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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 No.)
440 Lincoln Street, Worcester, Massachusetts 01653
(Address of principal executive offices)
(Zip Code)
(508) 855-1000
(Registrant's telephone number, including area code)
_________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date: 53,179,453 shares of common
stock outstanding, as of May 1, 2003.
36
Total Number of Pages Included in This Document
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Comprehensive Income 6
Consolidated Statements of Cash Flows 7
Notes to Interim Consolidated Financial Statements 8 - 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16 - 33
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 34
Item 4. Controls and Procedures 34
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 35
SIGNATURES 36
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
---------------------------------
(In millions, except per share data) 2003 2002
- -------------------------------------------------------------------------------------------------------------
Revenues
Premiums........................................................ $ 575.2 $ 582.6
Universal life and investment product policy fees............... 90.3 96.0
Net investment income........................................... 118.7 150.5
Net realized investment gains (losses).......................... 13.2 (12.3)
Other income.................................................... 52.4 32.5
-------------- --------------
Total revenues............................................... 849.8 849.3
-------------- --------------
Benefits, losses and expenses
Policy benefits, claims, losses and loss adjustment expenses.... 486.7 536.4
Policy acquisition expenses..................................... 171.3 111.5
Gain from retirement of trust instruments supported by funding
obligations................................................. (4.7) -
Income from sale of universal life business..................... (5.5) -
Gains on derivative instruments................................. (1.5) (16.3)
Restructuring costs............................................. 3.3 -
Other operating expenses........................................ 151.6 152.6
-------------- --------------
Total benefits, losses and expenses.......................... 801.2 784.2
-------------- --------------
Income before federal income taxes.............................. 48.6 65.1
-------------- --------------
Federal income tax (benefit) expense:
Current...................................................... (28.4) 9.8
Deferred..................................................... 35.9 (0.3)
-------------- --------------
Total federal income tax expense.......................... 7.5 9.5
-------------- --------------
Income before minority interest and cumulative effect of
change in accounting principle.......................... 41.1 55.6
Minority interest:
Distributions on mandatorily redeemable preferred securities
of a subsidiary trust holding solely junior subordinated
debentures of the Company................................. (4.0) (4.0)
-------------- --------------
Income before cumulative effect of change in accounting
principle................................................... 37.1 51.6
Cumulative effect of change in accounting principle (less
applicable income tax benefit of $2.0 for the
quarter ended March 31, 2002)............................... - (3.7)
-------------- --------------
Net income...................................................... $ 37.1 $ 47.9
============== ==============
PER SHARE DATA
Basic
Income before cumulative effect of change in accounting
principle................................................. $ 0.70 $ 0.98
Cumulative effect of change in accounting principle (less
applicable income tax benefit of $0.04 for the
quarter ended March 31, 2002)............................. - (0.07)
-------------- --------------
Net income................................................... $ 0.70 $ 0.91
============== ==============
Weighted average shares outstanding.......................... 52.9 52.8
============== ==============
Diluted
Income before cumulative effect of change in accounting
principle................................................. $ 0.70 $ 0.97
Cumulative effect of change in accounting principle (less
applicable income tax benefit of $0.04 for the
quarter ended March 31, 2002)............................. - (0.07)
-------------- --------------
Net income................................................... $ 0.70 $ 0.90
============== ==============
Weighted average shares outstanding.......................... 53.0 53.1
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
3
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
(In millions, except per share data) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Assets
Investments:
Fixed maturities-at fair value (amortized cost of $7,204.5 and $7,715.9).. $ 7,487.9 $ 8,003.1
Equity securities-at fair value (cost of $49.1)........................... 52.2 52.8
Mortgage loans............................................................ 242.4 259.8
Policy loans.............................................................. 277.5 361.4
Other long-term investments............................................... 112.2 129.7
----------- -----------
Total investments....................................................... 8,172.2 8,806.8
----------- -----------
Cash and cash equivalents.................................................... 267.7 389.8
Accrued investment income.................................................... 130.8 138.3
Premiums, accounts and notes receivable, net................................. 584.5 564.7
Reinsurance receivable on paid and unpaid losses,
benefits and unearned premiums............................................ 2,080.5 2,075.8
Deferred policy acquisition costs............................................ 1,180.4 1,242.2
Deferred federal income taxes................................................ 377.0 413.2
Goodwill..................................................................... 131.2 131.2
Other assets................................................................. 432.3 473.5
Separate account assets...................................................... 11,016.2 12,343.4
----------- -----------
Total assets.............................................................. $ 24,372.8 $ 26,578.9
=========== ===========
Liabilities
Policy liabilities and accruals:
Future policy benefits.................................................... $ 3,737.5 $ 3,900.1
Outstanding claims, losses and loss adjustment expenses................... 3,059.4 3,066.5
Unearned premiums......................................................... 1,039.0 1,047.0
Contractholder deposit funds and other policy liabilities................. 774.7 772.8
----------- -----------
Total policy liabilities and accruals................................... 8,610.6 8,786.4
----------- -----------
Expenses and taxes payable................................................... 797.5 1,115.5
Reinsurance premiums payable................................................. 173.9 559.1
Trust instruments supported by funding obligations........................... 1,159.2 1,202.8
Long-term debt............................................................... 199.5 199.5
Separate account liabilities................................................. 11,016.2 12,343.4
----------- -----------
Total liabilities......................................................... 21,956.9 24,206.7
----------- -----------
Minority interest:
Mandatorily redeemable preferred securities of a subsidiary trust holding
solely junior subordinated debentures of the Company.................... 300.0 300.0
----------- -----------
Commitments and contingencies (Note 11)
Shareholders' equity
Preferred stock, $0.01 par value, 20.0 million shares authorized, none issued - -
Common stock, $0.01 par value, 300.0 million shares authorized, 60.4 million
shares issued............................................................. 0.6 0.6
Additional paid-in capital................................................... 1,768.5 1,768.4
Accumulated other comprehensive loss......................................... (38.6) (37.4)
Retained earnings............................................................ 783.3 746.2
Treasury stock at cost (7.3 and 7.5 million shares).......................... (397.9) (405.6)
----------- -----------
Total shareholders' equity................................................ 2,115.9 2,072.2
----------- -----------
Total liabilities and shareholders' equity.............................. $ 24,372.8 $ 26,578.9
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
4
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
Three Months Ended
March 31,
---------------------------
(In millions) 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Preferred Stock
Balance at beginning and end of period....................................... $ - $ -
--------- ----------
Common Stock
Balance at beginning and end of period....................................... 0.6 0.6
--------- ----------
Additional paid-in capital
Balance at beginning of period............................................... 1,768.4 1,758.4
Unearned compensation related to restricted stock and other........... 0.1 (1.5)
--------- ----------
Balance at end of period..................................................... 1,768.5 1,756.9
--------- ----------
Accumulated Other Comprehensive Loss
Net unrealized appreciation (depreciation) on investments and derivative
instruments:
Balance at beginning of period............................................... 83.4 28.4
Depreciation during the period:
Net depreciation on available-for-sale securities and derivative
instruments........................................................... (1.9) (88.0)
Benefit for deferred federal income taxes................................. 0.7 30.8
--------- ----------
(1.2) (57.2)
--------- ----------
Balance at end of period..................................................... 82.2 (28.8)
--------- ----------
Minimum Pension Liability:
Balance at beginning and end of period....................................... (120.8) (42.1)
--------- ----------
Total accumulated other comprehensive loss................................... (38.6) (70.9)
--------- ----------
Retained earnings
Balance at beginning of period............................................... 746.2 1,052.3
Net income.............................................................. 37.1 47.9
--------- ----------
Balance at end of period..................................................... 783.3 1,100.2
--------- ----------
Treasury Stock
Balance at beginning of period............................................... (405.6) (406.5)
Shares reissued at cost............................................... 7.7 4.5
--------- ----------
Balance at end of period..................................................... (397.9) (402.0)
--------- ----------
Total shareholders' equity............................................ $ 2,115.9 $ 2,384.8
========= ==========
The accompanying notes are an integral part of these consolidated financial statements.
5
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
---------------------------------
(In millions) 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Net income...................................................................... $ 37.1 $ 47.9
Other comprehensive loss:
Available-for-sale securities:
Net depreciation during the period..................................... (2.9) (100.9)
Benefit for deferred federal income taxes.............................. 1.0 35.3
----------- -----------
Total available-for-sale securities ........................................ (1.9) (65.6)
----------- -----------
Derivative instruments:
Net appreciation during the period..................................... 1.0 12.9
Provision for deferred federal income taxes............................ (0.3) (4.5)
----------- -----------
Total derivative instruments................................................. 0.7 8.4
----------- -----------
Other comprehensive loss ....................................................... (1.2) (57.2)
----------- -----------
Comprehensive income (loss)..................................................... $ 35.9 $ (9.3)
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
6
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------------------
(In millions) 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income.............................................................. $ 37.1 $ 47.9
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Net realized investment(gains) losses................................ (13.2) 12.3
Gains on derivative instruments...................................... (1.5) (16.3)
Net amortization and depreciation.................................... 7.5 6.5
Interest credited to contractholder deposit funds and trust
instruments supported by funding obligations...................... 14.5 23.5
Deferred federal income taxes........................................ 35.9 (0.3)
Change in deferred acquisition costs................................. 57.5 (74.0)
Change in premiums and notes receivable,
net of reinsurance payable......................................... 84.2 (2.4)
Change in accrued investment income.................................. 7.5 (10.2)
Change in policy liabilities and accruals, net....................... (166.3) 71.5
Change in reinsurance receivable..................................... (4.7) 19.7
Change in expenses and taxes payable................................. (318.9) 1.0
Other, net........................................................... 10.6 9.8
------------- -------------
Net cash (used in) provided by operating activities............ (249.8) 89.0
------------- -------------
Cash flows from investing activities
Proceeds from disposals and maturities of available-for-sale fixed
maturities.......................................................... 927.7 940.2
Proceeds from disposals of equity securities............................ 0.6 10.6
Proceeds from disposals of other investments............................ 34.5 9.4
Proceeds from mortgages matured or collected............................ 17.4 2.7
Proceeds from collections of installment finance and notes receivable... 64.9 61.6
Purchase of available-for-sale fixed maturities......................... (749.9) (723.3)
Purchase of other investments........................................... (10.6) (11.5)
Capital expenditures.................................................... (1.9) (1.9)
Payments related to terminated derivative instruments................... (9.9) (16.2)
Disbursements to fund installment finance and notes receivable.......... (75.8) (74.2)
Other investing activities, net......................................... 0.7 -
------------- -------------
Net cash provided by investing activities...................... 197.7 197.4
------------- -------------
Cash flows from financing activities
Deposits to contractholder deposit funds................................ - 100.0
Withdrawals from contractholder deposit funds........................... (10.9) (494.5)
Deposits to trust instruments supported by funding obligations.......... - 27.1
Withdrawals from trust instruments supported by funding obligations..... (59.1) (11.9)
Change in short-term debt............................................... - 49.0
------------- -------------
Net cash used in financing activities.......................... (70.0) (330.3)
------------- -------------
Net change in cash and cash equivalents.................................... (122.1) (43.9)
Cash and cash equivalents, beginning of period............................. 389.8 350.2
------------- -------------
Cash and cash equivalents, end of period................................... $ 267.7 $ 306.3
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
7
ALLMERICA FINANCIAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements of Allmerica
Financial Corporation ("AFC" or the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the requirements of Form 10-Q.
The interim consolidated financial statements of AFC include the accounts of
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC") and First
Allmerica Financial Life Insurance Company ("FAFLIC"), AFC's principal life
insurance and annuity companies; The Hanover Insurance Company ("Hanover") and
Citizens Insurance Company of America ("Citizens"), AFC's principal property and
casualty companies; and certain other insurance and non-insurance subsidiaries.
These legal entities conduct their operations through several business segments
discussed in Note 8. All significant intercompany accounts and transactions have
been eliminated.
The accompanying interim consolidated financial statements reflect, in the
opinion of the Company's management, all adjustments necessary for a fair
presentation of the financial position and results of operations. The results of
operations for the three months ended March 31, 2003 are not necessarily
indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with the Company's 2002 Annual Report
on Form 10-K filed with the Securities and Exchange Commission.
2. New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities - an
interpretation of ARB No. 51"("FIN 46"). FIN 46 provides guidance regarding the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", specifically as it relates to the identification of entities for
which control is achieved through a means other than voting rights ("variable
interest entities") and the determination of which party is responsible for
consolidating the variable interest entities (the "primary beneficiary"). In
addition to mandating that the primary beneficiary consolidate the variable
interest entity, FIN 46 also requires disclosures by companies that hold a
significant variable interest, even if they are not the primary beneficiary.
Certain financial statement disclosures are applicable immediately for those
entities for which it is reasonably possible that the enterprise will
consolidate any variable interest entities. This interpretation also applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. For those variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003, the provisions of
this interpretation shall be applied no later than the first reporting period
after June 15, 2003. The Company is currently assessing the effect that adoption
of FIN 46 will have on its financial position and results of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure"
("Statement No. 148"). This statement amends FASB Statement No. 123, "Accounting
for Stock-Based Compensation" ("Statement No. 123"), to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of Statement No. 123 to require more
prominent disclosures, in both annual and interim financial statements,
regarding the proforma effects of using the fair value method of accounting for
stock-based compensation. The provisions of this statement are effective for
fiscal years ending after December 15, 2002. The Company has elected to continue
applying the provisions of Accounting Principles Board Opinion No. 25 for
stock-based employee compensation.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others - an interpretation of FASB Statements No. 5, 57, and 107
and rescission of FASB Interpretation No. 34" ("FIN 45"). FIN 45 provides
guidance regarding financial statement disclosure requirements for guarantors
related to obligations under guarantees. FIN 45 also clarifies the requirements
related to the recognition of a liability by the guarantor, at the inception of
a guarantee, for these obligations under guarantees. This interpretation also
incorporates, without change, the guidance in FASB Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others", which is being
superseded. The initial recognition and measurement provisions of this
interpretation are required to be applied only on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of reporting periods ending
after December 15, 2002. The adoption of FIN 45 did not have a material effect
on the Company's financial position or results of operations.
8
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities"
("Statement No. 146"). This statement requires that a liability for costs
associated with an exit or disposal activity is recognized and measured
initially at its fair value in the period the liability is incurred. This
statement supersedes Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". Additionally,
the statement requires financial statement disclosures about the description of
the exit or disposal activity, including for each major type of cost, the total
amount expected to be incurred and a reconciliation of the beginning and ending
liability balances. The provisions of this statement are effective for all exit
and disposal activities initiated after December 31, 2002.
3. Discontinued Operations
During 1999, the Company approved a plan to exit its group life and health
insurance business, consisting of its Employee Benefit Services ("EBS")
business, its Affinity Group Underwriters ("AGU") business and its accident and
health assumed reinsurance pool business ("reinsurance pool business"). During
1998, the Company ceased writing new premiums in the reinsurance pool business,
subject to certain contractual obligations. Prior to 1999, these businesses
comprised substantially all of the former Corporate Risk Management Services
segment. Accordingly, the operating results of the discontinued segment,
including its reinsurance pool business, have been reported in the Consolidated
Statements of Income as discontinued operations in accordance with Accounting
Principles Board Opinion No.30, "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" ("APB Opinion No. 30"). In
1999, the Company recorded a $30.5 million loss, net of taxes, on the disposal
of this segment, consisting of after-tax losses from the run-off of the group
life and health business of $46.9 million, partially offset by net proceeds from
the sale of the EBS business of $16.4 million. Subsequent to the measurement
date of June 30, 1999, approximately $10.2 million of the aforementioned $46.9
million loss has been generated from the operations of the discontinued
business.
In 2000, the Company transferred its EBS business to Great-West Life and Annuity
Insurance Company of Denver. As a result of this transaction, the Company has
received consideration of approximately $27 million, based on renewal rights for
existing policies. The Company retained policy liabilities estimated at $68.9
million at March 31, 2003 related to this business.
As permitted by APB Opinion No. 30, the Consolidated Balance Sheets have not
been segregated between continuing and discontinued operations. At March 31,
2003 and 2002, the discontinued segment had assets of approximately $278.8
million and $313.0 million, respectively, consisting primarily of invested
assets and reinsurance recoverables, and liabilities of approximately $345.1
million and $369.1 million, respectively, consisting primarily of policy
liabilities. Revenues for the discontinued operations were $4.6 million and $6.8
million for the quarters ended March 31, 2003 and 2002, respectively.
4. Significant Transactions
Effective December 31, 2002, the Company effectively sold, through a 100%
coinsurance agreement, substantially all of its fixed universal life insurance
business. Under the agreement, the Company ceded approximately $660 million of
universal life insurance reserves in exchange for the transfer of approximately
$550 million of investment assets with an amortized cost of approximately $525
million and was subject to certain post-closing adjustments. At December 31,
2002, the Company recorded a pre-tax loss of $31.3 million. Subsequently, the
Company transferred cash and other investment assets of approximately $20
million and approximately $450 million, respectively, during the first quarter
of 2003, for the settlement of the net payable associated with this transaction.
This settlement excluded the transfer of approximately $80 million in cash
related to policies from the state of New York, which was settled on April 1,
2003. In addition, during the first quarter of 2003, the Company recorded
incremental income of $5.5 million related to the settlement of post-closing
items.
In the first quarter of 2003, the Company retired $52.7 million of long-term
funding agreement obligations which resulted in a pre-tax gain of $4.7 million
and is reported as gain from retirement of trust instruments supported by
funding obligations in the Consolidated Statements of Income. Certain amounts
related to the termination of derivative instruments used to hedge the retired
funding agreements were reported in separate line items in the Consolidated
Statements of Income. The net market value loss on the early termination of
derivative instruments used to hedge the retired funding agreements of $6.7
million was recorded as net realized investment gains in the Consolidated
Statements of Income. The net foreign currency transaction gain on the retired
foreign-denominated funding agreements of $3.6 million was recorded as other
income in the Consolidated Statements of Income.
9
In the fourth quarter of 2002, the Company recognized a pre-tax charge of $15.0
million related to the restructuring of its AFS segment, which was accounted for
under the guidance of Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benfits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". Approximately
$11.7 million of this charge relates to severance and other employee and agent
related costs resulting from the elimination of approximately 475 positions, of
which 397 employees have been terminated as of March 31, 2003 and 63 vacant
positions have been eliminated. All levels of employees, from staff to senior
management, were affected by the restructuring. Approximately $3.3 million of
this charge relates to other restructuring costs, consisting of lease and
contract cancellations and the present value of idle leased space. Additionally,
the Company terminated all life insurance and annuity agent contracts effective
December 31, 2002. As of March 31, 2003, the Company has made payments of
approximately $9.6 million related to this restructuring plan, of which
approximately $8.0 million relates to severance and other employee related
costs. During the first quarter of 2003, the Company eliminated an additional 37
positions related to this restructuring, of which 12 employees have been
terminated as of March 31, 2003. In accordance with Statement No. 146, the
Company recorded a pre-tax charge of $3.6 million, consisting of employee
related costs, during the first quarter of 2003.
5. Federal Income Taxes
Federal income tax expense for the three months ended March 31, 2003 and 2002,
has been computed using estimated effective tax rates. These rates are revised,
if necessary, at the end of each successive interim period to reflect the
current estimates of the annual effective tax rates.
6. Other Comprehensive Income
The following table provides a reconciliation of gross unrealized (losses) gains
to the net balance shown in the Statements of Comprehensive Income:
(Unaudited)
Three Months Ended
March 31,
----------------------------
(In millions) 2003 2002
- ------------------------------------------------------------------------------------------------------
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during period (net of
income tax expense (benefit) of $76.8 million and $(35.8)
million in 2003 and 2002).................................... $ (60.2) $ (64.4)
Less: reclassification adjustment for gains (losses) included
in net income (net of income tax expense(benefit) of $77.8
million and $(0.5) million in 2003 and 2002)................. (58.3) 1.2
----------- -----------
Total available-for-sale securities................................ (1.9) (65.6)
----------- -----------
Unrealized gains on derivative instruments:
Unrealized holding gains arising during period (net of
income tax benefit of $25.9 million and $4.8 million in 2003
and 2002).................................................... 23.1 (5.3)
Less: reclassification adjustment for losses included in net
income (net of income tax benefit of $26.2 million and $9.3
million in 2003 and 2002).................................... 22.4 (13.7)
----------- -----------
Total derivative instruments....................................... 0.7 8.4
----------- -----------
Other comprehensive loss........................................... $ (1.2) $ (57.2)
=========== ===========
10
7. Closed Block
Summarized financial information of the Closed Block is as follows for the
periods indicated:
(Unaudited)
March 31, December 31,
(In millions) 2003 2002
------------------------------------------------------------------------------------------------------
Assets
Fixed maturities-at fair value(amortized cost of $517.7 and $517.4).. $ 542.8 $ 542.4
Mortgage loans....................................................... 46.2 46.6
Policy loans......................................................... 164.0 167.4
Cash and cash equivalents............................................ 0.8 0.3
Accrued investment income............................................ 13.6 13.1
Deferred policy acquisition costs.................................... 8.1 8.2
Deferred federal income taxes........................................ 9.0 5.4
Other assets......................................................... 4.5 4.7
--------- ---------
Total assets...................................................... $ 789.0 $ 788.1
========= =========
Liabilities
Policy liabilities and accruals...................................... $ 769.1 $ 767.5
Policyholder dividends............................................... 48.9 57.1
Other liabilities.................................................... 27.3 23.8
--------- ---------
Total liabilities................................................. $ 845.3 $ 848.4
========= =========
Excess of Closed Block liabilities over assets designated to the
Closed Block......................................................... $ 56.3 $ 60.3
Amounts included in accumulated other comprehensive income:
Net unrealized investment losses, net of deferred federal income tax
benefit of $5.1 million and $5.2 million............................. (9.5) (9.6)
--------- ---------
Maximum future earnings to be recognized from Closed Block
assets and liabilities............................................... $ 46.8 $ 50.7
========= =========
(Unaudited)
Three Months Ended
March 31,
-----------------------
(In millions) 2003 2002
- ---------------------------------------------------------------------------------------------------
Revenues
Premiums............................................................. $ 20.9 $ 24.4
Net investment income................................................ 12.0 12.9
Net realized investment gains (losses)............................... 5.0 (0.1)
-------- ---------
Total revenues.................................................... 37.9 37.2
-------- ---------
Benefits and expenses
Policy benefits...................................................... 33.8 33.9
Policy acquisition (benefit) expenses................................ (0.3) 0.5
Other operating expenses............................................. 0.4 0.3
-------- ---------
Total benefits and expenses....................................... 33.9 34.7
-------- ---------
Contribution from the Closed Block............................. $ 4.0 $ 2.5
======== =========
Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block.
11
8. Segment Information
The Company offers financial products and services and conducts business
principally in three operating segments. These segments are Property and
Casualty (formerly "Risk Management"), Allmerica Financial Services ("AFS"), and
Asset Management (formerly "Allmerica Asset Management"). Prior to 2003,
Allmerica Financial Services and Asset Management comprised the Asset
Accumulation group. In accordance with Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information", the separate financial information of each segment is presented
consistent with the way results are regularly evaluated by the chief operating
decision makers in deciding how to allocate resources and in assessing
performance. A summary of the Company's reportable segments is included below.
The Property and Casualty segment manages its operations through two lines of
business based upon product and identified as Personal Lines and Commercial
Lines. Personal Lines include property and casualty coverages such as personal
automobile, homeowners and other personal policies, while Commercial Lines
include property and casualty coverages such as workers' compensation,
commercial automobile, commercial multiple peril and other commercial policies.
Prior to September 30, 2002, the Allmerica Financial Services segment
manufactured and sold variable annuities, variable universal life and
traditional life insurance products, as well as certain group retirement
produts. On September 27, 2002, the Company announced plans to consider
strategic alternatives, including a significant reduction of sales of
proprietary variable annuities and life insurance products. Subsequently, the
Company ceased all new sales of proprietary variable annuities and life
insurance products. After September 30, 2002, the AFS business consists of two
components. First, the segment includes its independent broker/dealer, VeraVest
Investments, Inc., ("VeraVest"), which distributes third-party investment and
insurance products. The Company has entered into agreements with leading
investment product and insurance providers and is seeking additional alliances
whereby these providers would compensate the Company for non-proprietary product
sales by VeraVest's registered representatives. Second, this segment will retain
and service existing variable annuity and variable universal life accounts, as
well as its remaining traditional life and group retirement accounts, which were
issued by its life insurance subsidiaries, AFLIAC and FAFLIC.
Through its Asset Management segment, prior to September 2002, FAFLIC offered
GICs. GICs, also referred to as funding agreements, are investment contracts
with either short-term or long-term maturities, which are issued to
institutional buyers or to various business or charitable trusts. Declining
financial strength ratings from various rating agencies during 2002 resulted in
GIC contractholders terminating all remaining short-term funding agreements and
made it impractical to continue selling new long-term funding agreements.
Furthermore, the Company retired certain long-term funding agreements, at
discounts, during the first quarter of 2003 and the fourth quarter of 2002 (see
Note 4 - Significant Transactions). This segment continues to be a Registered
Investment Advisor providing investment advisory services, primarily to
affiliates and to third parties, such as money market and other fixed income
clients through its subsidiary, Opus Investments, Inc. Additionally, this
segment includes AMGRO, Inc., the Company's property and casualty insurance
premium financing business.
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 related to certain officers and directors,
technology, finance, human resources and legal.
Management evaluates the results of the aforementioned segments based on a
pre-tax and pre-minority interest basis. Total segment income excludes certain
items, which are included in net income, such as net realized investment gains
and losses, including certain gains or losses on derivative instruments, because
fluctuations in these gains and losses are determined by interest rates,
financial markets and the timing of sales. Also, total segment income excludes
net gains and losses on disposals of businesses, discontinued operations,
restructuring and reorganization costs, extraordinary items, the cumulative
effect of accounting changes and certain other items.
12
Summarized below is financial information with respect to business segments:
(Unaudited)
Three Months Ended
March 31,
--------------------------
(In millions) 2003 2002
- -------------------------------------------------------------------------------------------
Segment revenues:
Property and Casualty................................... $ 609.0 $ 614.7
Allmerica Financial Services............................ 208.0 214.9
Asset Management........................................ 22.1 32.2
Corporate............................................... 0.5 1.7
Intersegment revenues................................... (3.0) (1.9)
---------- ---------
Total segment revenues.................................. 836.6 861.6
Adjustments to segment revenues:
Net realized investment gains (losses).................... 13.2 (12.3)
---------- ---------
Total revenues......................................... $ 849.8 $ 849.3
========== =========
Segment income (loss) before federal income taxes, minority
interest and cumulative effect of change in accounting
principle:
Property and Casualty................................... $ 44.2 $ 39.0
Allmerica Financial Services............................ 2.4 29.7
Asset Management........................................ 2.5 5.1
Corporate............................................... (17.1) (16.4)
---------- ---------
Segment income before federal income taxes and
minority interest.............................. 32.0 57.4
Adjustments to segment income:
Net realized investment gains(losses), net of amortization 8.2 (8.6)
Gain from retirement of trust instruments supported by
funding obligations............................ 4.7 -
Income from sale of universal life insurance business..... 5.5 -
Gains on derivative instruments........................... 1.5 16.3
Restructuring costs....................................... (3.3) -
---------- ---------
Income before federal income taxes, minority interest
and cumulative effect of change in accounting
principle........................................... $ 48.6 $ 65.1
========== =========
Identifiable Assets Deferred Acquisition Costs
- ---------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
March 31, December 31, March 31, December 31,
(In millions) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Property and Casualty (1)................. $ 6,052.5 $ 6,056.1 $ 215.4 $ 215.1
Allmerica Financial Services.............. 16,879.3 18,971.6 965.0 1,027.1
Asset Management.......................... 1,509.6 1,559.8 - -
Corporate and intersegment eliminations... (68.6) (8.6) - -
------------- -------------- -------------- --------------
Total.................................. $ 24,372.8 $ 26,578.9 $ 1,180.4 $ 1,242.2
============= ============== ============== ==============
(1) Includes assets related to the Company's discontinued operations of $278.8 million and $290.4 million at March 31, 2003
and December 31, 2002.
13
9. Earnings Per Share
The following table provides share information used in the calculation of the
Company's basic and diluted earnings per share:
(Unaudited)
Quarter Ended
March 31,
------------------------
(In millions, except per share data) 2003 2002
- ------------------------------------------------------------------------------------------
Basic shares used in the calculation of earnings per share..... 52.9 52.8
Dilutive effect of securities:
Employee stock options................................... - 0.1
Non-vested stock grants.................................. 0.1 0.2
---------- ----------
Diluted shares used in the calculation of earnings per
share.................................................... 53.0 53.1
========== ==========
Per share effect of dilutive securities on income before
cumulative effect of change in accounting principle and
net income.................................................. $ - $ 0.01
========== ==========
10. Stock-Based Compensation Plans
The Company applies the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees and related Interpretations" ("APB
Opinion No. 25"), in accounting for its stock-based compensation plans, and thus
compensation cost is not generally required to be recognized in the financial
statements for the Company's stock options issued to employees. However, costs
associated with the issuance of stock options to certain agents who did not
qualify as employees were recognized in 2003 and 2002.
The following table illustrates the effect on net income and net income per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", to stock-based compensation.
(Unaudited)
Quarter Ended
March 31,
------------------------
(In millions, except per share data) 2003 2002
- ------------------------------------------------------------------------------------------
Net income, as reported...................................... $ 37.1 $ 47.9
Stock-based compensation expense included in
reported net income, net of taxes................... 0.1 0.2
Total stock-based compensation expense
determined under fair value based method for all
awards, net of taxes................................ (2.7) (3.3)
---------- ----------
Proforma net income.......................................... $ 34.5 $ 44.8
========== ==========
Earnings per share:
Basic-as reported................................. $ 0.70 $ 0.91
========== ==========
Basic-proforma.................................... $ 0.65 $ 0.85
========== ==========
Diluted-as reported............................... $ 0.70 $ 0.90
========== ==========
Diluted-proforma.................................. $ 0.65 $ 0.85
========== ==========
14
11. Commitments and Contingencies
Litigation
In 1997, a lawsuit on behalf of a putative class was instituted against the
Company alleging fraud, unfair or deceptive acts, breach of contract,
misrepresentation, and related claims in the sale of life insurance policies. In
November 1998, the Company and the plaintiffs entered into a settlement
agreement and in May 1999, the Federal District Court in Worcester,
Massachusetts approved the settlement agreement and certified the class for this
purpose. AFC recognized a $31.0 million pre-tax expense in 1998 related to this
litigation. Subsequently, the Company has recognized pre-tax benefits totaling
$10.2 million resulting from the refinement of cost estimates. Although the
Company believes that it has appropriately recognized its obligation under the
settlement, this estimate may be revised based on the amount of reimbursement
actually tendered by AFC's insurance carriers.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the Company's opinion, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's consolidated financial statements.
15
PART I
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the interim consolidated results of operations and
financial condition of Allmerica Financial Corporation and subsidiaries ("AFC")
should be read in conjunction with the interim Consolidated Financial Statements
and related footnotes included elsewhere in this Quarterly Report and the
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in our 2002 Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
INTRODUCTION
Our results of operations include the accounts of Allmerica Financial Life
Insurance and Annuity Company ("AFLIAC") and First Allmerica Financial Life
Insurance Company ("FAFLIC"), our principal life insurance and annuity
companies. Our results of operations also include the accounts of The Hanover
Insurance Company ("Hanover") and Citizens Insurance Company of America
("Citizens"), our principal property and casualty companies; and other insurance
and non-insurance subsidiaries.
Description of Operating Segments
We offer financial products and services in three operating segments. These
segments are Property and Casualty (formerly "Risk Management"), Allmerica
Financial Services ("AFS"), and Asset Management (formerly "Allmerica Asset
Management"). Before 2003, AFS and Asset Management comprised the Asset
Accumulation group. We present the separate financial information of each
segment consistent with the manner in which our chief operating decision makers
evaluate results in deciding how to allocate resources and in assessing
performance. This presentation complies with Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information". Total segment income excludes certain items which are included in
net income, such as net realized investment gains and losses, including certain
gains or losses on derivative instruments, because fluctuations in these gains
and losses are determined by interest rates, financial markets and the timing of
sales. Also, total segment income excludes net gains and losses on disposals of
businesses, discontinued operations, restructuring and reorganization costs,
extraordinary items, the cumulative effect of accounting changes and certain
other items.
Results of Operations
Consolidated Overview
Our consolidated net income for the first quarter decreased $10.8 million, or
22.5%, to $37.1 million, compared to $47.9 million for the same period in 2002.
The decrease in net income resulted primarily from a $25.4 million decrease in
total segment income, partially offset by a $12.4 million increase in net
realized investment gains.
16
The following table reflects segment income and a reconciliation of total
segment income to consolidated net income.
Three Months Ended
March 31,
--------------------------------
(In millions) 2003 2002
- ------------------------------------------------------------------------------------------------------
Segment income (loss) before federal income taxes and minority
interest:
Property and Casualty........................................ $ 44.2 $ 39.0
Allmerica Financial Services................................. 2.4 29.7
Asset Management............................................. 2.5 5.1
Corporate.................................................... (17.1) (16.4)
----------- -------------
Total segment income before federal income taxes and
minority interest......................................... 32.0 57.4
----------- -------------
Federal income taxes on total segment income................. (4.3) (8.0)
Minority interest on Capital Securities...................... (4.0) (4.0)
Net realized investment gains(losses), net of taxes and 8.0 (4.4)
amortization...............................................
Income from sale of universal life insurance business,
net of taxes............................................... 3.6 -
Gain from retirement of trust instruments supported by
funding obligations, net of taxes.......................... 3.0 -
Gains on derivative instruments, net of taxes................ 1.0 10.6
Restructuring costs, net of taxes............................ (2.2) -
----------- -------------
Income before cumulative effect of change in
accounting principle........................................... 37.1 51.6
Cumulative effect of change in accounting principle,
net of taxes.............................................. - (3.7)
----------- -------------
Net income........................................................ $ 37.1 $ 47.9
=========== =============
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Our total segment income before taxes and minority interest decreased $25.4
million, or 44.3%, to $32.0 million in the first quarter of 2003. This decrease
was primarily attributable to $27.3 million of lower income from the AFS
segment, partially offset by increased income of $5.2 million from the Property
and Casualty segment. The decrease in AFS is primarily due to substantially
higher policy acquisition expenses. The increase in Property and Casualty
segment income is primarily attributable to a $28.3 million increase in
favorable development related to prior year reserves, primarily in the
commercial multiple peril and commercial automobile lines. In addition, the
increase in Property and Casualty segment income resulted from an estimated
approximately $28 million of net premium rate increases. These increases were
partially offset by an increase of approximately $41 million in current year,
non-catastrophe claims activity, primarily in personal lines, and a decrease in
net investment income of $6.5 million during the first quarter of 2003. Also,
higher employee related benefit expenses of $2.7 million partially offset the
increase in Property and Casualty segment income.
The effective tax rate for total segment income was 13.4% for the first quarter
of 2003, compared to 14.0% for the first quarter of 2002. The decrease in the
tax rate is primarily due to lower expected underwriting income in 2003,
partially offset by lower tax-exempt investment income and low income housing
credits in 2003.
Net realized gains on investments, after taxes, were $8.0 million in the first
quarter of 2003, primarily due to gains recognized from the sale of fixed
maturities, partially offset by impairments of fixed maturities. During the
first quarter of 2002, net realized losses on investments, after taxes, were
$4.4 million resulting primarily from impairments of fixed maturities and losses
related to the termination of certain derivative instruments, partially offset
by gains recognized from the sale of fixed maturities.
During the first quarter of 2003, we recognized incremental income of $3.6
million, net of taxes, from the settlement of post-closing items related to the
sale, in December 2002, of our universal life business, through a 100%
coinsurance agreement.
17
In the first quarter of 2003, we retired $52.7 million of long-term funding
agreement obligations, resulting in a gain of $3.0 million, net of taxes.
Gains on derivative instruments, net of taxes, decreased $9.6 million to a net
gain of $1.0 million due to a decrease in ineffective hedges.
During 2002, we began restructuring efforts in our AFS segment after deciding to
cease new sales of our proprietary life insurance and annuity products. We
recognized $2.2 million of costs, net of taxes, resulting from AFS related
position eliminations in 2003 in accordance with Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities".
Segment Results
The following is a discussion and analysis of our results of operations by
business segment. The segment results are presented before taxes and minority
interest and other items which we believe are not indicative of overall
operating trends, including realized gains and losses.
Property and Casualty
The following table summarizes the results of operations for the Property and
Casualty segment:
Three Months Ended
March 31,
-----------------------------
(In millions) 2003 2002
- ----------------------------------------------------------------------------------------------------
Segment revenues
Net premiums written..................................... $ 550.5 $ 554.9
=========== =============
Net premiums earned...................................... $ 554.2 $ 558.1
Net investment income.................................... 45.3 51.8
Other income............................................. 9.5 4.8
----------- -------------
Total segment revenues............................... 609.0 614.7
Losses and operating expenses
Losses and loss adjustment expenses (1).................. 405.2 421.1
Policy acquisition expenses.............................. 111.8 104.6
Other operating expenses................................. 47.8 50.0
----------- -------------
Total losses and operating expenses.................. 564.8 575.7
----------- -------------
Segment income................................................ $ 44.2 $ 39.0
=========== =============
(1) Includes policyholders' dividends of $0.4 million and $(0.3) million for the
quarters ended March 31, 2003 and 2002, respectively.
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Property and Casualty segment income increased $5.2 million, to $44.2 million,
for the first quarter of 2003. The increase in segment income is primarily
attributable to a $28.3 million increase in favorable development on prior
years' reserves, to $31.7 million in the first quarter of 2003, from $3.4
million in the same period of 2002. The favorable development in 2003 is
primarily the result of decreased claim frequency, primarily in the commercial
multiple peril and commercial automobile lines. Segment results also benefited
from approximately $28 million of net premium rate increases. Net premium rate
increases reflect base rate actions, discretionary pricing adjustments,
inflation and changes in exposure, net of estimated impact of loss inflation and
policy acquisition costs. These increases were partially offset by an increase
of approximately $41 million in current year, non-catastrophe claims activity,
primarily in personal lines and a decrease in net investment income of $6.5
million during the first quarter of 2003. Additionally, higher employee related
benefit expenses of $2.7 million partially offset the increase in segment
income. We recognized catastrophe losses of $11.2 million for both the first
quarters of 2003 and 2002.
18
We report underwriting results using statutory accounting principles, which are
prescribed by state insurance regulators. The primary difference between
statutory accounting principles and generally accepted accounting principles
("GAAP") is the deferral of certain underwriting costs under GAAP that are
amortized over the life of the policy. Under statutory accounting principles,
these costs are recognized when incurred or paid. We review the operations of
this business based upon statutory results.
In 2002, we reorganized our Property and Casualty segment. Under the new
structure, we manage this segment's operations through two lines of business
based upon product offerings: Personal Lines and Commercial Lines. Personal
Lines include personal automobile, homeowners and other personal policies.
Commercial Lines include workers' compensation, commercial automobile,
commercial multiple peril and other commercial policies.
The following tables summarize the results of operations for the Property and
Casualty segment:
Three Months Ended March 31,
----------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------------------------------------
Statutory Statutory
Net Statutory Net Statutory
Premiums Loss Premiums Loss
(In millions,except ratios) Written Ratio(1) Written Ratio(1)
- ------------------------------------------------------------------------- -----------------------------
Personal Lines:
Personal automobile...................$ 283.4 77.2 $ 285.2 72.9
Homeowners............................ 70.5 64.2 65.5 65.7
Other personal........................ 8.2 34.0 8.6 52.3
------------- -------------
Total personal.......................... 362.1 72.9 359.3 70.6
------------- -------------
Commercial Lines:
Workers' compensation................. 39.0 67.4 42.0 75.6
Commercial automobile................. 44.2 50.1 51.5 62.1
Commercial multiple peril............. 83.4 49.4 79.7 61.6
Other commercial...................... 21.5 13.2 21.7 26.7
------------- -------------
Total commercial........................ 188.1 48.4 194.9 60.5
------------- -------------
Total.................................. $ 550.2 64.7 $ 554.2 66.7
============= =============
Statutory combined ratio (2):
Personal lines...................... 109.4 105.1
Commercial lines.................... 88.9 103.6
Total............................... 102.5 104.3
============= =============
Statutory underwriting (loss) gain:
Personal lines...................... $ (33.0) $ (21.7)
Commercial lines.................... 20.4 (1.6)
------------- -------------
Total underwriting loss............. (12.6) (23.3)
Reconciliation to segment income:
Net investment income............... 45.3 51.8
Other income and expenses, net...... 8.1 3.4
Corporate overhead expenses (3)..... 8.0 7.3
Net deferred acquisition expenses... 0.3 2.2
Other Statutory to GAAP adjustments. (4.9) (2.4)
------------- -------------
Segment income......................... $ 44.2 $ 39.0
============= =============
- -----------------------------------------------------------------------------------------------------------
(1) Statutory loss ratio is a common industry measurement of the results of
property and casualty insurance underwriting. This ratio reflects incurred
claims compared to premiums earned.
(2) Statutory combined ratio is a common industry measurement of the results of
property and casualty insurance underwriting. This ratio is the sum of the
ratio of incurred claims and claim expenses to premiums earned and the
ratio of underwriting expenses incurred to premiums written. Federal income
taxes, net investment income and other non-underwriting expenses are not
reflected in the statutory combined ratio.
(3) Statutory underwriting results include certain overhead expenses, which on
a GAAP basis are reflected in the Corporate Segment.
19
Personal Lines
Personal lines' net premiums written increased $2.8 million, or 0.8%, to $362.1
million for the first quarter of 2003. This is primarily the result of an
increase of $5.0 million, or 7.6% in the homeowners line, partially offset by a
decrease of $1.8 million, or 0.6% in the personal automobile line. The increase
in the homeowners line resulted primarily from a 10.0% rate increase in
Michigan. The decrease in the personal automobile line is primarily the result
of a 3.7% decrease in policies in force since March 31, 2002.
Personal lines' underwriting results decreased $11.3 million, or 52.1%, to an
underwriting loss of $33.0 million for the first quarter of 2003. The decrease
in underwriting results is primarily attributable to a significant increase in
the frequency and severity of personal automobile medical costs related to
personal injury protection coverage in Michigan. In addition, both our personal
automobile and homeowners lines experienced an increase in claim frequency and
severity due to the harsher winter weather, especially in the Northeast. The
unfavorable items were partially offset by approximately $11.0 million of net
rate increases. In addition, catastrophe losses decreased $4.7 million, to $4.8
million for the first quarter of 2003, compared to $9.5 million for the same
period in 2002.
Commercial Lines
Commercial lines' net premiums written decreased $6.8 million, or 3.5%, to
$188.1 million for the first quarter of 2003. This is primarily the result of a
decrease of $7.3 million, or 14.2% in the commercial automobile line and a
decrease of $3.0 million, or 7.1% in the workers compensation line. These
decreases were partially offset by an increase in the commercial multiple peril
line of $3.7 million compared to the same period in 2002. Policies in force
decreased 11.7%, 19.9% and 7.4% in the workers'compensation,commercial
automobile, and commercial multiple peril lines,respectively,since March 31,
2002. Partially offsetting these decreases in policies in force were rate
increases in all of the commercial lines since March 31, 2002.
Commercial lines' underwriting results improved $22.0 million to an underwriting
profit of $20.4 million in the first quarter of 2003. Development on prior
years' reserves improved $28.0 million to $32.4 million of favorable development
for the first quarter of 2003, from $4.4 million for the same period in 2002.
The improvement in underwriting results is also attributable to approximately
$14 million of net rate increases during the first quarter of 2003. Partially
offsetting these favorable items is an increase in current year claims severity
primarily in the commercial multiple peril line. In addition, catastrophe losses
increased $4.7 million, to $6.4 million for the first quarter of 2003, compared
to $1.7 million for the same period in 2002.
Investment Results
Net investment income before taxes declined $6.5 million, or 12.5%, to $45.3
million for the quarter ended March 31, 2003. The decrease in net investment
income primarily reflects a reduction in average assets as a result of a $92.1
million dividend from the property and casualty companies to the holding company
in July 2002 and a transfer of $73.7 million in January, 2003 to fund the
property and casualty companies' portion of the additional minimum pension
liability recorded by us at December 31, 2002. In addition, net investment
income decreased due to a reduction in average pre-tax yields on fixed
maturities. Average pre-tax yields on debt securities decreased to 6.2% in 2003
compared to 6.5% in 2002, due to the lower prevailing fixed maturity investment
rates since first quarter of 2002. We expect our investment results to continue
to be affected by lower prevailing fixed maturity investment rates in 2003 and
defaults in the fixed maturities portfolio.
Reserve for Losses and Loss Adjustment
Expenses Overview of Loss Reserve
Estimation Process We maintain reserves for our property and casualty products
to provide for our ultimate liability for losses and loss adjustment
expenses("LAE") with respect to reported and unreported claims incurred as of
the end of each accounting period. These reserves are estimates, involving
actuarial projections at a given point in time, of what we expect the ultimate
settlement and administration of claims will cost based on facts and
circumstances then known, estimates of future trends in claim severity and
frequency, judicial theories of liability and policy coverage, and other
factors.
We determine the amount of loss and loss adjustment expense reserves based on a
very complex estimation process that uses information obtained from both company
specific and industry data, as well as general economic information. The
estimation process is judgmental, and requires us to continuously monitor and
evaluate the life cycle of claims on type-of-business and nature-of-claim bases.
Using data obtained from this monitoring and assumptions about emerging trends,
we develop information about the size of ultimate claims based on our historical
experience and other available market information. The most significant
assumptions, which vary by line of business, that we use in the estimation
process includes determining the trend in loss costs, the expected consistency
in the frequency and severity of claims incurred but not yet reported to prior
year claims, changes in the timing of the reporting of losses from the loss date
to the notification date, and the expected costs to settle unpaid claims.
Because the amount of the loss and LAE reserves are sensitive to our
assumptions, we do not completely rely on only one estimate to determine our
loss and LAE reserves. We develop several estimates using generally recognized
actuarial projection methodologies that result in a range of possible loss and
LAE reserve outcomes; and we adopt the best estimate within that range.
20
We may determine that the low or high end estimate calculated by the method does
not represent a reasonable estimate because certain projection methodologies may
not result in a reasonable reserve estimate for a particular line of business
due to certain underlying data or assumptions. When trends emerge that we
believe affect the future settlement of claims, we adjust our reserves
accordingly.
Management's Review of Judgments and Key Assumptions
The inherent uncertainty of estimating insurance reserves is greater for certain
types of property and casualty insurance lines. These lines include workers'
compensation and other liability lines, where a longer period of time may elapse
before a definitive determination of ultimate liability may be made. In
addition, the technological, judicial and political climates involving these
types of claims change regularly. We maintain our practice of significantly
limiting the issuance of long-tailed other liability policies, including
directors and officers ("D&O")liability, errors and omissions ("E&O") liability
and medical malpractice liability. The industry has experienced recent adverse
loss trends in these lines of business.
We regularly update our reserve estimates as new information becomes available
and further events occur which may impact the resolution of unsettled claims.
Reserve adjustments are reflected in results of operations as adjustments to
losses and LAE. Often these adjustments are recognized in periods subsequent to
the period in which the underlying loss event occurred. These types of
subsequent adjustments are described as "prior year reserve development". Such
development can be either favorable or unfavorable on our financial results.
Inflation generally increases the cost of losses covered by insurance contracts.
The effect of inflation on us varies by product. Our property and casualty
insurance premiums are established before the amount of losses and LAE, and the
extent to which inflation may affect such expenses are known. Consequently, we
attempt in establishing rates and reserves to anticipate the potential impact of
inflation in the projection of ultimate costs. Recently, we have experienced
increasing medical costs associated with personal automobile personal injury
protection claims. This increase is reflected in our reserve estimates, but
continued increases could contribute to increased losses and LAE in the future.
We regularly review our reserving techniques, our overall reserving position and
our reinsurance. Based on (i) our review of historical data, legislative
enactments, judicial decisions, legal developments in impositions of damages and
policy coverage, political attitudes and trends in general economic conditions,
(ii) our review of per claim information, (iii) our historical loss experience
and that of the industry, (iv) the relatively short-term nature of most policies
and (v) our internal estimates of required reserves, we believe that adequate
provision has been made for loss reserves. However, establishment of appropriate
reserves is an inherently uncertain process and we cannot provide assurance 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 our results of operations.
Loss Reserves By Line of Business
We perform actuarial reviews on certain detailed line of business coverages.
These individual estimates are summarized into six broader lines of business:
personal automobile, homeowners, workers' compensation, commercial automobile,
commercial multiple peril, and other lines.
21
The table below provides a reconciliation of the beginning and ending reserve
for unpaid losses and LAE as follows:
Three Months Ended
March 31,
----------------------------
(In millions) 2003 2002
- ---------------------------------------------------------------------------------------------------
Reserve for losses and LAE, beginning of period................... $ 2,961.7 $ 2,921.5
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of current year................. 436.0 425.5
Decrease in provision for insured events of prior years...... (31.7) (3.4)
------------ ------------
Total incurred losses and LAE.................................. 404.3 422.1
------------ ------------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current 140.7 134.4
year.......................................................
Losses and LAE attributable to insured events of prior years. 271.7 270.3
------------ ------------
Total payments............................................. 412.4 404.7
------------ ------------
Change in reinsurance recoverable on unpaid losses......... 10.7 (9.0)
------------ ------------
Reserve for losses and LAE, end of period..................... $ 2,964.3 $ 2,929.9
============ ============
As part of an ongoing process, we have re-estimated reserves for all prior
accident years and the reserves were decreased by $31.7 million and $3.4 million
for the quarters ended March 31, 2003 and 2002, respectively.
The table below summarizes the reserve for losses and LAE by line of business:
March 31, December 31,
(In millions) 2003 2002
- --------------------------------------------------------------------------
Personal Automobile.................. $ 1,035.7 $ 1,018.5
Homeowners and other................. 253.2 246.3
------------- ------------
Total Personal................. 1,288.9 1,264.8
Workers' Compensation................ 629.0 637.7
Commercial Automobile................ 321.7 327.4
Commercial Multiple Peril............ 563.6 566.3
Other Commercial..................... 161.1 165.5
------------- ------------
Total Commercial ............... 1,675.4 1,696.9
------------- ------------
Total reserve for losses and LAE..... $ 2,964.3 $ 2,961.7
============= ==============
Prior Year Development by Line of Business
When trends emerge that we believe affect the future settlement of claims, we
adjust our reserves accordingly. Reserve adjustments are reflected in the
Consolidated Statements of Income as adjustments to losses and loss adjustment
expenses. Often, we recognize these adjustments in periods subsequent to the
period in which the underlying loss event occurred. These types of subsequent
adjustments are disclosed and discussed separately as "prior year reserve
development". Such development can be either favorable or unfavorable to our
financial results.
22
The table below summarizes the change in provision for insured events of prior
years by line of business.
Three Months Ended March 31,
---------------------------------
(In millions) 2003 2002
- -----------------------------------------------------------------------------
Increase (decrease) in loss provision for
insured events of prior years:
Personal Automobile............... $ 2.4 $ (0.2)
Homeowners and other.............. 0.8 3.6
-------- --------
Total Personal............... 3.2 3.4
Workers' Compensation............. (0.9) 2.5
Commercial Automobile............. (4.1) (0.8)
Commercial Multiple Peril......... (10.6) (0.3)
Other Commercial.................. (7.6) (1.4)
--------- --------
Total Commercial............. (23.2) -
--------- --------
Increase (decrease) in loss provision for
insured events of prior years............ (20.0) 3.4
Decrease in LAE provision for
insured events of prior years............ (11.7) (6.8)
--------- --------
Decrease in total loss and LAE
provision for insured events of
prior years............................. $ (31.7) $ (3.4)
========= ========
Estimated loss reserves for claims occurring in prior years developed favorably
by $20.0 million during the first quarter of 2003 and unfavorably by $3.4
million during the first quarter of 2002. The favorable loss reserve development
during the first quarter of 2003 is primarily the result of a decrease in
commercial lines claim frequency in the 2002 accident year. Partially offsetting
this item was the adverse development in the personal automobile line in 2003,
which is primarily the result of increased claim severity related to medical
settlements for Citizens. Since these settlements have risen beyond previous
estimates, reserve increases have been recognized in the period in which the
information is obtained. The adverse loss reserve development in 2002 is
primarily the result of approximately $4 million of increased reserves related
to a judicial decision in Maine expanding eligibility for permanent impairment
status related to workers' compensation claims. In addition, adverse loss
reserve development in 2002 resulted from increased severity on homeowners'
prior years' reserves.
During the first quarter of 2003 and 2002, estimated LAE reserves for claims
occurring in prior years developed favorably by $11.7 million and $6.8 million,
respectively. The favorable development in both the periods is primarily
attributable to claims process improvement initiatives taken by us during the
1997 to 2001 calendar year period. Since 1997, we have lowered claim settlement
costs through increased utilization of in-house attorneys and consolidation of
claim offices. As actual experience begins to establish trends inherent within
the claim settlement process, the actuarial process recognizes these trends
within the reserving methodology impacting future claim settlement assumptions.
As these measures improved average settlement costs, the actuarial estimate of
future settlement costs are reduced and favorable development is recorded. These
measures are complete. The increase in favorable development for the three
months ended March 31, 2003, compared to the same period in 2002, is primarily
the result of the improving loss activity in commercial lines.
Asbestos and Environmental Reserves
We may be required to defend claims related to policies that include
environmental damage and toxic tort liability. Ending loss and LAE reserves for
all direct business written by our property and casualty companies related to
asbestos, environmental damage and toxic tort liability, included in the reserve
for losses and LAE, were $25.6 million at both March 31, 2003 and December 31,
2002, net of reinsurance of $16.1 million and $16.0 million at March 31, 2003
and December 31, 2002, respectively. As a result of our historical direct
underwriting mix of commercial lines policies toward smaller and middle market
risks, past asbestos, environmental damage and toxic tort liability loss
experience has remained minimal in relation to our total loss and LAE incurred
experience. We estimate our ultimate liability for these claims based upon
currently known facts, reasonable assumptions where the facts are not known,
current law and methodologies currently available. Although these outstanding
claims are not significant, their existence gives rise to uncertainty and are
discussed because of the possibility that they may become significant. We
believe that, notwithstanding the evolution of case law expanding liability in
asbestos and environmental claims, recorded reserves related to these claims are
adequate. In addition, we are not aware of any litigation or pending claims that
are expected to result in additional material liabilities in excess of recorded
reserves. The environmental liability could be revised in the near term if the
estimates used in determining the liability are revised.
23
In addition, we have established loss and LAE reserves for assumed reinsurance
and pool business with asbestos, environmental damage and toxic tort liability
of $45.2 million at both March 31, 2003 and December 31, 2002, respectively.
These reserves relate to pools in which we have terminated our participation;
however, we continue to be subject to claims related to years in which we were a
participant. We participated in 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. Our participation in this pool has resulted in
average paid losses of $2.3 million annually over the past ten years. During
2001, the pool commissioned an independent actuarial review of its then 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, we
recorded an additional $33.0 million of losses in the fourth quarter of 2001.
Because of the inherent uncertainty regarding the types of claims in these
pools, we cannot provide assurance that these reserves will be sufficient.
We estimated our ultimate liability for these claims based upon currently known
facts, reasonable assumptions where the facts are not known, current law and
methodologies currently available. Although these outstanding claims are not
significant, their existence gives rise to uncertainty and we discuss them
because of the possibility that they may become significant. We currently
believe that, notwithstanding the evolution of case law expanding liability in
environmental claims, recorded reserves related to these claims are adequate. In
addition, we are not aware of any litigation or pending claims that may result
in additional material liabilities in excess of recorded reserves. The
environmental liability could be revised in the near term if the estimates used
in determining the liability are revised.
Allmerica Financial Services
The following table summarizes the results of operations for the Allmerica
Financial Services segment for the quarters ended March 31, 2003 and March 31,
2002. The factors that affect this segment's results of operations after
September 27, 2002 are substantially different from those in effect before that
date. Accordingly, we believe the results of operations for the quarter ended
March 31, 2003 are more indicative of results of operations to be expected in
2003. Before the cessation of sales of our proprietary products, we distributed
our annuity products primarily through three distribution channels: (1)
"Agency", which consisted of our former career agency force; (2) "Select", which
consisted of a network of third party broker/dealers; and (3) "Partners", which
included distributors of the mutual funds advised by Scudder Investments,
Pioneer Investment Management, Inc. and Delaware Management Company.
Three Months Ended
March 31,
--------------------------
(In millions) 2003 2002
- ------------------------------------------------------------------------------------------------
Segment revenues
Premiums............................................... $ 21.0 $ 24.5
Fees:
Fees from surrenders................................ 26.4 7.0
Other proprietary product fees...................... 63.9 89.0
Net investment income.................................. 53.2 70.7
Brokerage and investment management income (1)......... 32.5 18.1
Other income........................................... 11.0 5.6
--------- ---------
Total segment revenues.................................... 208.0 214.9
Policy benefits, claims and losses..................... 74.4 107.2
Policy acquisition expenses............................ 59.8 11.6
Brokerage and investment management variable expenses (1) 22.2 11.8
Other operating expenses............................... 49.2 54.6
--------- ---------
Segment income............................................ $ 2.4 $ 29.7
========= =========
(1) Brokerage and investment management income primarily reflects fees earned
from the distribution of non-proprietary insurance and investment products
as well as the management of assets for proprietary products. Variable
expenses related to this business primarily consist of commissions and
subadvisory fees.
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Allmerica Financial Services segment income decreased $27.3 million, to $2.4
million during the first quarter of 2003. This decrease primarily reflects
substantially higher amortization of deferred acquisition costs ("DAC").
24
Our decision in 2002 to cease sales of proprietary products and ratings
downgrades during 2002 resulted in a substantial increase in redemptions of
variable annuities, which was expected. Annuity redemptions in the first quarter
of 2003 were $990.4 million compared to $506.9 million in the first quarter of
2002. The increased redemptions resulted in additional surrender fees of $19.4
million, from $7.0 million in the first quarter of 2002, to $26.4 million in the
first quarter of 2003. However, the additional surrender fees were substantially
offset by additional DAC amortization of $17.6 million, reflecting our current
DAC assumptions, which mandate a higher amortization level as a percentage of
gross annuity profits.
Other proprietary fees decreased $25.1 million, to $63.9 million in the first
quarter of 2003. This decrease was primarily due to the sale of our universal
life insurance business and to lower average variable annuity asset levels
resulting from increased surrenders and the decline in the equity market. Net
investment income declined $17.5 million, to $53.2 million in the first quarter
of 2003, primarily due to lower average invested general account assets. This
resulted primarily from increased surrenders and the sale of our universal life
insurance business. In addition, net investment income decreased due to the
effect of defaults and non-income producing investments in our portfolio of
fixed income securities.
Brokerage and investment management income increased $14.4 million, to $32.5
million in the first quarter of 2003. We have increased our sales of
non-proprietary products, consistent with our new strategy. These sales are made
through our broker/dealer, VeraVest Investments, Inc. and resulted in additional
brokerage income of $17.2 million in the first quarter of 2003. The fees
generated from these sales were partially offset by additional commissions of
$11.5 million paid to registered representatives. Investment management income
declined $2.8 million due to lower average assets under management.
Policy benefits in the first quarter of 2003 decreased $32.8 million, to $74.4
million. The decline is primarily the result of the sale of our universal life
insurance business and lower interest credited on general account assets.
Expenses related to guaranteed minimum death benefits ("GMDB") declined $2.5
million, from $14.1 million in the quarter ended March 31, 2002 to $11.6 million
in the quarter ended March 31, 2003. See also "Guaranteed Minimum Death
Benefits" below.
Policy acquisition expenses increased $48.2 million, to $59.8 million in the
first quarter of 2003. The increase in DAC amortization is primarily the result
of applying the higher amortization percentage, mandated by our current DAC
assumptions, to current gross profits generated by existing annuity accounts, as
well as a decline in the equity market. This includes DAC amortization related
to increased surrender fees as described above. In addition, during the first
quarter of 2003, we recognized additional amortization of $4.5 million, related
to our Partners and Select distribution channels. We determined that the
remaining DAC asset related to Partners and Select exceeded the present value of
total expected gross profits by $3.4 million and $1.1 million, respectively.
Accordingly, we recognized permanent impairments to our DAC asset of these
amounts. It should be noted that we have not permanently impaired our DAC asset
for the Agency channel because of that channel's higher expected profitability.
We continue to be exposed to further impairments to our DAC asset if our actual
experience is worse than our current assumptions.
Brokerage and investment management variable expenses increased $10.4 million,
to $22.2 million in the first quarter of 2003. The increase includes the
aforementioned $11.5 million increase in commissions paid to registered
representatives and a decrease of $1.1 million in other variable expenses.
Other operating expenses decreased $5.4 million, to $49.2 million in the first
quarter of 2003. The decrease reflects lower distribution and insurance
operation expenses, partially offset by acquisition costs that we had been
allowed to defer in 2002, as they related to proprietary annuity and insurance
sales. We no longer offer these products, so we are no longer allowed to defer
these types of costs under GAAP. Instead, our distribution efforts remain
focused on non-proprietary sales.
Guaranteed Minimum Death Benefits
The GMDB feature provides annuity contract holders with a guarantee that the
benefit received at death will be no less than a prescribed minimum amount. This
minimum amount is based on the net deposits paid into the contract, the net
deposits accumulated at a specified rate, the highest historical account value
on a contract anniversary, or more typically the greatest of these values. If
GMDB is higher than the current account value at the time of death, we incur a
cost equal to the difference. As of March 31, 2003, the difference between the
GMDB and the current account value (the "net amount at risk") for all existing
contracts was approximately $4.7 billion, compared to approximately $4.6 billion
at December 31, 2002. The increase was the result of a decline in the equity
market, partially offset by surrenders which result in forfeitures of the GMDB
benefit. For each one percent increase or decrease in the S&P 500 Index from
March 31, 2003 levels, the net amount at risk is estimated to increase or
decrease by approximately $50 million to $70 million. This amount will gradually
decline as surrenders also reduce the net amount at risk.
25
To estimate the cost of the GMDB feature with respect to the profitability of
the related insurance contract, we establish and apply various assumptions
relating to the appreciation of related account assets, mortality and contract
persistency, among other matters. We regularly evaluate these assumptions to
determine whether recent experience or anticipated trends merit adjustments to
such assumptions. We have a consistent policy of providing reserves for GMDB
based on our best estimate of the long-term cost of GMDB.
Based on account values as of March 31, 2003, the estimated annual GMDB expense
would be approximately $45 million. In the near term, cash costs will likely
exceed the annual expense, thereby reducing the reserve. Expected appreciation
in asset levels would gradually reduce, and eventually reverse, this difference
over time. We cannot provide assurance that the existing reserve will be
sufficient, or that our estimate of long-term GMDB costs is accurate or
sufficient. Future changes in market levels, persistency of existing accounts,
mortality and other factors may result in material changes to GMDB costs and
related expenses.
Annuity Account Values and Redemptions
The following table summarizes annuity redemption activity for the AFS segment
for the periods indicated. Redemptions include both full policy and partial
policy surrenders, withdrawals and death benefits (to the extent equal to
account value).
Three Months Ended
----------------------------------------------------------------------------------------------
March 31, December 31, March 31,
2003 2002 2002
- ---------------------------------------------------------------------------------------------------------------------------
Account Account Account
(In millions) Values(1) Redemptions(2) Values(1) Redemptions(2) Values(1) Redemptions(2)
- ---------------------------------------------------------------------------------------------------------------------------
Agency................. $ 4,623.6 $ 430.4 $ 4,762.2 $ 415.3 $ 5,993.8 $ 143.1
Select................. 2,995.3 267.8 3,279.7 441.3 3,406.0 134.4
Partners............... 4,507.2 292.2 4,721.9 426.8 5,123.3 229.4
----------------------------------------------------------------------------------------------
Total............... $ 12,126.1 $ 990.4 $ 12,763.8 $ 1,283.4 $ 14,523.1 $ 506.9
==============================================================================================
(1) Account values at March 31 reflect market values as of January 1 of the
year indicated; account values at December 31 reflect market values as of
October 1 of the year indicated.
(2) Redemptions reflect quarterly activity for the period indicated.
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Redemptions increased substantially in the first quarter of 2003, as compared to
the first quarter of 2002, due to the ratings downgrades during 2002 and our
decision to cease all new sales of proprietary variable annuities and life
insurance products.
26
Asset Management
The following table summarizes the results of operations for the Asset
Management segment for the periods indicated.
Three Months Ended
March 31,
--------------------------
(In millions) 2003 2002
- -------------------------------------------------------------------------------------
Interest margins on GICs:
Net investment income............................ $ 19.9 $ 26.5
Interest credited................................ (18.6) (23.6)
--------- ---------
Net interest margin................................. 1.3 2.9
--------- ---------
Premium financing business:
Fees.............................................. 3.0 2.7
Operating expenses................................ (2.9) (1.7)
--------- ---------
Net premium financing income......................... 0.1 1.0
--------- ---------
Fees and other income:
External............................................. 2.2 1.9
Internal............................................. 1.1 1.3
Other operating expenses............................. (2.2) (2.0)
--------- ---------
Segment income....................................... $ 2.5 $ 5.1
========= =========
Average GIC deposits outstanding..................... $ 1,383.6 $ 2,437.5
========= =========
Outstanding GIC deposits, end of period.............. $ 1,363.7 $ 2,314.4
========= =========
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Asset Management segment income decreased $2.6 million, or 51.0%, to $2.5
million during the first quarter of 2003, primarily due to decreased earnings
from guaranteed investment contracts ("GICs") and our premium financing
business. Earnings on GICs decreased $1.6 million primarily due to lower average
GIC deposits outstanding and unfavorable fluctuations in foreign currency
exchange rates. These decreases were partially offset by the reinvestment of
assets from the retirement of funding agreements at discounts. Net premium
financing income decreased $0.9 million, primarily due to higher interest costs.
Ratings downgrades during 2002 resulted in our termination of all remaining
short-term funding agreements, and ultimately, we ceased selling new long-term
funding agreements. Furthermore, we retired some of our funding agreements at
discounts during the first quarter of 2003 and the fourth quarter of 2002.
Although these retirements resulted in gains for us, income from the GIC product
line will be unfavorably affected in future periods due to the declining balance
of outstanding GIC deposits.
We use derivative instruments to hedge our GIC portfolio (see Derivative
Instruments). For floating rate GIC liabilities that are matched with fixed rate
securities, we manage the interest rate risk by hedging with interest rate swap
contracts designed to pay fixed and receive floating interest. In addition, some
funding agreements are denominated in foreign currencies. To mitigate the
short-term effect of changes in currency exchange rates, we regularly hedge this
risk by entering into foreign exchange swap, futures and options contracts, as
well as compound foreign currency/interest rate swap contracts to hedge our net
foreign currency exposure. These hedges resulted in a $1.5 million and a $14.7
million reduction in net investment income during the first quarter of 2003 and
2002, respectively, offset by similar reductions in GIC interest credited during
the respective periods. The decreased effect of derivative instruments was due
to a decrease in average outstanding GIC deposits and the associated hedges. In
addition, these hedges resulted in a $4.0 million reduction in other income
during the first quarter of 2003, resulting from exposure to foreign currency
fluctuations due to the termination of swap contracts in the fourth quarter of
2002, which were replaced with alternative derivatives. Although we believe our
exposure to foreign currency and interest rate fluctuations is currently
economically hedged, we cannot provide assurance that we will not experience
losses from ineffective hedges in the future.
27
Corporate
The following table summarizes the results of operations for the Corporate
segment for the periods indicated.
Three Months Ended
March 31,
---------------------------
(In millions) 2003 2002
- ---------------------------------------------------------------------------------------
Segment revenues
Net investment income.............................. $ 0.5 $ 1.7
Interest expense................................... 3.8 3.8
Other operating expenses........................... 13.8 14.3
---------- ----------
Segment loss ........................................ $ (17.1) $ (16.4)
========== ==========
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Segment loss increased $0.7 million, or 4.3%, to $17.1 million in the first
quarter of 2003, primarily as a result of lower net investment income. Net
investment income decreased due to lower average invested assets and to lower
investment yields. This decrease was partially offset by lower corporate
overhead costs, primarily due to the resignation of our president in 2002.
Interest expense for both periods relates principally to the interest paid on
our senior debentures.
Investment Portfolio
We held general account investment assets diversified across several asset
classes, as follows:
March 31, 2003 December 31, 2002
--------------------------------------------------------------------
Carrying % of Total Carrying % of Total
(In millions) Value Carrying Value Value Carrying Value
- -----------------------------------------------------------------------------------------------------------------------
Fixed maturities (1)................... $ 7,487.9 88.7% $ 8,003.1 87.1%
Equity securities (1).................. 52.2 0.6 52.8 0.6
Mortgages.............................. 242.4 2.9 259.8 2.8
Policy loans (1)....................... 277.5 3.3 361.4 3.9
Cash and cash equivalents (1).......... 267.7 3.2 389.8 4.2
Other long-term investments............ 112.2 1.3 129.7 1.4
--------------------------------------------------------------------
Total............................. $8,439.9 100.0% $9,196.6 100.0%
====================================================================
(1) We carry these investments at fair value.
Total investment assets decreased $756.7 million, or 8.2%, to $8.4 billion
during the first quarter of 2003, primarily as a result of a decrease in fixed
maturities of $515.2 million, a decrease in cash and cash equivalents of $122.1
million and policy loans of $83.9 million. These decreases resulted primarily
from the sale of our universal life insurance business and annuity surrenders
from the general account in the AFS segment. In addition, fixed maturities
decreased in the Asset Management segment due to the retirement of certain
long-term funding agreements.
Our fixed maturity portfolio is comprised primarily of investment grade
corporate securities, tax-exempt issues of state and local governments, U.S.
government and agency securities and other issues. Based on ratings by the
National Association of Insurance Commissioners ("NAIC"), investment grade
securities comprised 90.0% and 90.5% of our total fixed maturity portfolio at
March 31, 2003 and December 31, 2002, respectively. Although we expect that new
funds will be invested primarily in cash, cash equivalents and investment grade
fixed maturities, we may invest a portion of new funds in below investment grade
fixed maturities or equity securities. The average yield on fixed maturities was
6.2% and 6.9% for March 31, 2003 and 2002, respectively. This decline reflects
lower prevailing fixed maturity investment rates since the first quarter of
2002. Due to the current interest rate environment, we expect our investment
yield to be negatively affected by lower prevailing fixed maturity investment
rates in 2003.
28
As of March 31, 2003 and December 31, 2002, $360.6 million and $423.1 million,
respectively, of our fixed maturities were invested in traditional private
placement securities. Fair values of traditional private placement securities
are determined by either a third party broker or by internally developed pricing
models, including the use of discounted cash flow analyses.
Principally as a result of our exposure to below investment grade securities, we
recognized $23.5 million and $22.4 million of realized losses on
other-than-temporary impairments of fixed maturities during the first quarter of
2003 and 2002, respectively. Other-than-temporary impairments of fixed
maturities for the first quarter of 2003 included $8.0 million related to
securitized investments, $5.8 million related to the airline/transportation
sector, $4.7 million related to the consumer non-cyclical sector, and $3.5
million related to the industrial sector. Other-than-temporary impairments of
fixed maturities for the first quarter of 2002 included $13.6 million related to
the communication sector, $4.9 million related to securitized investments, $2.2
million related to the industrial sector, and $1.3 million related to the
finance sector. The losses reflect the continued deterioration of high-yield
securities in our portfolio. In our determination of other-than-temporary
impairments, we consider several factors and circumstances, including the
issuer's overall financial condition, the issuer's credit and financial strength
ratings, the issuer's financial performance, including earnings trends, dividend
payments, and asset quality, a weakening of the general market conditions in the
industry or geographic region in which the issuer operates, a prolonged period
in which the fair value of an issuer's securities remains below our cost, and
with respect to fixed maturity investments, any factors that might raise doubt
about the issuer's ability to pay all amounts due according to the contractual
terms. We apply these factors to all securities. Other-than-temporary
impairments are recorded as a realized loss, which serves to reduce net income
and earnings per share. Temporary losses are recorded as unrealized losses,
which do not affect net income and earnings per share but reduce other
comprehensive income. We cannot provide assurance that the other-than-temporary
impairments will, in-fact, be adequate to cover future losses or that we will
not have substantial additional impairments in the future.
The following table provides information about our fixed maturities and equity
securities that have been continuously in an unrealized loss position.
March 31, 2003 December 31, 2002
-------------------------------------------------------------
Gross Gross
Unrealized Fair Unrealized Fair
(In millions) Losses Value Losses Value
- ---------------------------------------------------------------------------------------------------------------
Investment grade fixed maturities:
0-6 months.................................... $ 3.1 $ 208.8 $ 13.4 $ 287.2
7-12 months................................... 4.5 24.6 1.1 28.5
Greater than 12 months........................ 12.1 143.8 17.4 160.9
-------------------------------------------------------------
Total investment grade fixed maturities......... 19.7 377.2 31.9 476.6
Below investment grade fixed maturities:
0-6 months.................................... 14.1 93.3 15.9 120.4
7-12 months................................... 22.1 82.1 17.4 139.1
Greater than 12 months........................ 38.7 161.8 41.1 156.1
-------------------------------------------------------------
Total below investment grade fixed maturities... 74.9 337.2 74.4 415.6
Equity securities............................... 1.4 14.8 0.4 1.1
-------------------------------------------------------------
Total fixed maturities and equity securities.... $ 96.0 $ 729.2 $ 106.7 $ 893.3
=============================================================
The gross unrealized losses of fixed maturities and equity securities are viewed
as being temporary as it is our assessment that these securities will recover in
the near-term. Furthermore, as of March 31, 2003, we had the intent and ability
to retain such investments for a period of time sufficient to allow for this
anticipated recovery in fair value. The risks inherent in the assessment
methodology include the risk that, subsequent to the balance sheet date, market
factors may differ from our expectations; we may decide to subsequently sell a
security for unforeseen business needs; or changes in the credit assessment or
equity characteristics from our original assessment may lead us to determine
that a sale at the current value would maximize recovery on such investments. To
the extent that there are such adverse changes, the unrealized loss would then
be realized and we would record a charge to earnings.
29
The following table sets forth gross unrealized losses for fixed maturities by
maturity period, and for equity securities. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties, or we may have the
right to put or sell the obligations back to the issuers. Mortgage backed
securities are included in the category representing their ultimate maturity.
March 31, December 31,
(In millions) 2003 2002
- -------------------------------------------------------------------------------------------
Due in one year or less....................... $ 4.5 $ 3.2
Due after one year through five years......... 31.3 39.8
Due after five years through ten years........ 29.8 36.7
Due after ten years........................... 29.0 26.6
--------------------------------------
Total fixed maturities.......................... 94.6 106.3
Equity securities............................. 1.4 0.4
--------------------------------------
Total fixed maturities and equity securities.... $ 96.0 $ 106.7
======================================
Of the $96.0 million and $106.7 million of gross unrealized losses on fixed
maturities and equity securities, approximately $0.8 million and $1.8 million
relate to investment grade fixed maturity obligations of the U.S. Treasury, U.S.
government and agency securities, states and political subdivisions, as of March
31, 2003 and December 31, 2002, respectively. An additional $18.9 million and
$30.1 million of gross unrealized losses relates to holdings of investment grade
fixed maturities in a variety of industries and sectors, while approximately
$76.3 million and $74.8 million relate to holdings of below investment grade
fixed maturities and equity securities in a variety of industries and sectors as
of March 31, 2003 and December 31, 2002, respectively. Substantially all below
investment grade securities with an unrealized loss have been rated by the NAIC,
Standard & Poor's or Moody's as of March 31, 2003 and December 31, 2002.
We had fixed maturity securities with a carrying value of $32.5 million and
$39.9 million on non-accrual status at March 31, 2003 and December 31, 2002,
respectively. The effect of non-accruals, compared with amounts that would have
been recognized in accordance with the original terms of the fixed maturities,
was a reduction in net investment income of $4.6 million and $4.0 million for
the quarters ended March 31, 2003 and 2002, respectively. We expect that
defaults in the fixed maturities portfolio may continue to negatively affect
investment income.
Derivative Instruments
We enter into various types of interest rate swap contracts to hedge exposure to
interest rate fluctuations on floating rate funding agreement liabilities that
are matched with fixed rate securities. We also enter into foreign currency
swap, futures and options contracts, as well as compound foreign
currency/interest rate swap contracts, to hedge foreign currency and interest
rate exposure on specific funding agreement liabilities. We recognized $6.2
million and $13.4 million of net realized losses on derivatives for the first
quarter ended March 31, 2003 and 2002, respectively. The realized losses during
the first quarter of 2003 were primarily due to the termination of derivative
instruments used to hedge funding agreements in response to the retirement of
long-term funding agreements at discounts. The realized losses during the first
quarter of 2002 were due primarily to the termination of derivative instruments
used to hedge funding agreements, during a declining interest rate environment,
in response to short-term funding agreement withdrawals. We reclassified $13.3
million of these losses, that were previously recognized as ineffective hedges
in the fourth quarter of 2001, to realized investment losses from (gains) losses
on derivatives instruments in the Consolidated Statements of Income upon
termination of the interest rate swap contracts in the first quarter of 2002.
We manage the risk of cash flow variability on floating rate funding agreements
that are matched with fixed rate securities, by hedging with interest rate swap
contracts designed to pay fixed and receive floating interest. With the adoption
of Statement No. 133 on January 1, 2001, the swap contracts were considered cash
flow hedges of the interest rate risk associated with the floating rate funding
agreements, including funding agreements with put features allowing the
policyholder to cancel the contract before maturity. As of March 31, 2003, we no
longer have outstanding floating rate funding agreements with put features. In
addition, we no longer offer long-term or short-term funding agreements.
Income Taxes
We file a consolidated United States federal income tax return that includes AFC
and its domestic subsidiaries (including non-insurance operations). Entities
included within the consolidated group are segregated into either a life
insurance or a non-life insurance company subgroup. The consolidation of these
subgroups is subject to statutory restrictions on the percentage of eligible
non-life tax losses that can be applied to offset life company taxable income.
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The provision for federal income taxes before minority interest and the
cumulative effect of a change in accounting principle was $7.5 million during
the first quarter of 2003 compared to $9.5 million during the same period in
2002. These provisions resulted in consolidated effective federal tax rates of
15.4% and 14.6% for the quarters ended March 31, 2003 and 2002, respectively.
The increase in the tax rate is primarily due to a decrease in both tax exempt
investment income and low income housing credits, partially offset by lower
expected underwriting income in 2003.
Statutory Capital of Insurance Subsidiaries
The NAIC prescribes an annual calculation regarding risk based capital ("RBC").
RBC is a method of measuring the minimum amount of capital appropriate for an
insurance company to support its overall business operations in consideration of
its size and risk profile. The RBC ratio for regulatory purposes is calculated
as total adjusted capital divided by required risk based capital. Total adjusted
capital for life insurance companies is defined as capital and surplus, plus
asset valuation reserve, plus 50% of dividends apportioned for payment. Total
adjusted capital for property and casualty companies is capital and surplus. The
Company Action Level is the first level at which regulatory involvement is
specified based upon the level of capital. Regulators may take action for
reasons other than triggering various RBC action levels.
RBC ratios for regulatory purposes, as described above, are expressed as a
percentage of the capital required to be above the Authorized Control Level (the
"Regulatory Scale"); however, in the insurance industry RBC ratios are widely
expressed as a percentage of the Company Action Level (without regard to the
application of the negative trend test). Set forth below are RBC ratios for our
life insurance subsidiaries and for Hanover as of March 31, 2003, expressed both
on the Industry Scale (Total Adjusted Capital divided by the Company Action
Level) and Regulatory Scale (Total Adjusted Capital divided by Authorized
Control Level):
Total Adjusted Company Action Authorized Control RBC Ratio RBC Ratio
(In millions,except ratios) Capital Level Level Industry Scale Regulatory Scale
- --------------------------------------------------------------------------------------------------------------------------------
AFLIAC (1)............. $ 472.3 $ 177.4 $ 88.7 266% 532%
FAFLIC................. 193.3 88.6 44.3 218% 436%
Hanover (2)............ 882.8 390.1 195.1 226% 452%
(1) AFLIAC's Total Adjusted Capital includes $193.3 million related to its
subsidiary, FAFLIC.
(2) Hanover's Total Adjusted Capital includes $520.6 million related to its
subsidiary, Citizens.
Effective December 1, 2002, we entered into a mortality reinsurance program with
unaffiliated reinsurers covering the incidence of mortality on variable annuity
policies. For the quarter ended March 31, 2003, we incurred GMDB costs of $36.9
million and ceded $11.5 million of GMDB costs under this reinsurance program.
Liquidity and Capital Resources
Net cash used for operating activities was $249.8 million during the first
quarter of 2003 versus cash provided of $89.0 million during the first quarter
of 2002. During the first quarter of 2003, cash was used as a result of
continued increased surrender activity in AFS resulting from our decision to
cease new sales of our life insurance and annuity products. Cash was also used
to settle approximately $20 million of the payable related to the sale of our
universal life insurance business. These payments were partially offset by cash
receipts in the Property and Casualty segment related to funds held with a third
party reinsurer.
Net cash provided by investing activities was $197.7 million and $197.4 million
during the first quarters of 2003 and 2002, respectively. During 2003, net sales
of fixed maturities resulted from increased surrenders in AFS segment. In 2002,
net sales of fixed maturities resulted from funding agreement withdrawals.
Net cash used in financing activities was $70.0 million during the first quarter
of 2003, compared to net cash used in financing activities of $330.3 million for
the same period of 2002. The decrease in cash used in 2003 is primarily due to
lower net funding agreement withdrawals, including trust instruments supported
by funding obligations, totaling $70.0 million, as compared to net withdrawals
of $379.3 million in 2002.
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Additionally, during the first quarter of 2003, we transferred approximately
$450 million of investment assets to settle payables related to the sale of our
universal life insurance business. This settlement excluded approximately $80
million related to policies from the state of New York, which was settled on
April 1, 2003.
At March 31, 2003, AFC, as a holding company, held $34.8 million of cash and
investments. We believe our holding company has the ability to meet its
obligations through the remainder of 2003, consisting primarily of interest on
the Senior Debentures and Capital Securities. Therefore, we currently do not
expect that it will be necessary to dividend funds from the property and
casualty companies in 2003 in order to fund 2003 holding company obligations.
Accordingly, AFC did not receive any dividends from its insurance subsidiaries
during the first quarter of 2003. However, we believe the holding company will
require additional funding in 2004 in order to meet its obligations, which will
include obligations consistent with those expected for 2003 and may include
certain federal income tax liabilities. In 2002, we decided to suspend payment
of our annual common stock dividend. Whether we will pay dividends in the future
depends upon our earnings and financial condition, although we do not expect to
pay dividends in 2003.
We expect to continue to generate sufficient positive operating cash to meet all
short-term and long-term cash requirements. Our insurance subsidiaries maintain
a high degree of liquidity within their respective investment portfolios in
fixed maturity investments, common stock and short-term investments. We have
$150.0 million available under a committed syndicated credit agreement, which
expires on May 23, 2003. We do not expect to renew this credit agreement. At
March 31, 2003, no amounts were outstanding under this agreement. In addition,
we had no commercial paper borrowing as of March 31, 2003 and we do not
anticipate utilizing commercial paper in 2003. Ratings downgrades have adversely
affected the cost and availability of additional debt and equity financing and
will continue to do so in the future should ratings remain at current levels or
decrease further (See Rating Agency Actions).
Rating Agency Actions
Insurance companies are rated by rating agencies to provide both industry
participants and insurance consumers information on specific insurance
companies. Higher ratings generally indicate the rating agencies' opinion
regarding financial stability and a stronger ability to pay claims.
We believe that strong ratings are important factors in marketing our products
to our agents and customers, since rating information is broadly disseminated
and generally used throughout the industry. Insurance company financial strength
ratings are assigned to an insurer based upon factors deemed by the rating
agencies to be 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.
During April 2003, A.M. Best rating service upgraded its financial strength
ratings of our life insurance companies from C++ (marginal) to B- (fair). In
addition, A.M. Best downgraded our senior debt rating from bb+ to bb and our
Capital Securities rating from bb- to b+.
Forward-Looking Statements
We wish to caution readers that the following important factors, among others,
in some cases have affected and in the future could affect, our actual results
and could cause our actual results for 2003 and beyond to differ materially from
those expressed in any forward-looking statements made by, or on our behalf.
When used in Management's Discussion and Analysis, the words "believes",
"anticipates", "expects" and similar expressions are intended to identify
forward looking statements. See "Important Factors Regarding Forward-Looking
Statements" filed as Exhibit 99-2 to our Annual Report on Form 10-K for the
period ended December 31, 2002.
32
Factors that may cause actual results to differ materially from those
contemplated or projected, forecast, estimated or budgeted in such forward
looking statements include among others, the following possibilities: (i) lower
appreciation on or decline in value of our managed investments or the investment
markets in general, resulting in reduced variable product assets and related
variable product management and brokerage fees, lapses and increased surrenders,
increased DAC amortization, as well as increased cost of guaranteed minimum
death benefits/decreased account balances supporting our guaranteed benefits
products; (ii) adverse catastrophe experience and severe weather; (iii) adverse
loss development for events we have insured in either the current or in prior
years or adverse trends in mortality and morbidity; (iv) heightened competition,
including the intensification of price competition, the entry of new
competitors, and the introduction of new products by new and existing
competitors, or as the result of consolidation within the financial services
industry and the entry of additional financial institutions into the insurance
industry; (v) adverse state and federal legislation or regulation, including
decreases in rates, limitations on premium levels, increases in minimum capital
and reserve requirements, benefit mandates, limitations on the ability to manage
care and utilization, requirements to write certain classes of business and
recent and future changes affecting the tax treatment of insurance and annuity
products, as well as continued compliance with state and federal regulations;
(vi) changes in interest rates causing a reduction of investment income or in
the market value of interest rate sensitive investments; (vii) failure to obtain
new customers, retain existing customers or reductions in policies in force by
existing customers; (viii) difficulties in recruiting new or retaining existing
registered representatives and wholesalers to support the sale of
non-proprietary investment and insurance products; (ix) higher service,
administrative, or general expenses due to the need for additional advertising,
marketing, administrative or management information systems expenditures; (x)
loss or retirement of key executives; (xi) our success in hiring a new president
and chief executive officer; (xii) increases in costs, particularly those
occurring after the time our products are priced and including construction,
automobile, and medical and rehabilitation costs; (xiii) changes in our
liquidity due to changes in asset and liability matching, including the effect
of defaults of debt securities; (xiv) restrictions on insurance underwriting;
(xv) adverse changes in the ratings obtained from independent rating agencies,
such as Moody's, Standard and Poor's and A.M. Best, or the inability to restore
the property and casualty subsidiaries' A.M. Best rating to the "A-" level or
higher; (xvi) possible claims relating to sales practices for insurance
products; (xvii) failure of a reinsurer of our policies to pay its liabilities
under reinsurance or coinsurance contracts or adverse effects on the cost and
availability of reinsurance; (xviii) earlier than expected withdrawals from our
general account annuities, GICs (including funding agreements), and other
insurance products; (xix) changes in the mix of assets comprising our investment
portfolio and the fluctuation of the market value of such assets; (xx) losses
resulting from our participation in certain reinsurance pools; (xxi) losses due
to foreign currency fluctuations; (xxii) defaults in debt securities held by us;
(xxiii) higher employee benefit costs due to changes in market values of plan
assets, interest rates and employee compensation levels, and (xxiv) the effect
of our restructuring actions.
In addition, with respect to the Allmerica Financial Services segment, we have
provided forward-looking information relating to the impact of equity market
values on financial metrics, including among other things, GMDB expenses, net
amount at risk, DAC amortization and Actuarial Guideline 34 reserves for
statutory accounting purposes. This information is an estimation only and is
based upon matters as in effect on March 31, 2003. Actual amounts of these
financial metrics would vary based upon numerous other factors, including but
not limited to, variable product account values, allocation between separate and
general accounts, mortality experience, surrender and withdrawal rates and
patterns, investment experience and performance of equity and financial markets
throughout the period, as well as from period to period.
33
PART I - FINANCIAL INFORMATION
ITEM 3
QUANTITATIVE AND QUALITATIVE DICLOSURES
ABOUT MARKET RISK
Our market risks, and the ways we manage them, are summarized in management's
discussion and analysis of financial condition and results of operations as of
December 31, 2002, included in our Form 10-K for the year ended December 31,
2002. There have been no material changes in the first three months of 2003 to
these risks or our management of them.
ITEM 4
CONTROLS AND PROCEDURES
Based on their evaluation, as of a date within 90 days of the filing of this
Form 10-Q, the Company's Executive Officers of the Chairman and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures are
effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
EX - 99.3 Certification of J. Kendall Huber, Executive Officer of the
Chairman, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002.
EX - 99.4 Certification of Edward J. Parry III, Executive Officer of the
Chairman and Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
EX - 99.5 Certification of Robert P. Restrepo, Jr., Executive Officer of
the Chairman, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
EX - 99.6 Certification of J. Kendall Huber, Executive Officer of the
Chairman, pursuant to 15 U.S.C. 78m, 78o(d), as adopted pursuant
to section 302 of the Sarbanes-Oxley Act of 2002.
EX - 99.7 Certification of Edward J. Parry III, Executive Officer of the
Chairman and Chief Financial Officer, pursuant to 15 U.S.C. 78m,
78o(d), as adopted pursuant to section 302 of the Sarbanes-Oxley
Act of 2002.
EX - 99.8 Certification of Robert P. Restrepo, Jr., Executive Officer of
the Chairman, pursuant to 15 U.S.C. 78m, 78o(d), as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On January 8, 2003, Allmerica Financial Corporation announced a series of
transactions which will significantly improve statutory capital positions of its
life insurance companies. The benefit of these actions is reflected in the
statutory capital of the Company's life insurance subsidiaries as of December
31, 2002.
On Feburary 3, 2003, Allmerica Financial Corporation announced net operating
income and net income for the fourth quarter of 2002 and net operating loss and
net loss for the full-year 2002.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Allmerica Financial Corporation
-------------------------------
Registrant
Dated May 14, 2003
------------- /s/ J. Kendall Huber
----------------------------------------
J. Kendall Huber
Executive Officer of the Chairman
Dated May 14, 2003
------------ /s/ Edward J.Parry III
----------------------------------------
Edward J. Parry III
Officer of the Chairman, Chief Financial
Officer and Principal Accounting Officer
Dated May 14, 2003
------------ /s/ Robert P.Restrepo, Jr.
----------------------------------------
Robert P. Restrepo, Jr.
Executive Officer of the Chairman
36