The appropriate asset allocation for the Company (the selection of broad
investment categories such as fixed maturities, equity securities, mortgages
and real estate) is determined by management initially through a process that
focuses overall on the types of businesses in each segment that the Company
engages in and the level of surplus (net worth) required to support these
businesses.
At the segment level, the Company has developed an asset/liability
management approach tailored to specific insurance, investment product and
income objectives. The investment assets of the Company are then managed in
over 20 portfolio segments consistent with specific products or groups of
products having similar liability characteristics. As part of this approach,
management develops investment guidelines for each portfolio consistent with
the return objectives, risk tolerance, liquidity, time horizon, tax and
regulatory requirements of the related product or business segment. Specific
investments frequently meet the requirements of, and are acquired by, more
than one investment portfolio (or investment segment of the general account of
FAFLIC or AFLIAC, with each investment segment holding a pro rata interest in
such investments and the cash flows therefrom). Management has a general
policy of diversifying investments both within and across all portfolios. The
Company monitors the credit quality of its investments and its exposure to
individual borrowers, industries, sectors and, in the case of mortgages and
real estate, property types and geographic locations. In 1999, management
continued its strategy of shifting portfolio holdings from equity securities
to higher quality fixed maturity securities. All investments held by the
Company's insurance subsidiaries are subject to diversification requirements
under insurance laws.
Consistent with this management approach, portfolio managers maintain close
working relationships with the managers of related product lines within the
Risk Management, Allmerica Financial Services and Allmerica Asset Management
segments. Changes in the outlook for investment markets or the returns
generated by portfolio holdings are reflected as appropriate on a timely basis
in the pricing of the Company's products and services.
Rating Agencies
Insurance companies are rated by rating agencies to provide both industry
and participants and insurance consumers meaningful information on specific
insurance companies. Higher ratings generally indicate financial stability and
a stronger ability to pay claims.
FAFLIC, AFLIAC, Hanover and Citizens all received an A.M. Best financial
condition rating of A (Excellent) in February 2000.
21
FAFLIC and AFLIAC received Duff & Phelps claims-paying ability ratings of AA
(Very High) in March 2000.
FAFLIC, AFLIAC and Hanover received Moody's financial strength ratings of A1
(Good) in February 2000.
FAFLIC, AFLIAC and Hanover, together with its subsidiaries, including
Citizens Insurance, received S&P claims-paying ability rating of AA-
(Excellent) as of February 3, 2000.
Management believes that its strong ratings are important factors in
marketing the products of its insurance companies to its agents and customers,
since rating information is broadly disseminated and generally used throughout
the industry. Insurance company ratings are assigned to an insurer based upon
factors relevant to policyholders and are not directed toward protection of
investors. Such ratings are neither a rating of securities nor a
recommendation to buy, hold or sell any security.
Employees
The Company has approximately 6,300 employees located throughout the
country. Management believes relations with employees and agents are good.
ITEM 2
PROPERTIES
The Company's headquarters are located at 440 Lincoln Street, Worcester,
Massachusetts, and consist primarily of approximately 758,000 rentable square
feet of office and conference space owned in fee and include the headquarters
of Hanover.
Citizens owns its home office, located at 645 W. Grand River, Howell,
Michigan, which is approximately 137,000 rentable square feet. Citizens also
owns a three-building complex located at 808 North Highlander Way, Howell,
Michigan, with approximately 207,000 rentable square feet, where various
business operations are conducted.
The Company leases office space for its sales force throughout the United
States. The leased property houses agency offices and group insurance sales
offices. Hanover also leases offices throughout the country for its field
employees.
The Company believes that its facilities are adequate for its present needs
in all material respects.
ITEM 3
LEGAL PROCEEDINGS
Reference is made to Note 22 on page 78 of the Notes to Consolidated
Financial Statements of the 1999 Annual Report to Shareholders, the applicable
portions of which are incorporated herein by reference.
Sales Practices
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries by individual plaintiffs
alleging fraud, unfair or deceptive acts, breach of contract,
misrepresentation, and related claims in the sale of life insurance policies.
In October 1997, the plaintiffs voluntarily dismissed the Louisiana suit and
filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. In early November 1998, the Company and the plaintiffs entered
into a settlement
22
agreement. The court granted preliminary approval of the settlement on
December 4, 1998. On May 19, 1999, the court issued an order certifying the
class for settlement purposes and granting final approval of the settlement
agreement. AFC recognized a $20.2 million expense, net of taxes, during the
third quarter of 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.
Other
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the opinion of management, 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.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth
quarter of the fiscal year covered by this Annual Report on Form 10-K.
23
PART II
ITEM 5
MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
Common Stock and Shareholder Ownership
The common stock of Allmerica Financial Corporation is traded on the New
York Stock Exchange under the symbol "AFC". On March 22, 2000, the Company had
47,919 shareholders of record and 53.5 million shares outstanding. On the same
date, the trading price of the Company's common stock was $46.50 per share.
Common Stock Prices and Dividends
High Low Dividends
--------- -------- ---------
1999
First Quarter.................................... $57 7/8 $50 3/16 --
Second Quarter................................... $62 1/4 $54 1/2 --
Third Quarter.................................... $64 7/16 $47 9/16 $0.25
Fourth Quarter................................... $59 11/16 $46 1/2 --
1998
First Quarter.................................... $66 3/8 $42 5/16 $0.05
Second Quarter................................... $72 1/8 $61 5/16 $0.05
Third Quarter.................................... $72 1/8 $57 5/16 $0.05
Fourth Quarter................................... $57 7/8 $39 1/4 --
1999 Dividend Schedule
Allmerica Financial Corporation declared an annual cash dividend of $0.25
per share on July 27, 1999, which was paid on November 15, 1999. The record
date for such dividend was November 1, 1999. The payment of future dividends,
if any, on the Company's Common Stock will be a business decision made by the
Board of Directors from time to time based upon the results of operations and
financial condition of the Company and such other factors as the Board of
Directors considers relevant.
Dividends paid by the Company may be funded from dividends paid to the
Company from its subsidiaries. Dividends from insurance subsidiaries are
subject to restrictions imposed by state insurance laws and regulations.
Reference is made to "Liquidity and Capital Resources" on pages 44 and 45 of
Management's Discussion and Analysis of Financial Condition and Results of
Operations and to Note 15 on page 73 of the Notes to Consolidated Financial
Statements of the 1999 Annual Report to Shareholders, the applicable portions
of which are incorporated herein by reference.
ITEM 6
SELECTED FINANCIAL DATA
Reference is made to the "Five Year Summary of Selected Financial
Highlights" on page 21 of the 1999 Annual Report to Shareholders, which is
incorporated herein by reference.
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 22-47 of the 1999 Annual Report
to Shareholders, which is incorporated herein by reference.
24
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Reference is made to "Market Risk and Risk Management Policies" on pages 37-
43 of Management's Discussion and Analysis of Financial Condition and Results
of Operations of the 1999 Annual Report to Shareholders, which is incorporated
herein by reference.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements on pages 49-53
and the accompanying Notes to Consolidated Financial Statements on pages 54-79
of the 1999 Annual Report to Shareholders which meet the requirements of
Regulation S-X, and which include a summary of quarterly results of
consolidated operations (see Note 24 of Notes to Consolidated Financial
Statements--page 79), which is incorporated herein by reference.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
25
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
Information regarding Directors of the Company is incorporated herein by
reference from the Proxy Statement for the Annual Meeting of Shareholders to
be held May 16, 2000, to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is biographical information concerning the executive
officers of the Company.
John F. O'Brien, 56
Director, Chief Executive Officer and President of the Company since February
1995
See biography under "Directors of the Registrant" above.
Bruce C. Anderson, 55
Vice President of the Company since February 1995
Mr. Anderson has been Vice President of AFC since February 1995 and Vice
President of Allmerica P&C and Citizens since March 1997. Mr. Anderson has
been employed by FAFLIC since 1967 and has been Vice President and Director of
FAFLIC since October 1984 and April 1996, respectively. In addition, Mr.
Anderson is a director and/or executive officer at various other non-public
affiliates.
Mark R. Colborn, 51
Vice President of the Company since 2000
Mr. Colborn has been Vice President of AFC since March 2000. In addition,
Mr. Colborn has served as Vice President of AFLIAC since July 1992 and FAFLIC
since June 1992. He is also an executive officer at various other non-public
affiliates of AFC.
John P. Kavanaugh, 45
Vice President and Chief Investment Officer of the Company since 1996
Mr. Kavanaugh has been Vice President and Chief Investment Officer of AFC
since September 1996, has been employed by FAFLIC since 1983, and has been
Vice President of FAFLIC since December 1991 and Vice President of AFLIAC
since January 1992. Mr. Kavanaugh has also served as Director and Chief
Investment Officer of FAFLIC, Hanover, Citizens Insurance and AFLIAC since
August 1996, and Vice President and Chief Investment Officer of Allmerica P&C
and Citizens since September 1996. Mr. Kavanaugh is also a director and/or
executive officer at various other non-public affiliates.
J. Kendall Huber, 45
Vice President and General Counsel of the Company since March 2000
Mr. Huber has been Vice President, General Counsel and Assistant Secretary
of AFC since March 2000. Prior to joining AFC, Mr. Huber was Executive Vice
President, General Counsel, and Secretary of Promus Hotel Corporation from
February 1999 to January 2000. Previously, Mr. Huber was Vice President and
Deputy General Counsel of Legg Mason, Inc., from November 1998 to January
1999. He has also served as Vice President and Deputy General Counsel of USF&G
Corporation, where he was employed from March 1990 to August 1998.
26
Edward J. Parry, III, 40
Vice President and Treasurer of the Company since February 1995
Chief Financial Officer of the Company since December 1996
Mr. Parry has been Chief Financial Officer of AFC since December 1996. He
has also been Vice President and Treasurer of AFC since February 1995. He has
served as Chief Financial Officer of FAFLIC, AFLIAC, Allmerica P&C, Hanover,
Citizens and Citizens Insurance since December 1996 and as Vice President and
Treasurer of FAFLIC, AFLIAC, Allmerica P&C and Hanover since February 1993 and
of Citizens since September 1993 and December 1992, respectively. Mr. Parry is
also a director and/or executive officer at various other non-public
affiliates.
Richard M. Reilly, 61
Vice President of the Company since February 1997
Mr. Reilly has been Vice President of AFC and FAFLIC since February 1997 and
November 1990, respectively, and Vice President of Allmerica P&C and Citizens
since March 1997. He has also been a Director and Vice President of AFLIAC
since November 1990 and President and Chief Executive Officer of AFLIAC since
August 1995. Mr. Reilly was Vice President of AFC from February 1995 through
December 1995. Additionally, Mr. Reilly has been the President of Allmerica
Investment Trust, Allmerica Funds, and Allmerica Securities Trust, each a
registered investment company, since February 1991, April 1991 and February
1991, respectively. Mr. Reilly is also a director and/or holds an executive
office at various other non-public affiliates.
Robert P. Restrepo, 49
Vice President of the Company since May 1998
Mr. Restrepo has been Vice President of AFC and President, Chief Executive
Officer and Director of Allmerica P&C since May 1998. Prior to joining AFC,
Mr. Restrepo was Chief Executive Officer, Personal Lines at Travelers Property
and Casualty, a member of the Travelers Group from January 1996 to May 1998.
Additionally, Mr. Restrepo was the Senior Vice President, Personal Lines at
Aetna Life & Casualty Company from March 1991 to January 1996. Mr. Restrepo is
also a director and/or executive officer at various other non-public
affiliates of AFC.
Eric A. Simonsen, 54
Vice President of the Company since February 1995
Mr. Simonsen has been Vice President of AFC since February 1995. He has been
a Vice President of APY since August 1992, of Citizens since December 1992 and
of AFLIAC since September 1990. He also served as a director of APY from
August of 1992 to July 1997. In addition, he has served as Vice President and
as a Director of FAFLIC since September 1990 and April 1996, respectively. Mr.
Simonsen has been President of Allmerica Services Corporation since December
1996. Mr. Simonsen was Chief Financial Officer of AFC from February 1995 to
December 1996, of FAFLIC and AFLIAC from September 1990 to December 1996, of
Allmerica P&C from August 1992 to December 1996 and of Citizens from December
1992 to December 1996. Mr. Simonsen is also a director and/or executive
officer at various other non-public affiliates.
ITEM 11
EXECUTIVE COMPENSATION
Incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 16, 2000, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
27
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 16, 2000, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 16, 2000, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934.
28
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The consolidated financial statements and accompanying notes thereto on
pages 49 through 79 of the 1999 Annual Report to Shareholders have been
incorporated herein by reference in their entirety.
Annual
Report
Page(s)
-------
Report of Independent Accountants..................................... 48
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997.................................................. 49
Consolidated Balance Sheets as of December 31, 1999 and 1998.......... 50
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997..................................... 51
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1999, 1998 and 1997..................................... 52
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.................................................. 53
Notes to Consolidated Financial Statements............................ 54-79
(a)(2) Financial Statement Schedules
Page No. in
Schedule this Report
-------- -----------
Report of Independent Accountants on Financial
Statement Schedules.................................... 35
I Summary of Investments--Other than Investments in
Related Parties........................................ 36
II Condensed Financial Information of Registrant.......... 37-39
III Supplementary Insurance Information.................... 40-42
IV Reinsurance............................................ 43
V Valuation and Qualifying Accounts...................... 44
VI Supplemental Information concerning Property/Casualty
Insurance Operations................................... 45
(a)(3) Exhibit Index
Exhibits filed as part of this Form 10-K are as follows:
2.1 Plan of Reorganization.+
2.2 Stock and Asset Purchase Agreement by and among State Mutual Life
Assurance Company of America, 440 Financial Group of Worcester, Inc.,
and The Shareholder Services Group, Inc. dated as of March 9, 1995.+
3.1 Certificate of Incorporation of AFC.+
3.2 By-Laws of AFC.+
4 Specimen Certificate of Common Stock.+
4.1 Form of Indenture relating to the Debentures between the Registrant
and State Street Bank & Trust Company, as trustee.++
4.2 Form of Global Debenture.++
4.3 Amended and Restated Declaration of Trust of AFC Capital Trust I dated
February 3, 1997.+++++
4.4 Indenture dated February 3, 1997 relating to the Junior Subordinated
Debentures of AFC.+++++
4.5 Series A Capital Securities Guarantee Agreement dated February 3,
1997.+++++
4.6 Common Securities Guarantee Agreement dated February 3, 1997.+++++
29
4.8 Rights Agreement dated as of December 16, 1997, between the
Registrant and First Chicago Trust Company of New York as Rights
Agent, filed as Exhibit 1 to the Company's Form 8-A dated December
17, 1997 is incorporated herein by reference.
10.3 Administrative Services Agreement between State Mutual Life
Assurance Company of America and The Hanover Insurance Company,
dated July 19, 1989.+
10.4 First Allmerica Financial Life Insurance Company Employees' 401(k)
Matched Savings Plan incorporated by reference to Exhibit 10.1 to
the Allmerica Financial Corporation Registration Statement on Form
8-K (No. 333-576) and incorporated herein by reference originally
filed with the Commission on January 24, 1996.
10.5 State Mutual Life Assurance Company of America Excess Benefit
Retirement Plan.+
10.6 State Mutual Life Assurance Company of America Supplemental
Executive Retirement Plan.+
10.7 State Mutual Incentive Compensation Plan.+
10.8 State Mutual Companies Long-Term Performance Unit Plan.+
10.9 Indenture of Lease between State Mutual Life Assurance Company of
America and the Hanover Insurance Company dated July 3, 1984 and
corrected First Amendment to Indenture of Lease dated December 20,
1993.+
10.12 Lease dated March 23, 1993 by and between Aetna Life Insurance
Company and State Mutual Life Assurance Company of America,
including amendments thereto, relating to property in Atlanta,
Georgia.+
10.13 Stockholder Services Agreement dated as of January 1, 1992 between
Private Healthcare Systems, Inc. and State Mutual Life Assurance
Company of America, the successor to its wholly-owned subsidiary,
Group Healthcare Network, Inc.+
10.14 Lease dated January 26, 1995 by and between Citizens Insurance and
Upper Peninsula Commission for Area Progress, Inc., including
amendments thereto, relating to property in Escanaba, Michigan.+
10.16 Trust Indenture for the State Mutual Life Assurance Company of
America Employees' 401(k) Matched Savings Plan between State Mutual
Life Assurance Company of America and Bank of Boston/Worcester.+
10.17 State Mutual Life Assurance Company of America Non-Qualified
Executive Retirement Plan.+
10.18 State Mutual Life Assurance Company of America Non-Qualified
Executive Deferred Compensation Plan.+
10.19 The Allmerica Financial Cash Balance Pension Plan incorporated by
reference to Exhibit 10.19 to the Allmerica Financial Corporation
September 30, 1995 report on Form 10-Q and incorporated herein by
reference.
10.20 The Allmerica Financial Corporation Employment Continuity
Plan.++++++
10.21 Amended and Restated Form of Non-Solicitation Agreement executed by
substantially all of the executive officers of AFC incorporated by
reference to Exhibit 10.21 to the Allmerica Financial Corporation
June 30, 1997 report on Form 10-Q and incorporated herein by
reference.
10.23 Amended Allmerica Financial Corporation Long-Term Stock Incentive
Plan.+++++++
10.24 The Allmerica Financial Corporation Director Stock Ownership Plan
incorporated by reference to Exhibit 10.21 to the Allmerica
Financial Corporation June 30, 1996 report on Form 10-Q and
incorporated herein by reference.
10.25 Reinsurance Agreement dated September 29, 1997 between First
Allmerica Financial Life Insurance Company and Metropolitan Life
Insurance Company.+++++++
10.26 Consolidated Service Agreement between Allmerica Financial
Corporation and its subsidiaries, dated January 1, 1998.+++++++
10.27 Deferral Agreement, dated April 4, 1997, between Allmerica Financial
Corporation and John F. O'Brien.+++++++
10.28 Severance Agreement, dated September 25, 1997, between First
Allmerica Financial Life Insurance Company and Larry C.
Renfro.+++++++
10.29 Credit agreement dated as of June 17, 1998 between the Registrant
and the Chase Manhattan Bank.++++++++
30
10.30 Form of Deferral Agreement executed by substantially all of the
executive officers of AFC dated January 30, 1998.++++++++
10.31 Form of Restricted Stock Agreement, dated January 30, 1998 and
executed by substantially all of the executive officers of
AFC.++++++++
10.32 Form of Converted Stock Agreement, dated January 30, 1998 and
executed by substantially all of the executive officers of
AFC.++++++++
10.33 Employment Agreement, dated May 13, 1998 between First Allmerica
Financial Life Insurance Company and Robert P. Restrepo, Jr.++++++++
10.34 Restricted Stock Agreement, dated May 26, 1998, between Allmerica
Financial Corporation and Robert P. Restrepo, Jr.++++++++
10.35 Credit agreement dated as of December 1, 1998 between the Registrant
and the Chase Manhattan Bank.++++++++
10.36 Amendment to the Credit Agreement dated as of June 17, 1998 between
the Registrant and the Chase Manhattan Bank incorporated by
reference to Exhibit 10.36 to the Allmerica Financial Corporation
June 30, 1999 report on Form 10-Q and incorporated herein by
reference.
10.37 Allmerica Financial Corporation Short-Term Incentive Compensation
Plan incorporated herein by reference to Exhibit A contained in the
Registrant's Proxy Statement (Commission File
No. 001-13754) originally filed with the Commission on March 31,
1999.
13 The following sections of the Annual Report to Shareholders for 1999
("1999 Annual Report") which are expressly incorporated by reference
into this Annual Report on Form 10-K:
. Management's Discussion and Analysis of Financial Condition and
Results of Operations at pages 22 through 47 of the 1999 Annual
Report.
. Consolidated Financial Statements and Notes thereto at pages 49
through 79 of the 1999 Annual Report.
. Report of Independent Accountants at page 48 of the 1999 Annual
Report.
. The information appearing under the caption "Five Year Summary of
Selected Financial Highlights" at page 21 of the 1999 Annual
Report.
. The information appearing under the caption "Shareholder
Information" at page 81 of the 1999 Annual Report.
21 Subsidiaries of AFC.
23 Consent of Independent Accountants.
24 Power of Attorney.
27 Financial Data Schedule.
99.1 Internal Revenue Service Ruling dated April 15, 1995.+
99.2 Important Factors Regarding Forward Looking Statements.
- --------
+ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's Registration Statement on Form S-
1 (No. 33-91766) originally filed with the Commission on May 1, 1995.
++ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's Registration Statement on Form S-
1 (No. 33-96764) originally filed with the Commission on September 11,
1995.
+++ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's 1995 Annual Report on Form 10-K
originally filed with the Commission on March 28, 1996.
++++ Incorporated by herein by reference to Exhibit I of the Current Report
of the Registrant (Commission File No. 1-13754) filed February 20,
1997.
+++++ Incorporated herein by reference to Exhibits 2, 3, 4, 5 and 6,
respectively, contained in the Registrant's Current Report on Form 8-K
filed on February 5, 1997.
++++++ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's 1996 Annual Report on Form 10-K
originally filed with the Commission on March 24, 1997.
31
+++++++ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's 1997 Annual Report on Form 10-K
originally filed with the Commission on March 27, 1998
++++++++ Incorporated herein by reference to the correspondingly numbered
exhibit contained in the Registrant's 1998 Annual Report Form 10-K
originally filed with the Commission on March 29, 1999.
(b) Reports on Form 8-K
On October 7, 1999, Allmerica Financial Corporation announced that it has
reached an agreement to sell its group life and health insurance business to
Great-West Life & Annuity Insurance Company of Denver.
On October 28, 1999, Allmerica Financial Corporation announced its financial
results for the three months ended September 30, 1999.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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
Date: March 23,2000 /s/ John F. O'Brien
By: _________________________________
John F. O'Brien,
Chairman of the Board,
Chief Executive Officer and
President
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 23, 2000 /s/ John F. O'Brien
By: _________________________________
John F. O'Brien,
Chairman of the Board,
Chief Executive Officer and
President
Date: March 23, 2000 /s/ Edward J. Parry, III
By: _________________________________
Edward J. Parry III,
Vice President, Chief Financial
Officer, Treasurer and Principal
Accounting Officer
Date: March 23, 2000 *
By: _________________________________
Michael P. Angelini,
Director
Date: March 23, 2000 *
By: _________________________________
E. Gordon Gee,
Director
Date: March 23, 2000 *
By: _________________________________
Samuel J. Gerson,
Director
Date: March 23, 2000 *
By: _________________________________
Gail L. Harrison,
Director
Date: March 23, 2000 *
By: _________________________________
Robert P. Henderson,
Director
33
Date: March 23, 2000 *
By: _________________________________
M Howard Jacobson,
Director
Date: March 23, 2000 *
By: _________________________________
Wendell J. Knox,
Director
Date: March 23, 2000
By: _________________________________
Terrence Murray,
Director
Date: March 23, 2000 *
By: _________________________________
Robert J. Murray,
Director
Date: March 23, 2000 *
By: _________________________________
John L. Sprague,
Director
Date: March 23, 2000 *
By: _________________________________
Robert G. Stachler,
Director
Date: March 23, 2000 *
By: _________________________________
Herbert M. Varnum,
Director
/s/ Edward J. Parry
*By: ________________________________
Edward J. Parry,
Attorney-in-fact
34
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors
of Allmerica Financial Corporation
Our audits of the consolidated financial statements referred to in our report
dated February 1, 2000, appearing in the Allmerica Financial Corporation 1999
Annual Report to Shareholders (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
_____________________________________
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 1, 2000
35
Schedule I
ALLMERICA FINANCIAL CORPORATION
Summary of Investments--Other than Investments in Related Parties
December 31, 1999
Amount at
which shown
in the balance
Type of Investment Cost(1) Value sheet
- ------------------ -------- ------- --------------
(In millions)
Fixed maturities:
Bonds:
United States Government and government
agencies and authorities.................. $ 188.8 $ 189.4 $ 189.4
States, municipalities and political
subdivisions.............................. 2,189.8 2,137.6 2,137.6
Foreign governments........................ 89.0 91.9 91.9
Public utilities........................... 359.9 349.0 349.0
All other corporate bonds.................. 3,976.1 3,886.0 3,886.0
Redeemable preferred stocks.................. 291.4 279.9 279.9
-------- ------- --------
Total fixed maturities..................... 7,095.0 6,933.8 6,933.8
-------- ------- --------
Equity securities:
Common stocks:
Public utilities........................... -- 1.3 1.3
Banks, trust and insurance companies....... 0.1 3.0 3.0
Industrial, miscellaneous and all other.... 28.4 57.8 57.8
Nonredeemable preferred stocks............... 21.0 21.1 21.1
-------- ------- --------
Total equity securities.................... 49.5 83.2 83.2
-------- ------- --------
Mortgage loans on real estate.................. 521.2 XXXXXX 521.2
Real estate(2)................................. 12.6 XXXXXX 12.6
Policy loans................................... 170.5 XXXXXX 170.5
Other long-term investments.................... 177.0 XXXXXX 167.4
-------- ------- --------
Total investments.......................... $8,025.8 XXXXXX $7,888.7
======== ======= ========
- --------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums and
accretion of discounts.
(2) Includes $10.9 million of real estate acquired through foreclosure.
36
Schedule II
ALLMERICA FINANCIAL CORPORATION
Condensed Financial Information of Registrant
Parent Company Only
Statements of Income for the Years Ended December 31,
1999 1998 1997
------ ------ ------
Revenues
Net investment income............................... $ 5.3 $ 7.1 $ 11.4
Net realized investment (losses) gains.............. (0.4) 1.7 (0.2)
------ ------ ------
Total revenues.................................... 4.9 8.8 11.2
------ ------ ------
Expenses
Interest expense.................................... 40.6 40.5 41.1
Operating expenses.................................. 2.3 2.5 5.0
------ ------ ------
Total expenses.................................... 42.9 43.0 46.1
------ ------ ------
Net loss before federal income taxes and equity in net
income of unconsolidated subsidiaries................ (38.0) (34.2) (34.9)
Income tax benefit:
Federal............................................. 14.2 12.4 11.8
State............................................... 0.3 0.5 0.5
Equity in net income of unconsolidated subsidiaries... 319.3 222.5 231.8
------ ------ ------
Net income............................................ $295.8 $201.2 $209.2
====== ====== ======
The condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto.
37
Schedule II
(continued)
ALLMERICA FINANCIAL CORPORATION
Condensed Financial Information of Registrant
Parent Company Only
Balance Sheets
December 31,
------------------
1999 1998
-------- --------
(In millions,
except share
and per share
data)
Assets
Fixed maturities-at fair value (amortized cost of $0.8 in
1998)................................................... $ -- $ 0.9
Cash and cash equivalents................................ 5.6 2.9
Investment in unconsolidated subsidiaries................ 2,761.5 3,008.0
Receivable from subsidiaries............................. 47.2 43.9
Other assets............................................. 7.4 0.5
-------- --------
Total assets........................................... $2,821.7 $3,056.2
======== ========
Liabilities
Expenses and taxes payable............................... $ 14.8 $ 34.7
Interest and dividends payable........................... 13.3 13.0
Short-term debt.......................................... 44.6 41.1
Long-term debt........................................... 508.8 508.8
-------- --------
Total liabilities...................................... 581.5 597.6
-------- --------
Shareholders' Equity
Preferred stock, par value $0.01 per share, 20.0 million
shares authorized, none issued.......................... -- --
Common stock, par value $0.01 per share, 300.0 million
shares authorized, 60.4 million shares issued at both
December 31, 1999 and December 31, 1998................. 0.6 0.6
Additional paid-in capital............................... 1,770.5 1,768.8
Accumulated other comprehensive income................... (75.3) 180.5
Retained earnings........................................ 882.2 599.9
Treasury stock at cost (6.2 and 1.8 million shares)...... (337.8) (91.2)
-------- --------
Total shareholders' equity............................. 2,240.2 2,458.6
-------- --------
Total liabilities and shareholders' equity............. $2,821.7 $3,056.2
======== ========
The condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto.
38
Schedule II (continued)
ALLMERICA FINANCIAL CORPORATION
Condensed Financial Information of Registrant
Parent Company Only
Statement of Cash Flows for the Years Ended December 31,
1999 1998 1997
------- ------- -------
(In millions)
Cash flows from operating activities
Net income......................................... $ 295.8 $ 201.2 $ 209.2
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in undistributed income of subsidiaries.... (319.3) (222.5) (231.8)
Net realized investment (gains) losses............ 0.4 (1.7) 0.2
Change in expenses and taxes payable.............. (2.8) 24.7 0.9
Change in interest and dividends payable.......... 0.3 (2.8) 10.0
Change in receivable from subsidiaries............ 3.3 (43.9) --
Other, net........................................ 1.7 8.0 (0.3)
------- ------- -------
Net cash used in operating activities............... (20.6) (37.0) (11.8)
------- ------- -------
Cash flows from investing activities
Capital contributed to unconsolidated
subsidiaries...................................... (54.1) (95.7) (79.9)
Proceeds from disposals and maturities of
available-for-sale fixed maturities............... 84.6 123.9 98.7
Purchase of available-for-sale fixed maturities.... (41.4) -- (74.9)
Purchase of minority interest in Allmerica P&C..... -- -- (425.6)
Proceeds from sale of common stock of subsidiary... 247.6 -- 195.0
------- ------- -------
Net cash provided by (used in) investing
activities......................................... 236.7 28.2 (286.7)
------- ------- -------
Cash flow from financing activities
Increase in long-term debt......................... -- -- 9.3
Dividend received from unconsolidated
subsidiaries...................................... 39.5 50.0 --
Net proceeds from issuance of commercial paper..... 3.5 41.1 --
Net proceeds from issuance of common stock......... 1.1 11.4 2.8
Proceeds from the issuance of mandatorily
redeemable preferred securities of a subsidiary
trust holding solely junior subordinated
debentures of the Company......................... -- -- 296.3
Treasury stock purchased at cost................... (250.2) (82.7) --
Treasury stock reissued at cost.................... 6.2 -- --
Dividends paid to shareholders..................... (13.5) (9.0) (11.5)
------- ------- -------
Net cash (used in) provided by financing
activities......................................... (213.4) 10.8 296.9
------- ------- -------
Net change in cash and cash equivalents............. 2.7 2.0 (1.6)
Cash and cash equivalents at beginning of the
period............................................. 2.9 0.9 2.5
------- ------- -------
Cash and cash equivalents at end of the period...... $ 5.6 $ 2.9 $ 0.9
======= ======= =======
The condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto.
39
Schedule III
ALLMERICA FINANCIAL CORPORATION
Supplementary Insurance Information
December 31, 1999
Future
policy Amortization
benefits, Other Benefits, of
Deferred losses, policy claims, deferred
policy claims and claims and Net losses and policy Other
acquisition loss Unearned benefits Premium investment settlement acquisition operating Premiums
costs expenses premiums payable revenue income expenses costs expenses written
----------- ---------- -------- ---------- -------- ---------- ---------- ------------ --------- --------
(In millions)
Risk Management.. $ 173.3 $3,003.8 $887.2 $ 24.8 $1,948.2 $221.4 $1,420.3 $370.6 $197.0 $1,977.0
Asset
Accumulation
Allmerica
Financial
Services........ 1,213.1 2,659.8 3.0 700.2 2.3 251.1 232.1 59.1 211.7 --
Allmerica Asset
Management...... 0.4 -- -- 1,316.0 -- 138.2 118.3 0.2 8.5 --
Corporate........ -- -- -- -- -- 6.0 -- -- 65.3 --
Eliminations..... -- -- -- -- -- (1.0) -- -- (5.9) --
-------- -------- ------ -------- -------- ------ -------- ------ ------ --------
Total........... $1,386.8 $5,663.6 $890.2 $2,041.0 $1,950.5 $615.7 $1,770.7 $429.9 $476.6 $1,977.0
======== ======== ====== ======== ======== ====== ======== ====== ====== ========
40
Schedule III (continued)
ALLMERICA FINANCIAL CORPORATION
Supplementary Insurance Information
December 31, 1998
Future
policy Amortization
benefits, Other Benefits, of
Deferred losses, policy claims, deferred
policy claims and claims and Net losses and policy Other
acquisition loss Unearned benefits Premium investment settlement acquisition operating Premiums
costs expenses premiums payable revenue income expenses costs expenses written
----------- ---------- -------- ---------- -------- ---------- ---------- ------------ --------- --------
(In millions)
Risk Management.. $ 167.5 $2,955.4 $840.1 $ 21.4 $1,967.9 $229.8 $1,495.4 $379.7 $206.4 $1,956.7
Asset
Accumulation
Allmerica
Financial
Services........ 993.1 2,663.1 3.1 823.8 2.7 253.1 219.3 69.6 209.3 --
Allmerica Asset
Management...... 0.6 -- -- 1,791.8 -- 111.4 89.3 0.3 8.4 --
Corporate........ -- -- -- -- -- 11.9 -- -- 63.8 --
Eliminations..... -- -- -- -- -- (1.8) -- -- (7.6) --
-------- -------- ------ -------- -------- ------ -------- ------ ------ --------
Total........... $1,161.2 $5,618.5 $843.2 $2,637.0 $1,970.6 $604.4 $1,804.0 $449.6 $480.3 $1,956.7
======== ======== ====== ======== ======== ====== ======== ====== ====== ========
41
Schedule III (continued)
ALLMERICA FINANCIAL CORPORATION
Supplementary Insurance Information
December 31, 1997
Future
policy Amortization
benefits, Other Benefits, of
Deferred losses, policy claims, deferred
policy claims and claims and Net losses and policy Other
acquisition loss Unearned benefits Premium investment settlement acquisition operating Premiums
costs expenses premiums payable revenue income expenses costs expenses written
----------- ---------- -------- ---------- -------- ---------- ---------- ------------ --------- --------
(In millions)
Risk Management.. $170.1 $2,946.8 $844.6 $ 20.0 $1,955.5 $254.1 $1,443.7 $399.9 $215.5 $1,659.6
Asset
Accumulation
Allmerica
Financial
Services........ 794.5 2,476.9 2.2 847.5 24.9 281.6 256.1 8.1 217.8 --
Allmerica Asset
Management...... 0.9 -- -- 985.2 0.1 82.5 64.2 0.5 8.0 --
Corporate........ -- -- -- -- -- 14.0 -- -- 64.1 --
Eliminations..... -- -- -- -- -- (1.1) -- -- (11.5) --
------ -------- ------ -------- -------- ------ -------- ------ ------ --------
Total........... $965.5 $5,423.7 $846.8 $1,852.7 $1,980.5 $631.1 $1,764.0 $408.5 $493.9 $1,659.6
====== ======== ====== ======== ======== ====== ======== ====== ====== ========
42
Schedule IV
ALLMERICA FINANCIAL CORPORATION
Reinsurance
December 31,
Assumed Percentage
Ceded to from of amount
Gross other other Net assumed
amount companies companies amount to net
--------- --------- --------- --------- ----------
(In millions)
1999
Life insurance in force..... $41,393.1 $21,251.5 $374.2 $20,515.8 1.82%
========= ========= ====== ========= =====
Premiums:
Life insurance............ $ 21.3 $ 18.6 $ 0.7 $ 3.4 20.59%
Accident and health
insurance................ 32.2 31.4 -- 0.8 --
Property and casualty
insurance................ 2,135.0 261.7 73.0 1,946.3 3.75%
--------- --------- ------ ---------
Total premiums.............. $ 2,188.5 $ 311.7 $ 73.7 $ 1,950.5 3.78%
========= ========= ====== ========= =====
1998
Life insurance in force..... $44,790.9 $23,886.9 $555.4 $21,459.4 2.59%
========= ========= ====== ========= =====
Premiums:
Life insurance............ $ 15.8 $ 13.3 $ 0.7 $ 3.2 21.88%
Accident and health
insurance................ 35.6 34.5 -- 1.1 --
Property and casualty
insurance................ 1,967.9 66.1 64.5 1,966.3 3.28%
--------- --------- ------ ---------
Total premiums.............. $ 2,019.3 $ 113.9 $ 65.2 $ 1,970.6 3.31%
========= ========= ====== ========= =====
1997
Life insurance in force..... $44,902.9 $ 7,237.1 $308.9 $37,974.7 0.81%
========= ========= ====== ========= =====
Premiums:
Life insurance............ $ 16.7 $ 14.9 $ 0.6 $ 2.4 25.00%
Accident and health
insurance................ 39.2 14.2 -- 25.0 --
Property and casualty
insurance................ 2,046.2 195.1 102.0 1,953.1 5.22%
--------- --------- ------ ---------
Total premiums.............. $ 2,102.1 $ 224.2 $102.6 $ 1,980.5 5.18%
========= ========= ====== ========= =====
43
Schedule V
ALLMERICA FINANCIAL CORPORATION
Valuation and Qualifying Accounts
December 31,
Additions
-------------------
Deductions
Balance at Charged to Charged from Balance
beginning costs and to other allowance at end
of period expense accounts account of period
---------- ---------- -------- ---------- ---------
(In millions)
1999
Mortgage loans............ $11.5 $(2.4) $-- $ 3.3 $ 5.8
Allowance for doubtful
accounts................. 5.4 5.6 -- 5.2 5.8
----- ----- ---- ----- -----
$16.9 $ 3.2 $-- $ 8.5 $11.6
===== ===== ==== ===== =====
1998
Mortgage loans............ $20.7 $(6.8) $-- $ 2.4 $11.5
Allowance for doubtful
accounts................. 6.1 4.4 -- 5.1 5.4
----- ----- ---- ----- -----
$26.8 $(2.4) $-- $ 7.5 $16.9
===== ===== ==== ===== =====
1997
Mortgage loans............ $19.6 $ 2.5 $-- $ 1.4 $20.7
Real estate............... 14.9 6.0 -- 20.9 --
Allowance for doubtful
accounts................. 4.5 5.7 -- 4.1 6.1
----- ----- ---- ----- -----
$39.0 $14.2 $-- $26.4 $26.8
===== ===== ==== ===== =====
44
Schedule VI
ALLMERICA FINANCIAL CORPORATION
Supplemental Information Concerning Property and Casualty Insurance Operations
For the Years Ended December 31,
Reserves Discount,
for if any,
Deferred losses and deducted
policy loss from Net Net
Affiliation with acquisition adjustment previous Unearned premiums investment
Registrant costs expenses(2) column(1) premiums(2) earned income
---------------- ----------- ----------- --------- ----------- -------- ----------
(In millions)
Consolidated Property
and Casualty
Subsidiaries
1999.................. $167.3 $2,618.7 $-- $883.3 $1,946.3 $220.5
====== ======== ==== ====== ======== ======
1998.................. $164.9 $2,597.3 $-- $834.9 $1,966.3 $228.9
====== ======== ==== ====== ======== ======
1997.................. $167.2 $2,615.4 $-- $838.3 $1,953.1 $253.3
====== ======== ==== ====== ======== ======
Amortization Paid
Losses and loss of deferred losses
adjustment expenses policy and loss Net
------------------------ acquisition adjustment premiums
Current Year Prior Years expenses expenses written
------------ ----------- ------------ ---------- --------
1999............... $1,601.4 $(183.4) $370.6 $1,499.1 $1,975.4
======== ======= ====== ======== ========
1998............... $1,609.0 $(127.2) $379.7 $1,514.9 $1,955.1
======== ======= ====== ======== ========
1997............... $1,564.1 $(127.9) $399.9 $1,507.2 $1,991.8
======== ======= ====== ======== ========
- --------
(1) The Company does not employ any discounting techniques.
(2) Reserves for losses and loss adjustment expenses are shown gross of $694.2
million, $591.7 million and $576.7 million of reinsurance recoverable on
unpaid losses in 1999, 1998 and 1997, respectively. Unearned premiums are
shown gross of prepaid premiums of $57.4 million, $37.9 million and $30.0
million in 1999, 1998 and 1997, respectively.
45