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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, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: to
Commission file number: 1-13754
ALLMERICA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3263626
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
440 Lincoln Street, Worcester, Massachusetts 01653
(Address of principal executive offices) (Zip Code)
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 21, 2002 the aggregate market
value of the voting and non-voting stock held by nonaffiliates of the registrant
was $2,281,932,311.
The number of shares outstanding of the registrant's common stock, $.01
par value, was 53,375,394 shares outstanding as of March 21, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Allmerica Financial Corporation's Annual Report to
Shareholders for 2001 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 14, 2002 are incorporated by reference in Part
III.
Total number of pages, including cover page: 45
Exhibit Index is on pages 29-32
PART I
ITEM 1
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"); Allmerica Financial Life
Insurance and Annuity Company ("AFLIAC"); The Hanover Insurance Company
("Hanover"); Citizens Insurance Company of America ("Citizens"); and certain
other insurance and non-insurance subsidiaries.
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 has a Corporate
segment, which consists primarily of cash, investments, corporate debt, Capital
Securities (mandatorily redeemable preferred securities of a subsidiary trust
holding solely junior subordinated debentures of the Company) and corporate
overhead expenses. Corporate overhead expenses reflect costs not attributable to
a particular segment, such as those generated by certain officers and directors,
technology, finance, human resources and legal.
Information with respect to each of the Company's segments is included in
"Results of Operations" on pages 18-31 in Management's Discussion and Analysis
of Financial Condition and Results of Operations and in Note 15 on pages 73-74
of the Notes to the Consolidated Financial Statements included in the 2001
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 principally generated through The Hanover
Insurance Company and Citizens Insurance Company of America. For the year ended
December 31, 2001, the Risk Management segment accounted for $2,454.8 million,
or 71.4%, of consolidated segment revenues and $93.5 million, or 48.3%, of
consolidated segment income before federal income taxes and minority interest.
The Company underwrites personal and commercial property and casualty insurance
primarily through an independent agent network concentrated in the Northeast,
Midwest and Southeast United States.
2
The Company strives to maintain a focus on the core disciplines of
underwriting, pricing, claims adjusting and investing. The Company's overall
strategy is to improve profitability through disciplined underwriting, effective
claim handling, marketing, agency management, operating efficiencies and
measured growth. The Company, in its Risk Management segment, continues to have
strong regional focus and places heavy emphasis on underwriting profitability
and loss reserve adequacy in each major product line. The Risk Management
segment of AFC was the 23rd largest property and casualty insurance group in the
United States based on 2000 direct premiums written, according to A.M. Best.
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, extracontractual liability and the size of jury awards, acts of
terrorism, 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.
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 commercial
automobile, workers' compensation 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.
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
AFC pursues measured growth in its existing markets through local
operations that apply extensive knowledge of markets to offer competitive
products and services and through the establishment of long-term relationships
with larger, well-established independent 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. The Company is committed to maintaining the local
market presence afforded by its eighteen branch sales and underwriting offices.
Regional business centers provide processing support and are located in Howell,
Michigan, Worcester, Massachusetts and Atlanta, Georgia. Administrative
functions are centralized in its headquarters in Worcester, Massachusetts.
3
During the fourth quarter of 2001, the Company completed an extensive
review of its agency relationships which resulted in the termination of 377
agencies and the withdrawal of commercial lines' underwriting authority from an
additional 314 agencies. These actions affected approximately 27% of the
approximately 2,500 active agencies representing the Company in 2001. These
agencies have consistently produced unsatisfactory loss ratios. In addition, the
Company terminated virtually all of its specialty commercial programs, which
accounted for $54.4 million of net premiums written in 2001, and discontinued a
number of special marketing arrangements. The total earned premium associated
with the exited business was $252.9 million in 2001 and is estimated to be
approximately $170 million and $65 million in 2002 and 2003, respectively. The
Company is contractually or under statutory regulations obligated to renew
policies with certain agents that will be in runoff in 2002 and 2003. The
Company believes that these actions will ultimately result in improved
underwriting results. In connection with these actions, the Company performed an
actuarial review of outstanding reserves with segregated loss history on the
exited business. Based on this review, losses and expenses totaling $68.3
million were recorded in 2001. Actual future losses from the exited business may
vary from the Company's estimate.
During 1999, AFC introduced a businessowner policy ("BOP") product called
Dimension 2000+SM. The Company has expanded the distribution of this product to
additional agents since its inception. The new product is designed to replace
the traditional BOP product for certain classes of customers. This product is
targeted toward small business, providing broadened coverage and enabling ease
of conducting business. Dimension 2000+ SM is sold through agents utilizing an
internet based point-of-sale system which provides full quote-to-issue
capabilities. This point-of-sale system was expanded to commercial automobile
policies in 2001. These investments in technology have improved the service
provided to agents and the timing of policy issuance.
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. The Risk Management segment of the Company is not
dependent on a single customer or even a few customers, for which the loss of
any one or more would have an adverse effect upon the segment's insurance
operations. Risk Management focuses on two target areas: standard, or
traditional markets, and sponsored program business.
Standard Markets
The Company markets property and casualty products primarily in the
Northeast, Midwest and Southeast United States through the Standard Markets
distribution channel, which at December 31, 2001 provided for more than $1,550
million of Risk Management's written premium. This channel predominantly markets
property and casualty insurance products through approximately 2,000 independent
insurance agencies and seeks 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 and appropriate relationship actions
are made based on this performance.
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 mainly 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 is intended to motivate 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 the Company as their principal supplier of insurance products. The Risk
Management segment sponsors an
4
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, AFC is a principal
provider with many of its agencies, averaging more than $1 million of written
premiums per agent in 2001.
Sponsored Markets
This distribution channel offers primarily 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 example, the Company has developed
and marketed groups in the personal segments that are tailored for members of
associations, financial institutions and employers. 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.
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. As of December 31, 2001, written premium in the Sponsored
Markets distribution channel was more than $650 million.
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 $20.1 million, $26.1 million and $24.2 million in 2001, 2000 and 1999,
respectively, relating primarily to coverages for personal and commercial
automobile, personal and commercial property, and workers' compensation. The
decrease in the underwriting loss in 2001 is primarily related to Hanover's
participation in the Massachusetts Commonwealth Automobile Reinsurers ("CAR")
pool which is consistent with a decrease in the participation ratio. The
increase in the underwriting loss in 2000 compared to 1999 is the primarily the
result of an increase in Hanover's participation in the CAR pool 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 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.
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. Net premiums earned and losses
and loss adjustment expenses ("LAE") ceded to CAR were $34.2 million and $38.0
million in 2001, $37.3 million and $44.5 million in 2000, and $42.8 million and
$42.6 million in 1999. At December 31, 2001, CAR represented 10% or more of the
Company's reinsurance business.
A reinsurance mechanism that exists in Michigan, the Michigan Catastrophic
Claims Association ("MCCA"), covers no-fault first party medical losses of
retentions in excess of $250,000. All automobile insurers in this state are
required to participate in this reinsurance mechanism. Insurers are reimbursed
for their covered losses in excess of the $250,000 threshold. Effective July 1,
2002 this threshold will increase to $300,000 and will continue to increase in
amounts, which have not yet been determined, over the next ten years until it
reaches $500,000. Funding for MCCA comes from assessments against automobile
insurers based upon their proportionate market share of the state's automobile
liability insurance market. The Company ceded to the MCCA premiums earned and
losses and LAE of $7.2 million and $44.5 million in 2001, $3.7 million and $31.1
million in 2000, and $3.7 million and $75.3 million in 1999. At December 31,
2001, the MCCA represented 10% or more of the Company's reinsurance business.
At December 31, 2001 and 2000, the Company, in the Risk Management
segment, had reinsurance recoverables on paid and unpaid losses from CAR of
$40.4 million and $56.4 million, respectively, and from MCCA of $320.2 million
and $298.4 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.
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 in excess of retentions 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.
Reference is made to Note 17 on pages 74 and 75 and Note 20 on page 78 of
the Notes to Consolidated Financial Statements of the 2001 Annual Report to
Shareholders, the applicable portions of which are incorporated herein by
reference.
6
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 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.
Voluntary Pools
The Company has terminated its participation in virtually all of its
voluntary pool business, however the Company continues to be subject to claims
related to years in which it was a participant. The Company was a participant in
a voluntary excess and casualty reinsurance pool (Excess and Casualty
Reinsurance Association "ECRA") from 1950 to 1982. In 1982 the pool was
dissolved and since that time the business has been in runoff. The Company's
participation in this pool has resulted in an average loss of $2.5 million
annually over the past ten years. During 2001, the pool commissioned an
independent actuarial review of the current reserve position, which noted a
range of reserve deficiency primarily as a result of adverse development of
asbestos claims. As a result of this study, the Company recorded an additional
$33.0 million of losses in 2001. Management believes that this item is not
indicative of overall operating trends of this pool or other voluntary pools in
which the Company participates. Because of the inherent uncertainty regarding
the types of claims in this pool, there can be no assurance that these
additional reserves will be sufficient. Loss and LAE reserves for the Company's
voluntary pools were $73.1 million, including $45.3 million related to ECRA, as
of December 31, 2001.
Other Involuntary Pools
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 Louisiana.
7
Competition
The property and casualty industry is 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
Standard Markets and Sponsored Markets distribution channels, markets through
independent agents and, therefore, competes with other independent agency
companies for business in each of the agencies representing them.
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, 2001, approximately 36% and 16% of AFC's written premium is
generated in the states of Michigan and Massachusetts, respectively. The
Company's other primary markets include New York, New Jersey, Maine and Indiana.
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, 2000, the Company is the largest writer of property and
casualty insurance in Michigan through independent agents based upon direct
written premiums. About half of the Company's Michigan business is in the
personal automobile line. In Michigan personal lines, AFC ranked fourth with
9.4% of the total market. In Michigan, AFC's principal personal lines
competition is from Auto Club of Michigan, State Farm Group and Allstate.
In Michigan, AFC's commercial lines competition is principally from
national agency companies, and regional and local companies. According to A.M.
Best, as of December 31, 2000, AFC is the largest commercial lines writer in
Michigan with approximately 9% of the market. The insurance industry, including
the Company, initiated commercial lines rate increases in 2000 and continued to
increase rates in 2001, as compared to rate decreases in prior years primarily
due to price competition.
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. Management believes that its
emphasis on maintaining a local presence in its markets, through the use of the
Standard Markets distribution channel, coupled with investments in operating and
client technologies, will enable it to compete effectively.
Although the environment in Massachusetts' personal automobile market has
continued to be competitive, the Company's personal automobile direct written
premiums increased by 5.1% in 2001. Approximately 23% of Allmerica's personal
automobile business is written in Massachusetts. The Massachusetts Division of
Insurance sets the rates for personal automobile business in the state.
Effective January 1, 2001, rates decreased 8.3%, reversing the previous trend of
0.7% increases that occurred in both 2000 and 1999. There was no material rate
change in 2002. The Massachusetts Division of Insurance allows companies to
offer discounts for sponsoring organizations and safe drivers. In 2001, the
Company modified some of the discounts it previously offered. In 2002, the
discount for safe drivers remains consistent with those offered in 2001 at 2%.
In addition, the Company's Sponsored Markets unit currently offers more than 125
group programs throughout the state, including a large group plan with
approximately 425,000 eligible members.
8
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 (the sum of the ratio of incurred claims and claim expense to
premiums earned and the ratio of underwriting expenses incurred to premiums
written) in each of its product lines regardless of market conditions. This
strategy is intended to better enable the Company to achieve measured growth and
consistent profitability. 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
seeks to utilize 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 Risk
Management segment has field claims adjusters strategically located throughout
its operating territories. All claims staff members work closely with the agents
and seek to settle claims rapidly and in a cost-effective manner.
Claims office adjusting staff are supported by general adjusters for large
property loss claims, by automobile and heavy equipment damage appraisers for
automobile material damage losses, and by medical specialists whose principal
concentration is on 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
maintains a special investigative unit which investigates suspected insurance
fraud and abuse.
The Company, in the Risk Management segment, utilizes claims processing
technology which allows most of the smaller and more routine personal lines
claims to be processed at centralized locations. The centralization helps to
increase efficiency and minimize 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 loss adjustment expense experience and to higher customer satisfaction
ratings by permitting the early and direct settlement of these small claims.
Approximately 30% of the total number of paid claims reported in the Midwest
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 snow, ice storms,
hurricanes, earthquakes, tornadoes, wind, hail, terrorism, fires and explosions,
and the incidence and severity of catastrophes are inherently unpredictable. The
Company manages its catastrophe risks through underwriting procedures, including
the use of specific exclusions for floods, terrorism and other factors, and
through reinsurance programs. The Company is currently using terrorism exclusion
forms from the Insurance Service Office for its commercial property and general
liability exposures in states that have approved the use of the forms
unconditionally. Some states have limitations related to the use of exclusions
that
9
require the Company to demonstrate a lack of reinsurance coverage for the
terrorism peril. There are also five states, as of March 21, 2002, that have not
approved the use of any terrorism exclusions. 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 25, 26 and 27 of Management's Discussion and Analysis of Financial
Condition and Results of Operations of the 2001 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 settlement and 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.
The following table reconciles reserves determined in accordance with
accounting principles and practices prescribed or permitted by insurance
statutory authorities ("Statutory") to reserves determined in accordance with
generally accepted accounting principles ("GAAP") at December 31, as follows:
2001 2000 1999
---- ---- ----
(In millions)
Statutory reserve for losses and LAE $2,057.5 $1,906.5 $1,926.6
GAAP adjustments:
Reinsurance recoverable on unpaid losses 864.6 816.9 694.2
Other(*) (0.6) (4.3) (2.1)
------------------------------------
GAAP reserve for losses and LAE $2,921.5 $2,719.1 $2,618.7
====================================
(*) Primarily represents purchase accounting adjustments.
10
Analysis of Losses and Loss Adjustment Expenses Reserve Development
The following table sets forth the development of net GAAP reserves for
unpaid losses and LAE from 1991 through 2001 for the Company.
Year ended December 31,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ----
(In millions)
Net reserve for losses and LAE(1) ......... $2,056.9 $1,902.2 $1,924.5 $2,005.5 $2,038.7 $2,117.2
Cumulative amount paid as of(2):
One year later ............................ -- 780.3 703.8 638.0 643.0 732.1
Two years later ........................... -- -- 1,063.8 996.0 967.4 1,054.3
Three years later ......................... -- -- -- 1,203.0 1,180.7 1,235.0
Four years later .......................... -- -- -- -- 1,301.5 1,365.9
Five years later .......................... -- -- -- -- -- 1,439.8
Six years later ........................... -- -- -- -- -- --
Seven years later ......................... -- -- -- -- -- --
Eight years later ......................... -- -- -- -- -- --
Nine years later .......................... -- -- -- -- -- --
Ten years later ........................... -- -- -- -- -- --
Net reserve re-estimated as of(3):
End of year ............................... 2,056.9 1,902.2 1,924.5 2,005.5 2,038.7 2,117.2
One year later ............................ -- 2,010.8 1,837.1 1,822.1 1,911.5 1,989.3
Two years later ........................... -- -- 1,863.3 1,781.4 1,796.8 1,902.8
Three years later ......................... -- -- -- 1,818.6 1,734.9 1,832.5
Four years later .......................... -- -- -- -- 1,762.9 1,783.7
Five years later .......................... -- -- -- -- -- 1,810.9
Six years later ........................... -- -- -- -- -- --
Seven years later ......................... -- -- -- -- -- --
Eight years later ......................... -- -- -- -- -- --
Nine years later .......................... -- -- -- -- -- --
Ten years later ........................... -- -- -- -- -- --
--------------------------------------------------------------------------
(Deficiency) Redundancy, net(4,5) ......... $ -- $ (108.6) $ 61.2 $ 186.9 $ 275.8 $ 306.3
--------------------------------------------------------------------------
Year ended December 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In millions)
Net reserve for losses and LAE(1) ......... $2,132.5 $2,109.3 $2,019.6 $1,936.9 $1,772.4
Cumulative amount paid as of(2):
One year later ............................ 627.6 614.3 566.9 564.3 569.0
Two years later ........................... 1,008.3 940.7 884.4 862.7 888.0
Three years later ......................... 1,217.8 1,172.8 1,078.1 1,068.4 1,077.1
Four years later .......................... 1,325.9 1,300.4 1,210.9 1,184.1 1,207.1
Five years later .......................... 1,408.8 1,369.9 1,289.5 1,267.5 1,279.4
Six years later ........................... 1,459.8 1,427.6 1,353.3 1,323.1 1,337.2
Seven years later ......................... -- 1,466.1 1,377.2 1,355.8 1,377.3
Eight years later ......................... -- -- 1,408.3 1,387.7 1,404.1
Nine years later .......................... -- -- -- 1,413.3 1,431.6
Ten years later ........................... -- -- -- -- 1,453.9
Net reserve re-estimated as of(3):
End of year ............................... 2,132.5 2,109.3 2,019.6 1,936.9 1,772.4
One year later ............................ 1,991.1 1,971.7 1,891.5 1,868.1 1,755.0
Two years later ........................... 1,874.3 1,859.4 1,767.4 1,762.8 1,717.7
Three years later ......................... 1,826.8 1,780.3 1,691.5 1,703.3 1,670.8
Four years later .......................... 1,780.7 1,766.2 1,676.3 1,658.9 1,654.1
Five years later .......................... 1,740.1 1,735.6 1,653.7 1,637.3 1,634.6
Six years later ........................... 1,771.3 1,699.2 1,630.3 1,650.5 1,630.6
Seven years later ......................... -- 1,733.1 1,603.9 1,627.2 1,644.2
Eight years later ......................... -- -- 1,637.2 1,607.4 1,626.1
Nine years later .......................... -- -- -- 1,637.6 1,611.8
Ten years later ........................... -- -- -- -- 1,642.2
------------------------------------------------------------
(Deficiency) Redundancy, net(4,5) ......... $ 361.2 $ 376.2 $ 382.4 $ 299.3 $ 130.2
------------------------------------------------------------
(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, 2001 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 2001 for the Company:
11
Year ended December 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997 1996
-------- -------- -------- -------- -------- --------
(In millions)
Reserve for losses and LAE:
Gross liability ................... $2,921.5 $2,719.1 $2,618.7 $2,597.2 $2,615.4 $2,744.1
Reinsurance recoverable ........... 864.6 816.9 694.2 591.7 576.7 626.9
-------- -------- -------- -------- -------- --------
Net liability ................... $2,056.9 $1,902.2 $1,924.5 $2,005.5 $2,038.7 $2,117.2
======== ======== ======== ======== ======== ========
One year later:
Gross re-estimated liability ...... $2,882.0 $2,553.4 $2,432.9 $2,472.6 $2,541.9
Re-estimated recoverable .......... 871.2 716.3 610.8 561.1 552.6
-------- -------- -------- -------- --------
Net re-estimated liability ...... $2,010.8 $1,837.1 $1,822.1 $1,911.5 $1,989.3
======== ======== ======== ======== ========
Two years later:
Gross re-estimated liability ...... $2,640.8 $2,379.6 $2,379.3 $2,424.5
Re-estimated recoverable .......... 777.5 598.2 582.5 521.7
-------- -------- -------- --------
Net re-estimated liability ...... $1,863.3 $1,781.4 $1,796.8 $1,902.8
======== ======== ======== ========
Three years later:
Gross re-estimated liability ...... $2,439.7 $2,305.2 $2,395.3
Re-estimated recoverable .......... 621.1 570.2 562.8
-------- -------- --------
Net re-estimated liability ...... $1,818.6 $1,734.9 $1,832.5
======== ======== ========
Four years later:
Gross re-estimated liability ...... $2,351.0 $2,336.3
Re-estimated recoverable .......... 588.1 552.6
-------- --------
Net re-estimated liability ...... $1,762.9 $1,783.7
======== ========
Five years later:
Gross re-estimated liability ...... $2,380.8
Re-estimated recoverable .......... 569.9
--------
Net re-estimated liability ...... $1,810.9
========
Six years later:
Gross re-estimated liability ......
Re-estimated recoverable ..........
Net re-estimated liability ......
Seven years later:
Gross re-estimated liability ......
Re-estimated recoverable ..........
Net re-estimated liability ......
Eight years later:
Gross re-estimated liability ......
Re-estimated recoverable ..........
Net re-estimated liability ......
Nine years later:
Gross re-estimated liability ......
Re-estimated recoverable ..........
Net re-estimated liability ......
Year ended December 31,
-------------------------------------------
1995 1994 1993 1992
-------- -------- -------- --------
(In millions)
Reserve for losses and LAE:
Gross liability .................. $2,896.0 $2,821.7 $2,717.3 $2,598.9
Reinsurance recoverable .......... 763.5 712.4 697.7 662.0
-------- -------- -------- --------
Net liability .................. $2,132.5 $2,109.3 $2,019.6 $1,936.9
======== ======== ======== ========
One year later:
Gross re-estimated liability ..... $2,587.8 $2,593.5 $2,500.5 $2,460.5
Re-estimated recoverable ......... 596.7 621.8 609.0 592.4
-------- -------- -------- --------
Net re-estimated liability ..... $1,991.1 $1,971.7 $1,891.5 $1,868.1
======== ======== ======== ========
Two years later:
Gross re-estimated liability ..... $2,427.7 $2,339.2 $2,333.3 $2,341.9
Re-estimated recoverable ......... 553.4 479.8 565.9 579.1
-------- -------- -------- --------
Net re-estimated liability ..... $1,874.3 $1,859.4 $1,767.4 $1,762.8
======== ======== ======== ========
Three years later:
Gross re-estimated liability ..... $2,358.6 $2,227.0 $2,145.5 $2,257.3
Re-estimated recoverable ......... 531.8 446.7 454.0 554.1
-------- -------- -------- --------
Net re-estimated liability ..... $1,826.8 $1,780.3 $1,691.5 $1,703.2
======== ======== ======== ========
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 ..... $2,299.8 $2,215.2 $2,091.7 $2,027.3
Re-estimated recoverable ......... 559.7 479.6 438.0 390.0
-------- -------- -------- --------
Net re-estimated liability ..... $1,740.1 $1,735.6 $1,653.7 $1,637.3
======== ======== ======== ========
Six years later:
Gross re-estimated liability ..... $2,351.2 $2,158.9 $2,096.6 $2,022.6
Re-estimated recoverable ......... 579.9 459.7 466.3 372.1
-------- -------- -------- --------
Net re-estimated liability ..... $1,771.3 $1,699.2 $1,630.3 $1,650.5
======== ======== ======== ========
Seven years later:
Gross re-estimated liability ..... $2,210.5 $2,050.3 $2,050.1
Re-estimated recoverable ......... 477.4 446.4 422.9
-------- -------- --------
Net re-estimated liability ..... $1,733.1 $1,603.9 $1,627.2
======== ======== ========
Eight years later:
Gross re-estimated liability ..... $2,099.9 $2,013.6
Re-estimated recoverable ......... 462.7 406.2
-------- --------
Net re-estimated liability ..... $1,637.2 $1,607.4
======== ========
Nine years later:
Gross re-estimated liability ..... $2,062.2
Re-estimated recoverable ......... 424.6
--------
Net re-estimated liability ..... $1,637.6
========
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 snow, ice storms,
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
12
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 Company's 2001 catastrophe reinsurance program, AFC retained
$45.0 million of loss per hurricane occurrence and $25.0 million of loss per
occurrence for all other exposures, 15% of all loss amounts in excess of $45.0
million, or $25.0 million for non-hurricane losses, up to $230.0 million, and
all amounts in excess of $230.0 million. Effective January 1, 2002, the Company
modified its catastrophe reinsurance program. Under this new program, AFC
retains $45.0 million of loss per hurricane occurrence and $30.0 million of loss
per occurrence for all other exposures, 15% of all aggregate loss amounts in
excess of $45.0 million, or $30.0 million for non-hurricane losses, up to $230.0
million and all amounts in excess of $230.0 million. Additionally, this 2002
program excludes catastrophes related to terrorist activities.
Under the Company's 2001 property catastrophe aggregate treaty, the treaty
provided for annual aggregate coverage totaling 90% of catastrophe losses in
excess of $65.0 million up to $115.0 million. The Company's retention was
calculated cumulatively, in the aggregate, on a quarterly basis with the
aggregate losses comprised of all catastrophe losses that exceeded $0.5 million
per each loss occurrence. The maximum contribution from the Company for any
one-loss occurrence for the purposes of calculating the aggregate retention was
$25.0 million. Effective January 1, 2002, the Company modified its property
catastrophe aggregate treaty. Under this new treaty, catastrophe losses will be
calculated cumulatively, in the aggregate, at the end of each quarter during the
term of the contract and will be subject to a retention limit based on property
lines' net earned premium. This limit will equal 13.26% of the net earned
premium at March 31, 2002, subject to a minimum net earned premium of $158.0
million and a maximum of $165.0 million, 13.21% of the net earned premium at
June 30, 2002, subject to a minimum net earned premium of $318.0 million and a
maximum of $328.0 million, 11.6% of the net earned premium at September 30,
2002, subject to a minimum net earned premium of $483.0 million and a maximum of
$498.0 million, and 10.7% of the net earned premium at December 31, 2002 subject
to a minimum net earned premium of $654.0 million and a maximum of $680.0
million. The 2002 property catastrophe aggregate treaty excludes terrorist
related activities. Personal lines' losses due to fire or collapse as a result
of an act of terrorism are not excluded from coverage under this treaty, except
for those losses that result from biological, chemical or nuclear terrorism.
Effective July 1, 2001, 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 monoline inland marine
and commercial auto physical damage. All other property business is 100% covered
by reinsurers for each loss in excess of $2.0 million per occurrence up to $18.0
million. Amounts in excess of $19.5 million for monoline inland marine and
commercial auto physical damage are 100% retained by the Company while amounts
in excess of $18.0 million in all other property lines are retained by the
Company.
Under the 2001 casualty reinsurance program, the reinsurers were
responsible for 40% of the amount of each loss in excess of $0.5 million per
occurrence up to $1.0 million and 100% of the amount of each loss in excess of
$1.0 million per occurrence up to $30.5 million for general liability and
workers' compensation. Additionally, this reinsurance covered 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, were
retained 100% by the Company, while amounts in excess of $30.5 million, in the
general liability line, were retained 100% by the Company. Effective January 1,
2002, under the Company's casualty reinsurance program, the reinsurers are
responsible for 45% of the amount of each loss in excess of $0.5 million per
occurrence up to $1.0 million and 100% of the amount of each loss in excess of
$1.0 million per occurrence up to $30.5 million for general liability and
workers' compensation. Amounts in excess of $30.5 million are retained 100% by
the Company. In addition, the 2002 program excludes terrorism claims for
coverage in excess of $3.0 million.
The Company entered into a whole account aggregate excess of loss
reinsurance agreement, which provides coverage for accident year 1999 for the
Company's property and casualty business. The program covered losses
13
and allocated LAE, including those incurred but not yet reported, in excess of a
specified whole account loss and allocated LAE ratio. The annual coverage limit
for losses and allocated LAE is $150.0 million. The effect of this agreement on
results of operations in each reporting period is based on losses and allocated
LAE ceded, reduced by a sliding scale premium of 50-67.5% depending on the size
of the loss, and increased by a ceding commission of 20% of ceded premium. In
addition, net investment income is reduced for amounts credited to the
reinsurer. As a result of this agreement, the Company recognized net benefits of
$0.2 million, $9.8 million and $15.9 million for the years ended December 31,
2001, 2000, and 1999 respectively, based on estimates of losses and allocated
LAE for accident year 1999. The 2001 impact from this treaty includes a $1.1
million net benefit related to the aforementioned exit of selected property and
casualty agencies, policies, groups and programs. The effect of this agreement
on the results of operations in future periods is not currently determinable, as
it will be based both on future losses and allocated LAE for accident year 1999.
The Company, in the Risk Management segment, 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 17 on pages 74 and 75 of the
Notes to Consolidated Financial Statements of the 2001 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.
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 annuities and life
insurance to upper income individuals and small businesses throughout the United
States. These products are marketed through the Company's career agency force of
705 agents as of December 31, 2001, 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, 2001, the Allmerica Financial
Services segment accounted for $826.5 million, or 24.1%, of consolidated segment
revenues and $143.0 million, or 73.9%, 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 and variable 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
14
insurance, (ii) continue to expand existing and develop additional distribution
channels, (iii) continue to leverage the Company's technological resources to
support marketing and client service initiatives, (iv) improve the productivity
of and expand the career agency distribution system and (v) implement a targeted
marketing approach emphasizing value-added service.
The Company has utilized its technological resources to support its
marketing and client service initiatives in this segment. The Company has
invested in administration systems and valuation systems to better support its
variable product lines. The Company continues to upgrade those systems to
provide improved service to its policyholders.
According to 2001 A.M Best's Policy Reports, the Company was among the
twenty largest writers of individual variable annuity contracts in the United
States in 2000, based on statutory premiums and deposits. Sales of variable
products represented approximately 98.1%, 98.2% and 97.9% of this segment's
statutory premiums and deposits in 2001, 2000 and 1999, respectively. Statutory
premiums and deposits, a common industry benchmark for sales achievement,
totaled $3,385.6 million, $3,877.0 million and $3,535.9 million in 2001, 2000
and 1999, 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.
Products
The following table reflects premiums and deposits on a statutory
accounting principles ("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, 2001, 2000 and
1999. 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.
2001 2000 1999
-------- -------- --------
(In millions)
Statutory Premiums and Deposits
Variable universal life .................. $ 204.1 $ 209.1 $ 187.0
Group variable universal life ............ 64.8 47.7 94.9
Separate account annuities ............... 1,923.1 2,555.1 1,922.2
General account annuities (1) ............ 926.8 524.7 830.2
Retirement investment account annuities .. 6.0 9.3 16.4
Group annuities .......................... 197.7 463.1 409.3
Universal life ........................... 15.4 17.2 23.0
Traditional life ......................... 47.4 50.6 52.6
Individual health ........................ 0.3 0.2 0.3
-------- -------- --------
Total statutory premiums and deposits $3,385.6 $3,877.0 $3,535.9
======== ======== ========
(1) The general account includes approximately $73.0 million, $145.7 million,
and $590.5 million in 2001, 2000, and 1999 respectively, 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. In addition, deposits into the general account in 2001 also reflect
approximately $300.0 million related to a promotional annuity program which
offered enhanced crediting rates of 7% for new general account deposits, for up
to one year.
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 98 in 1998 to more than
450 in 2001, 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 retirement plans of corporate employers. The Company
also offers participant recordkeeping and administrative services to defined
benefit retirement plans. Currently, the Company provides administration and
recordkeeping for approximately 117 qualified pension and profit sharing plans
which have assets totaling $0.5 billion. The Company does not plan to continue
marketing efforts for its defined benefit business. It expects to continue to
administer its defined benefit business which, in recent years, has not
experienced new sales.
On July 1, 2001, the Company sold its defined contribution business, in
which it had provided consulting services to defined contribution benefit
retirement plans, to Minnesota Life Insurance Company, as a result ofthe
Company's conclusion that this business lacked scale to compete effectively in
the 401(k) market.
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.
16
Distribution
The Company's life insurance and annuity products are distributed
primarily through three distribution channels: (1) "Agency", which consists of
the Company's career agency force; (2) "Select", which consists of a network of
third party broker-dealers; and (3) "Partners", which includes distributors of
the mutual funds advised by Scudder Investments ("Scudder"), Pioneer Investment
Management, Inc ("Pioneer"), and Delaware Management Company ("Delaware"). In
the fourth quarter of 2001, the Company terminated its distribution relationship
with Delaware, which had represented approximately 3% of all individual annuity
deposits in 2001 and approximately 7% of average assets at December 31, 2001.
The Company's national career agency sales force consists of 705 agents,
housed in 19 branches located in or adjacent to most of the major metropolitan
centers in the United States. These branches are supported and managed through 7
regional marketing centers. Virtually all of the 705 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 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 2001, total statutory premiums and deposits from
sales of variable annuities through the agency sales force totaled $679.9
million, compared to $885.7 million and $930.1 million in 2000 and 1999,
respectively. Total statutory premiums from sales of variable life insurance
through the agency sales force totaled $73.9 million in 2001, compared to $66.3
million and $97.6 million in 2000 and 1999, respectively.
In addition, both the Select and Partners distribution channels have made
significant contributions to the overall growth of variable product sales in
this segment. Products sold through these 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. The Company's strategy is to increase sales under its
existing distribution channels and to continue to pursue additional
relationships in these markets. As part of this strategy, the Company increased
its Select wholesaling force from approximately 20 wholesalers to 55 wholesalers
in 2001. Through its various distribution channels, the Company has obtained
access to over 616 distribution firms employing over 90,000 sales personnel. In
addition, establishment of these channels has enabled the Company to offer a
broader range of investment options through alliances with Scudder and Pioneer
mutual funds as well as other financial institutions. During 2001, total
statutory premiums and deposits from sales of variable annuities through
additional distribution channels totaled $2,170.0 million, compared to $2,194.1
million and $1,822.3 million in 2000 and 1999, respectively. In addition, total
statutory premiums from sales of variable life insurance through additional
distribution channels totaled $67.9 million in 2001, compared to $62.1 million
and $55.4 million in 2000 and 1999, respectively.
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
a system utilizing advanced demographic screening and telemarketing techniques.
The Company also regularly delivers seminars focused on retirement planning to
these prospective clients. During 2001, the Company delivered 578 seminars
nationally with a total of 9,750 attendees. While developed for and primarily
utilized by the agency channel, these programs are being extended to the
Company's other distribution channels.
17
Underwriting
Life insuranece 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. Underwrting 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 distribution channel, 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, included in the Consolidated Balance Sheets
in the 2001 Annual Report to Shareholders, the applicable portions of which are
incorporated herein by reference, to meet obligations on various policies and
contracts. Reserves for 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. The
Company periodically reviews both reserve assumptions and policyholder
liabilities.
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 18.3% of this segment's statutory individual life insurance
premiums in 2001.
In order to manage the mortality risk of its individual universal life and
variable universal life businesses, the Company has established a reinsurance
program, which provides for annual coverage utilizing both automatic and
facultative reinsurance. Under the automatic reinsurance agreements, the
Company's retention limits range from 15-20% of the mortality risk and are
subject to a $2.0 million limit per life. For life policies that do not qualify
for automatic reinsurance, 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.
In addition, the Company maintains coinsurance agreements to reinsure
substantially all of its individual disability income business and yearly
renewable term business.
18
The Company seeks to enter into reinsurance treaties with highly rated
reinsurers. The Company's policy is to utilize reinsurers which have received an
A.M. Best rating of "A- (Excellent)" or better (Best's Insurance Reports, 2000
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 0.6%. There have been
several claims for which the Company's share was approximately $158,550 since
the Company entered the pool on January 1, 1989. The Company anticipates that
its share in the pool, due to the events of September 11, 2001, will increase to
$1,078,583 in 2002. Approximately 122 companies currently participate in this
pool.
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, 2001, there were approximately 2,400 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 since
prior regulatory restrictions on the sale of insurance and securities by these
institutions have been repealed.
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 distribution 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.
Allmerica Asset Management
General
Through the Allmerica Asset Management segment, the Company offers "Stable
Value Products", such as Guaranteed Investment Contracts ("GICs") and funding
agreements, to ERISA-qualified retirement plans as well as other non-ERISA
institutional buyers, such as money market funds and securities lending
collateral reinvestment programs. Also, Euro-GICs, a type of funding agreement,
are issued in conjunction with the Company's European Medium Term Note program.
In addition, this segment includes 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, 2001, this segment accounted for
approximately $155.2 million, or 4.5%, of consolidated segment revenues, and
$20.7 million, or 10.7%, of consolidated segment income before federal income
taxes and minority interest.
19
Products and Services
Stable Value Products
The Company offers its customers the option of investing in Stable Value
Products such as the traditional 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 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 funding agreement is similar to the traditional GIC, except that it is
issued to non-ERISA institutional buyers, such as money market funds and
securities lending collateral reinvestment programs. 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, and put features. Some
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 2-10 years, and may
utilize either fixed or variable interest rates also based on an index such as
LIBOR, and be denominated in either U.S. dollars or foreign currencies. Deposits
from customers in 2001 were invested in these longer-term funding agreements.
During 2001, funding agreement deposits were approximately $1.2 billion,
as compared to $1.1 billion and $1.0 billion in 2000 and 1999, respectively.
Long term funding agreements, including Euro-GICs, accounted for 100% of these
deposits in 2001, compared to 71% in 2000 and 27% 1999. Short term funding
agreements accounted for 28% of the deposits in 2000 and 73% in 1999. The
decreasing volume of short term funding agreement deposits reflects an overall
decline in this market. In addition, the Company's market share has decreased
due to its decision to limit its short term funding agreement portfolio and from
withdrawals which resulted from uncertainties related to rating agency actions.
The Company expects to continue its sales of long term funding agreements in
2002.
Reference is made to "Recent Developments" on page 43 of Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
2001 Annual Report to Shareholders, which is incorporated herein by reference.
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, 2001, Allmerica Asset
Management had assets under management of approximately $18.8 billion, of which
approximately $6.2 billion represented assets managed for third party clients
(i.e. entities unaffiliated with the Company). One institutional money market
fund represents approximately 80% of assets managed for third party clients.
Assets under management for third party clients grew by approximately $4.0
billion during 2001.
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.
20
Competition
Prior to 1997, GIC deposits consisted primarily of traditional GICs. The
Company introduced its funding agreement product in the latter part of 1997.
There are approximately two dozen insurance companies that offer funding
agreements. 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.
By utilizing asset/liability management techniques, the Company is able to offer
yields and product structures that are competitive with comparably rated
instruments. 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. These termination requests received by the Company were paid in a
timely manner. Management does not expect significant deposits in short-term
funding agreements to continue due to a diminished market for this product.
Reference is made to "Products and Services - Stable Value Products" on page 20
of this Form 10-K.
The Company introduced its Euro-GIC product in the latter part of 1999.
Currently, there are approximately a dozen 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 continues
to establish and maintain relationships with investment banking firms who manage
the distribution of this product.
Investment Portfolio
General
At December 31, 2001, the Company held $10.7 billion of investment assets.
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; 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 and mortgages)
is determined by management initially through a process that focuses overall on
the types of businesses in each segment in which the Company engages, and the
level of surplus (net worth) required to support these businesses.
21
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, property types and
geographic locations. During 2001, the Company shifted approximately 3% of its
portfolio holdings from below investment grade securities to higher quality
fixed maturity securities as a result of the continued deterioration of the
high-yield market. 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.
Rating Agencies
Insurance companies are rated by rating agencies to provide both industry
participants and insurance consumers meaningful information on specific
insurance companies. Higher ratings generally indicate financial stability and a
stronger ability to pay claims.
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.
Reference is made to "Shareholder Information - Industry Ratings" on page
81 of the 2001 Annual Report to Shareholders, which is incorporated herein by
reference. Rating agency actions are included in "Recent Developments" on page
43 in Management's Discussion and Analysis of Financial Condition and Results of
Operations in the 2001 Annual Report to Shareholders, which is incorporated
herein by reference.
Employees
The Company has approximately 5,600 employees located throughout the
country as of December 31, 2001. Management believes relations with employees
and agents are good.
22
ITEM 2
PROPERTIES
The Company's headquarters are located at 440 Lincoln Street, Worcester,
Massachusetts, and consist primarily of approximately 761,110 rentable square
feet of office and conference space owned in fee and includes the headquarters
of Hanover.
Citizens owns its home office, located at 645 W. Grand River, Howell,
Michigan, which is approximately 118,554 rentable square feet. Citizens also
owns a three-building complex located at 808 North Highlander Way, Howell,
Michigan, with approximately 155,730 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 and Citizens also lease 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 20 on page 78 of the Notes to Consolidated
Financial Statements of the 2001 Annual Report to Shareholders, the applicable
portions of which are incorporated herein by reference.
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 21, 2002, the Company had
41,023 shareholders of record and 53,375,394 million shares outstanding. On the
same date, the trading price of the Company's common stock was $44.02 per share.
Common Stock Prices and Dividends
High Low Dividends
---- --- ---------
2001
First Quarter.................. $67.25 $47.63 --
Second Quarter................. $57.50 $48.01 --
Third Quarter.................. $56.35 $40.62 --
Fourth Quarter................. $46.10 $38.17 $0.25
2000
First Quarter.................. $53.50 $35.31 --
Second Quarter................. $60.13 $46.31 --
Third Quarter.................. $65.44 $54.00 $0.25
Fourth Quarter................. $72.50 $58.13 --
2001 Dividend Schedule
Allmerica Financial Corporation declared an annual cash dividend of $0.25
per share on October 23, 2001, which was paid on November 20, 2001. The record
date for such dividend was November 5, 2001. 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 41-43 of Management's
Discussion and Analysis of Financial Condition and Results of Operations and to
Note 14 on pages 72 and 73 of the Notes to Consolidated Financial Statements of
the 2001 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 17 of the 2001 Annual Report to Shareholders, which is
incorporated herein by reference.
24
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 18-44 of the 2001 Annual Report to
Shareholders, which is incorporated herein by reference.
ITEM 7A
QUANTATATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Reference is made to "Market Risk and Risk Management Policies" on pages
33-39 of Management's Discussion and Analysis of Financial Condition and Results
of Operations in the 2001 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 47-51
and the accompanying Notes to Consolidated Financial Statements on pages 52-79
of the 2001 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 22 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 14, 2002, 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, 58
Director, Chief Executive Officer and President of the Company since
February 1995
See biography under "Directors of the Registrant" above.
Bruce C. Anderson, 57
Vice President of the Company since February 1995
Mr. Anderson has been Vice President of AFC since February 1995. 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.
Mark R. Colborn, 53
Vice President of the Company since March 2000
Mr. Colborn has been Vice President of AFC since March 2000. In addition,
Mr. Colborn has served as Vice President of FAFLIC since June 1992.
J. Kendall Huber, 47
Vice President and General Counsel of the Company since March 2000
Mr. Huber has been Vice President, General Counsel and Assistant Secretary
of AFC and FAFLIC 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.
Mark Hug, 44
Vice President of the Company since October 2001
Mr. Hug has been Vice President of AFC since October 2001. He has been
President and Chief Executive Officer of AFLIAC since December 2001 and Vice
President of FAFLIC since April 2000. Prior to joining AFC, Mr. Hug was Senior
Vice President, Product and Marketing of Equitable Life Insurance Company from
April 1997 to April 2000. Previously, Mr. Hug was Vice President, Sales of Aetna
Insurance Company from April 1992 to April 1997.
26
John P. Kavanaugh, 47
Vice President and Chief Investment Officer of the Company since September
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.
Edward J. Parry, III, 42
Vice President of the Company since February 1995
Chief Financial Officer of the Company since December 1996
Mr. Parry has been Chief Financial Officer of AFC and FAFLIC since
December 1996. He has also been Vice President of AFC since February 1995 and
was Treasurer from February 1995 to March 2000. He has been a Vice President of
FAFLIC since February 1993 and was Treasurer from February 1993 until March
2000.
Richard M. Reilly, 63
Senior Vice President of the Company since December 2001
Mr. Reilly has been Senior Vice President of AFC and FAFLIC since December
2001, and was Vice President of AFC and FAFLIC from February 1997 and November
1990, respectively, to December 2001. He was also President and Chief Executive
Officer of AFLIAC from August 1995 to December 2001 and Vice President of AFLIAC
since November 1990. Mr. Reilly was Vice President of AFC from February 1995
through December 1995. Additionally, Mr. Reilly has been the President of
Allmerica Investment Trust, and Allmerica Securities Trust, each a registered
investment company, since February 1991.
Robert P. Restrepo, Jr., 51
Vice President of the Company since May 1998
Mr. Restrepo has been Vice President of AFC and FAFLIC since May 1998. He
has been President and Chief Executive Officer of the Hanover Insurance Company
since December 2001. He was President and Chief Executive Officer of Allmerica
Property and Casaulty Companies, Inc. from May 1998 to December 2000. 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.
Gregory D. Tranter, 45
Vice President and Chief Information Officer of the Company since October
2000
Mr. Tranter has been Vice President and Chief Information Officer of AFC
since October 2000. Mr. Tranter has been Vice President and Chief Information
Officer of AFC's insurance subsidiaries since August 1998. Prior to joining AFC,
Mr. Tranter was Vice President, Automation Strategy of Travelers Property &
Casualty Company from April 1996 to July 1998. Mr. Tranter was employed by Aetna
Life & Casualty Company from 1983 to 1996.
ITEM 11
EXECUTIVE COMPENSATION
Incorporated herein by reference from the Proxy Statement for the Annual
Meeting of Shareholders to be held May 14, 2002, 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 14, 2002, 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 14, 2002, 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 47 through 79 of the 2001 Annual Report to Shareholders have been
incorporated herein by reference in their entirety.
Annual
Report
Page(s)
-------
Report of Independent Accountants........................................................... 45
Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999...... 47
Consolidated Balance Sheets as of December 31, 2001 and 2000................................ 48
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001,
2000 and 1999............................................................................ 49
Consolidated Statements of Comprehensive Income for the years ended December 31, 2001,
2000 and 1999............................................................................ 50
Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2000 and 1999............................................................................ 51
Notes to Consolidated Financial Statements.................................................. 52-79
(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 an 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.+++
29
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.+++
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
S-8 (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 Amended 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. ++++
10.27 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.
++++
30
10.29 Credit Agreement dated as of June 17, 1998 between the Registrant
and the Chase Manhattan Bank. +++++
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 Arrangement, 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.
10.38 Amendment to the Credit Agreement dated as of May 25, 2001 between
the Registrant and the Chase Manhattan Bank incorporated by
reference to Exhibit 10.38 to the Allmerica Financial Corporation
June 30, 2001 report on Form 10-Q and incorporated herein by
reference.
10.39 Stock Pledge and Loan Agreement dated as of February 5, 2001 between
AMGRO, Inc., a subsidiary of the Registrant, and Robert P. Restrepo,
Jr. incorporated by reference to Exhibit 10.39 to the Allmerica
Financial Corporation June 30, 2001 report on Form 10-Q and
incorporated herein by reference.
10.40 Severance Agreement, dated November 19, 2001, between First
Allmerica Life Insurance Company and Eric A. Simonson.
13 The following sections of the Annual Report to Shareholders for 2001
("2001 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 18 through 44 of the 2001 Annual
Report.
. Consolidated Financial Statements and Notes thereto at pages 47
through 79 of the 2001 Annual Report.
. Report of Independent Accountants at page 45 of the 2001 Annual
Report.
. The information appearing under the caption "Five Year Summary
of Selected Financial Highlights" at page 17 of the 2001 Annual
Report.
. The information appearing under the caption "Shareholder
Information" at page 81 of the 2001 Annual Report.
21 Subsidiaries of AFC.
23 Consent of Independent Accountants.
24 Power of Attorney.
99.1 Internal Revenue Service Ruling dated April 15, 1995.+
99.2 Important Factors Regarding Forward Looking Statements.
31
+ 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 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 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 February 15, 2002, Allmerica Financial Corporation adjusted its
previously disclosed Shareholders' Equity balance and book value per share as of
December 31, 2001 due to final valuation work associated with Statement of
Financial Accounting Standards No. 87 "Employers' Accounting for Pensions."
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 25, 2002 By: /s/ JOHN F. O'BRIEN
--------------------------------------------
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 25, 2002 By: /s/ JOHN F. O'BRIEN
--------------------------------------------
John F. O'Brien,
Chairman of the Board,
Chief Executive Officer and President
Date: March 25, 2002 By: /s/ EDWARD J. PARRY, III
--------------------------------------------
Edward J. Parry III,
Vice President, Chief Financial Officer
and Principal Accounting Officer
Date: March 25, 2002 By: *
--------------------------------------------
Michael P. Angelini,
Director
Date: March 25, 2002 By:
--------------------------------------------
E. Gordon Gee,
Director
Date: March 25, 2002 By: *
--------------------------------------------
Samuel J. Gerson,
Director
Date: March 25, 2002 By: *
--------------------------------------------
Gail L. Harrison,
Director
Date: March 25, 2002 By: *
--------------------------------------------
Robert P. Henderson,
Director
33
Date: March 25, 2002 By: *
--------------------------------------------
M Howard Jacobson,
Director
Date: March 25, 2002 By: *
--------------------------------------------
Wendell J. Knox,
Director
Date: March 25, 2002 By: *
--------------------------------------------
Robert J. Murray,
Director
Date: March 25, 2002 By: *
--------------------------------------------
Terrence Murray,
Director
Date: March 25, 2002 By: *
--------------------------------------------
John R. Towers,
Director
Date: March 25, 2002 By: *
--------------------------------------------
Herbert M. Varnum,
Director
*By: /s/ EDWARD J. PARRY
--------------------------------------------
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 15, 2002, which contains an explanatory paragraph with respect to
the change in the Company's method of accounting for derivative instruments,
appearing in the 2001 Annual Report to Shareholders of Allmerica Financial
Corporation (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 15, 2002
35
Schedule I
ALLMERICA FINANCIAL CORPORATION
Summary of Investments--Other than Investments in Related Parties
December 31, 2001
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 ......................................... $ 186.8 $ 190.0 $ 190.0
States, municipalities and political subdivisions .......... 1,830.5 1,829.8 1,829.8
Foreign governments ........................................ 34.3 36.5 36.5
Public utilities ........................................... 908.5 914.5 914.5
All other corporate bonds .................................. 6,154.0 6,250.4 6,250.4
Redeemable preferred stocks ..................................... 179.9 180.5 180.5
--------- ---------- ----------
Total fixed maturities ..................................... 9,294.0 9,401.7 9,401.7
--------- ---------- ----------
Equity securities:
Common stocks:
Banks, trust and insurance companies ....................... 43.7 39.1 39.1
Industrial, miscellaneous and all other .................... 1.1 6.0 6.0
Nonredeemable preferred stocks .................................. 16.4 17.0 17.0
--------- ---------- ----------
Total equity securities .................................... 61.2 62.1 62.1
--------- ---------- ----------
Mortgage loans on real estate ........................................ 321.6 XXXXXX 321.6
Policy loans ......................................................... 379.6 XXXXXX 379.6
Other long-term investments .......................................... 180.9 XXXXXX 161.2
--------- ---------- ----------
Total investments .......................................... $10,237.3 XXXXXX $ 10,326.2
========= ========== ==========
(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.
36
Schedule II
ALLMERICA FINANCIAL CORPORATION
Condensed Financial Information of Registrant
Parent Company Only
Statements of Income for the Years Ended December 31,
2001 2000 1999
------ ------ ------
Revenues
Net investment income ............................................. $ 1.1 $ 3.6 $ 5.3
Net realized investment (losses) gains ............................ (6.1) 2.6 (0.4)
------ ------ ------
Total revenues ............................................... (5.0) 6.2 4.9
------ ------ ------
Expenses
Interest expense .................................................. 40.6 40.6 40.6
Operating expenses ................................................ 4.9 2.7 2.3
------ ------ ------
Total expenses ............................................... 45.5 43.3 42.9
------ ------ ------
Net loss before federal income taxes and equity in net income of
Unconsolidated subsidiaries ......................................... (50.5) (37.1) (38.0)
Income tax benefit:
Federal ........................................................... 15.3 13.2 14.2
State ............................................................. 1.2 -- 0.3
Equity in net income of unconsolidated subsidiaries .................... 30.9 223.8 319.3
------ ------ ------
Net (loss) income ...................................................... $ (3.1) $199.9 $295.8
====== ====== ======
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,
--------------------------
2001 2000
-------- --------
(In millions, except share
and per share data)
Assets
Fixed maturities - at fair value (amortized cost of $11.3 in 2001) .................. $ 11.1 $ --
Cash and cash equivalents ........................................................... 16.9 26.6
Investment in unconsolidated subsidiaries ........................................... 2,954.0 2,922.6
Net receivable from subsidiaries .................................................... 62.2 65.3
Other assets ........................................................................ 2.3 8.7
-------- --------
Total assets ................................................................... $3,046.5 $3,023.2
======== ========
Liabilities
Expenses and taxes payable .......................................................... $ 49.6 $ 35.6
Interest and dividends payable ...................................................... 13.9 13.6
Short-term debt ..................................................................... 83.1 56.1
Long-term debt ...................................................................... 508.8 508.8
-------- --------
Total liabilities .............................................................. 655.4 614.1
-------- --------
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, 2001 and December 31, 2000 ............ 0.6 0.6
Additional paid-in capital .......................................................... 1,758.4 1,765.3
Accumulated other comprehensive loss ................................................ (13.7) (5.2)
Retained earnings ................................................................... 1,052.3 1,068.7
Treasury stock at cost (7.5 and 7.7 million shares) ................................. (406.5) (420.3)
-------- --------
Total shareholders' equity ..................................................... 2,391.1 2,409.1
-------- --------
Total liabilities and shareholders' equity ..................................... $3,046.5 $3,023.2
======== ========
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,
2001 2000 1999
------ ------ ------
(In millions)
Cash flows from operating activities
Net (loss) income ...................................................................... $ (3.1) $199.9 $295.8
Adjustments to reconcile net income to net cash used in operating
activities:
Equity in net income of unconsolidated subsidiaries .................................. (30.9) (223.8) (319.3)
Dividend received from unconsolidated subsidiaries ................................... 41.1 109.8 39.5
Net realized investment (gains) losses ............................................... 6.1 (2.6) 0.4
Change in expenses and taxes payable ................................................. 14.0 22.5 (2.8)
Change in interest and dividends payable ............................................. 0.3 0.3 0.3
Change in receivable from subsidiaries ............................................... 3.1 (18.1) 3.3
Other, net ........................................................................... 5.9 (1.5) 1.7
------ ------ ------
Net cash provided by operating activities ................................................. 36.5 86.5 18.9
------ ------ ------
Cash flows from investing activities
Capital contributed to unconsolidated subsidiaries ..................................... (53.9) (16.9) (54.1)
Proceeds from disposals and maturities of available-for-sale fixed maturities .......... -- 33.5 84.6
Purchase of available-for-sale fixed maturities ........................................ (11.3) -- (41.4)
Proceeds from sale of common stock of subsidiary ....................................... -- -- 247.6
------ ------ ------
Net cash (used in) provided by investing activities ....................................... (65.2) 16.6 236.7
------ ------ ------
Cash flow from financing activities
Net proceeds from issuance of commercial paper ......................................... 27.0 11.5 3.5
Net proceeds from issuance of common stock ............................................. -- 0.6 1.1
Treasury stock purchased at cost ....................................................... -- (104.1) (250.2)
Treasury stock reissued at cost ........................................................ 5.3 23.3 6.2
Dividends paid to shareholders ......................................................... (13.3) (13.4) (13.5)
------ ------ ------
Net cash provided by (used in) financing activities ....................................... 19.0 (82.1) (252.9)
------ ------ ------
Net change in cash and cash equivalents ................................................... (9.7) 21.0 2.7
Cash and cash equivalents at beginning of the period ...................................... 26.6 5.6 2.9
------ ------ ------
Cash and cash equivalents at end of the period ............................................ $ 16.9 $ 26.6 $ 5.6
====== ====== ======
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, 2001
Future
policy
benefits, Other
Deferred losses, policy
policy claims and claims and
acquisition loss Unearned benefits Premium
costs expenses premiums payable revenue
----- -------- -------- ------- -------
(In millions)
Risk Management ............. $ 199.0 $3,126.3 $1,049.9 $ 24.9 $2,205.7
Asset Accumulation
Allmerica Financial Services 1,585.2 4,003.1 2.6 567.1 49.0
Allmerica Asset Management . -- -- -- 1,171.9 --
Corporate ................... -- -- -- -- --
Eliminations ................ -- -- -- -- --
-------- -------- -------- -------- --------
Total ................. $1,784.2 $7,129.4 $1,052.5 $1,763.9 $2,254.7
======== ======== ======== ======== ========
Amortization
Benefits, of
claims, deferred
Net losses and policy Other
investment settlement acquisition operating Premiums
income expenses costs expenses written
------ -------- ----- -------- -------
(In millions)
Risk Management ............. $ 216.0 $1,753.1 $ 401.7 $ 309.7 $2,285.0
Asset Accumulation
Allmerica Financial Services 288.9 344.6 77.4 252.0 --
Allmerica Asset Management . 144.5 69.5 0.1 100.1 --
Corporate ................... 6.7 -- -- 70.5 --
Eliminations ................ (0.9) -- -- (7.5) --
-------- -------- -------- -------- --------
Total ................. $ 655.2 $2,167.2 $ 479.2 $ 724.8 $2,285.0
======== ======== ======== ======== ========
40
Schedule III (continued)
ALLMERICA FINANCIAL CORPORATION
Supplementary Insurance Information
December 31, 2000
Future
policy
benefits, Other
Deferred losses, policy
policy claims and claims and
acquisition loss Unearned benefits Premium
costs expenses premiums payable revenue
----- -------- -------- ------- -------
(In millions)
Risk Management ............. $ 187.2 $3,017.5 $ 978.8 $ 25.1 $2,066.7
Asset Accumulation
Allmerica Financial Services 1,420.8 3,480.8 2.8 531.5 52.1
Allmerica Asset Management . 0.2 -- -- 1,636.5 --
Corporate ................... -- -- -- -- --
Eliminations ................ -- -- -- -- --
-------- -------- -------- -------- --------
Total ................. $1,608.2 $6,498.3 $ 981.6 $2,193.1 $2,118.8
======== ======== ======== ======== ========
Amortization
Benefits, of
claims, deferred
Net losses and policy Other
investment settlement acquisition operating Premiums
income expenses costs expenses written
------ -------- ----- -------- -------
(In millions)
Risk Management ............. $ 218.4 $1,563.0 $ 373.2 $ 184.9 $2,153.4
Asset Accumulation
Allmerica Financial Services 283.6 315.1 83.2 242.5 --
Allmerica Asset Management . 138.1 103.7 0.2 23.0 --
Corporate ................... 6.3 -- -- 82.3 --
Eliminations ................ (0.9) -- -- (7.0) --
-------- -------- -------- -------- --------
Total ................. $ 645.5 $1,981.8 $ 456.6 $ 525.7 $2,153.4
======== ======== ======== ======== ========
41
Schedule III (continued)
ALLMERICA FINANCIAL CORPORATION
Supplementary Insurance Information
December 31, 1999
Future
policy
benefits, Other
Deferred losses, policy
policy claims and claims and
acquisition loss Unearned benefits Premium
costs expenses premiums payable revenue
----- -------- -------- ------- -------
(In millions)
Risk Management ............. $ 173.3 $3,003.8 $ 887.2 $ 24.8 $1,948.2
Asset Accumulation
Allmerica Financial Services 1,226.2 3,390.8 3.0 804.4 54.4
Allmerica Asset Management . 0.4 -- -- 1,316.0 --
Corporate ................... -- -- -- -- --
Eliminations ................ -- -- -- -- --
-------- -------- -------- -------- --------
Total ................. $1,399.9 $6,394.6 $ 890.2 $2,145.2 $2,002.6
======== ======== ======== ======== ========
Amortization
Benefits, of
claims, deferred
Net losses and policy Other
investment settlement acquisition operating Premiums
income expenses costs expenses written
------ -------- ----- -------- -------
(In millions)
Risk Management ............. $ 221.4 $1,420.3 $ 370.6 $ 197.0 $1,977.0
Asset Accumulation
Allmerica Financial Services 304.9 323.0 61.6 211.8 --
Allmerica Asset Management . 138.2 118.3 0.2 8.5 --
Corporate ................... 6.0 -- -- 65.3 --
Eliminations ................ (1.0) -- -- (5.9) --
-------- -------- -------- -------- --------
Total ................. $ 669.5 $1,861.6 $ 432.4 $ 476.7 $1,977.0
======== ======== ======== ======== ========
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)
2001
Life insurance in force ............................ $30,550.4 $21,108.8 $454.1 $ 9,895.7 4.59%
========= ========= ====== ========= ====
Premiums:
Life insurance .............................. $ 58.3 $ 10.3 $ 0.7 $ 48.7 1.44%
Accident and health insurance ............... 30.8 27.9 -- 2.9 --
Property and casualty insurance ............. 2,438.6 293.7 53.5 2,198.4 2.43%
--------- --------- ------ --------- ----
Total premiums ..................................... $ 2,527.7 $ 331.9 $ 54.2 $ 2,250.0 2.41%
========= ========= ====== ========= ====
2000
Life insurance in force ............................ $33,752.4 $19,375.5 $488.3 $14,865.2 3.28%
========= ========= ====== ========= ====
Premiums:
Life insurance .............................. $ 62.6 $ 11.4 $ 0.7 $ 51.9 1.35%
Accident and health insurance ............... 31.7 29.6 -- 2.1 --
Property and casualty insurance ............. 2,297.8 299.8 66.8 2,064.8 3.24%
--------- --------- ------ ---------
Total premiums ..................................... $ 2,392.1 $ 340.8 $ 67.5 $ 2,118.8 3.19%
========= ========= ====== ========= ====
1999
Life insurance in force ............................ $43,492.4 $21,281.5 $374.2 $22,585.1 1.66%
========= ========= ====== ========= ====
Premiums:
Life insurance .............................. $ 72.7 $ 19.2 $ 0.7 $ 54.2 1.29%
Accident and health insurance ............... 33.5 31.4 -- 2.1 --
Property and casualty insurance ............. 2,135.0 261.7 73.0 1,946.3 3.75%
--------- --------- ------ ---------
Total premiums ..................................... $ 2,241.2 $ 312.3 $ 73.7 $ 2,002.6 3.68%
========= ========= ====== ========= ====
43
Schedule V
ALLMERICA FINANCIAL CORPORATION
Valuation and Qualifying Accounts
December 31,
Additions
------------------------
Deductions
Balance at Charged to Charged to from Balance at
beginning of costs and other allowance end of
period expense accounts account period
------ ------- -------- ------- ------
(In millions)
2001
Mortgage loans .................................... $ 4.4 $ 0.6 $ -- $ 1.2 $ 3.8
Allowance for doubtful accounts ................... 6.9 18.8 -- 15.4 10.3
------- ------- -------- ------- -------
$ 11.3 $ 19.4 $ -- $ 16.6 $ 14.1
======= ======= ======== ======= =======
2000
Mortgage loans .................................... $ 5.8 $ (1.3) $ -- $ 0.1 $ 4.4
Allowance for doubtful accounts ................... 5.8 8.4 -- 7.3 6.9
------- ------- -------- ------- -------
$ 11.6 $ 7.1 $ -- $ 7.4 $ 11.3
======= ======= ======== ======= =======
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
======= ======= ======== ======= =======
44
Schedule VI
ALLMERICA FINANCIAL CORPORATION
Supplemental Information Concerning Property and Casualty Insurance Operations
For the Years Ended December 31,
Discount, if
Reserves for any,
Deferred losses and deducted
policy loss from Net Net
acquisition adjustment previous Unearned premiums investment
Affiliation with Registrant costs expenses(2) column(1) premiums(2) earned income
--------------------------- ----- ----------- --------- ----------- ------ ------
(In millions)
Consolidated Property and Casualty
Subsidiaries
2001....................... $ 195.8 $2,921.5 $ -- $1,047.7 $2,198.4 $ 215.4
======= ======== ========= ======== ======== ========
2000....................... $ 183.9 $2,719.1 $ -- $ 975.9 $2,064.8 $ 217.9
======= ======== ========= ======== ======== ========
1999....................... $ 167.3 $2,618.7 $ -- $ 883.3 $1,946.3 $ 220.5
======= ======== ========= ======== ======== ========
Amortization
Losses and loss of deferred Paid losses
adjustment expenses policy and loss Net
------------------- acquisition adjustment premiums
Current Year Prior Years expenses expenses written
------------ ----------- -------- -------- -------
2001....................... $1,720.4 $ 107.4 $ 401.7 $1,673.1 $2,277.7
======== ========= ======== ======== ========
2000....................... $1,634.9 $ ( 87.4) $ 373.2 $1,574.0 $2,151.6
======== ========= ======== ======== ========
1999....................... $1,601.4 $ (183.4) $ 370.6 $1,499.1 $1,975.4
======== ========= ======== ======== ========
(1) The Company does not employ any discounting techniques.
(2) Reserves for losses and loss adjustment expenses are shown gross of $864.6
million, $816.9 million and $694.2 million of reinsurance recoverable on
unpaid losses in 2001, 2000 and 1999, respectively. Unearned premiums are
shown gross of prepaid premiums of $55.6 million, $63.2 million and $57.4
million in 2001, 2000 and 1999, respectively.
45