UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report
Pursuant to
Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): February 3, 2003
ALLMERICA FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 1-13754 04-3263626
(State or other jurisdic- (Commission File Number) (I.R.S. Employer I.D.
tion of Incorporation) Number)
440 Lincoln Street, Worcester, Massachusetts 01653
(Address of Principal Executive Offices)
(Zip Code)
(508) 855-1000
(Registrant's Telephone Number including area code)
Page 1 of 13 pages
Exhibit Index on page 4
1
Item 9. Regulation FD Disclosure
On February 3, 2003, Allmerica Financial Corporation announced net operating
income and net income for the fourth quarter of 2002 and a net operating loss
and a net loss for the full-year 2002.
Item 7. Financial Statements and Exhibits.
Exhibit 99 Press Release dated February 3, 2003, announcing that
Allmerica Financial Corporation reported net operating income
and net income for the fourth quarter of 2002 and a net
operating loss and a net loss for the full-year 2002.
2
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Allmerica Financial Corporation
Registrant
By: /s/ Edward J. Parry III
Edward J. Parry III
Executive Officer of the Chairman,
Chief Financial Officer and
Principal Accounting Officer
Date: February 4, 2003
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Exhibit Index
Exhibit 99 Press Release dated February 3, 2003, announcing that
Allmerica Financial Corporation reported net operating income
and net income for the fourth quarter of 2002 and a net
operating loss and a net loss for the full-year 2002.
4
Exhibit 99
Allmerica Financial Corporation Reports Fourth Quarter Net Operating Income of
$0.42 Per Share and Net Income of $0.28 Per Share
WORCESTER, Mass., February 3, 2003 - Allmerica Financial Corporation (NYSE: AFC)
(the "Company") today reported net operating income and net income for the
fourth quarter and a net operating loss and a net loss for the full-year 2002.
Fourth quarter summary:
Net operating income per share was $0.42, or $21.9 million compared to $0.64 per
share, or $34.0 million in 2001. Net operating income and loss exclude certain
items which management believes are not indicative of overall operating trends,
including net realized investment gains and losses and certain other items, net
of taxes.
Risk Management pre-tax operating earnings were $35.2 million, up from $29.0
million reported in the fourth quarter of 2001.
Asset Accumulation pre-tax operating earnings were $7.8 million, as compared to
pre-tax operating earnings of $25.9 million for the same period in 2001.
Net income was $14.9 million, or $0.28 per share in the fourth quarter of 2002
versus a net loss of $70.7 million, or $1.34 per share in the same period of
2001. In the fourth quarter, net income included a gain on the retirement of
long-term funding agreements of $66.7 million, or $1.26 per share, gains on
derivatives of $6.5 million, or $0.12 per share, net realized investment losses
of $45.8 million, or $0.87 per share, a loss on the sale of the Company's
universal life insurance business of $20.3 million, or $0.38 per share, and
restructuring and reorganization costs of $14.1 million, or $0.27 per share. Net
loss for the same period of 2001 included losses from selected property and
casualty exited agencies, policies, groups, and programs of $44.4 million, or
$0.84 per share, losses on derivatives of $24.4 million, or $0.46 per share,
increased voluntary pool asbestos and environmental reserves of $21.5 million,
or $0.41 per share, net realized investment losses of $12.6 million, or $0.24
per share, and restructuring costs of $1.8 million, or $0.03 per share.
Full-year summary:
Net operating loss per share was $5.21, or $275.4 million, as compared to net
operating
5
income of $3.10 per share or $164.5 million in 2001.
Risk Management pre-tax operating earnings for the year were $184.3 million, up
significantly from $93.5 million for the full year 2001.
Asset Accumulation reported a pre-tax operating loss of $600.6 million, as
compared to $163.7 million of pre-tax operating income in 2001.
The Company reported a net loss of $306.1 million, or $5.79 per share in 2002
versus a net loss of $3.1 million, or $0.06 per share in 2001. In 2002, the net
loss included a gain on the retirement of long-term funding agreements of $66.7
million, or $1.26 per share, gains on derivatives of $26.2 million, or $0.50 per
share, net realized investment losses of $89.4 million, or $1.69 per share, a
loss on the sale of the Company's fixed universal life insurance business of
$20.3 million, or $0.38 per share, restructuring and reorganization costs of
$14.1 million, or $0.27 per share, a contingency payment received from the sale
of the defined contribution business of $2.3 million, or $0.04 per share, a
benefit of $1.6 million, or $0.03 per share, from the release of a reserve
related to sales practice litigation which was settled in 1998, and a charge
reflecting the cumulative effect of a change in accounting principle of $3.7
million, or $0.07 per share. In 2001, net loss included net realized investment
losses of $78.8 million, or $1.48 per share, losses from selected property and
casualty exited agencies, policies, groups, and programs of $44.4 million, or
$0.84 per share, losses on derivatives of $22.9 million, or $0.43 per share,
increased voluntary pool asbestos and environmental reserves of $21.5 million,
or $0.41 per share, restructuring costs of $1.8 million, or $0.03 per share, a
benefit of $5.0 million, or $0.09 per share, related to the release of reserves
for the aforementioned sales practice litigation, and a charge reflecting the
cumulative effect of a change in accounting principle of $3.2 million, or $0.06
per share.
"We achieved solid results in both the Asset Accumulation and Risk Management
segments of our business in the fourth quarter," said Edward J. Parry, III,
president of Allmerica's Asset Accumulation Companies and Allmerica Financial
Corporation's chief financial officer. "We successfully completed a series of
transactions which significantly improved the year-end statutory capital and
surplus positions in our life insurance companies. In addition, we are pleased
with our progress in VeraVest Investments Inc., our recently introduced
broker-dealer." Robert P. Restrepo, Jr., president of Allmerica's Property and
Casualty Companies added, "Risk Management, our property and casualty business,
ended 2002 with good fourth quarter operating results and completed the year
with substantially improved earnings. Our increased profits reflect rate
increases and the continuing positive effects of our agency management
initiatives."
Segment Results
Allmerica Financial operates in two primary businesses: Risk Management and
Asset Accumulation. Risk Management markets property and casualty insurance
products on a regional basis through The Hanover Insurance Company and Citizens
Insurance Company of America. Asset Accumulation consists of Allmerica Financial
Services and Allmerica Asset Management. Allmerica Financial Services markets
non-proprietary insurance and retirement
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savings products and services primarily to individuals through VeraVest
Investments, Inc. (formerly named "Allmerica Investments, Inc.") and manages a
portfolio of proprietary life insurance and annuity products previously issued
through Allmerica's two life insurance subsidiaries. Allmerica Asset Management
markets investment management services to institutions, pension funds, and other
organizations through Opus Investment Management, Inc. (formerly named
"Allmerica Asset Management, Inc.").
Risk Management
Risk Management pre-tax operating earnings were $35.2 million in the fourth
quarter of 2002, up from $29.0 million in the fourth quarter of 2001. Full-year
Risk Management pre-tax operating earnings were $184.3 million in 2002, up
significantly from $93.5 million in 2001. Earnings were higher in both periods
due to continued rate increases, primarily in commercial lines, decreased
commercial lines losses, and lower pre-tax catastrophe losses. These items were
partially offset by increased losses in personal auto, lower net investment
income, and increased expenses.
Property and Casualty highlights:
Net premiums written were $543.5 million in the fourth quarter of 2002, as
compared to $550.2 million in the fourth quarter of 2001. Full-year net premiums
written were $2.3 billion in both 2002 and 2001.
Net premiums earned were $575.0 million in the fourth quarter of 2002, as
compared to $560.8 million in the fourth quarter of 2001. Full-year net premiums
earned were $2.3 billion in 2002 versus $2.2 billion in 2001.
The statutory loss ratio was 69.5 percent in the fourth quarter of 2002, as
compared to 68.2 percent for the fourth quarter of 2001. For the year 2002, the
statutory loss ratio was 65.8 percent, as compared to 71.0 percent for all of
2001.
The statutory expense ratio was 29.5 percent in the fourth quarter of 2002,
versus 27.5 percent in the same period in 2001. The full-year statutory expense
ratio was 28.7 percent in 2002, as compared to 26.7 percent in 2001.
In the fourth quarter of 2002, pre-tax catastrophe losses were $7.5 million, as
compared to $13.3 million in the comparable period one year earlier. Pre-tax
catastrophe losses were $31.3 million for the full year of 2002, as compared to
$51.0 million for all of 2001.
Asset Accumulation
Allmerica Financial Services reported a pre-tax operating loss of $0.7 million
in the quarter, as compared to $21.7 million of pre-tax operating earnings in
the fourth quarter of 2001. Earnings for the quarter decreased principally due
to the increased amortization of deferred policy acquisition costs, which more
than offset increased surrender fee income.
For the full year, this segment reported a pre-tax operating loss of $625.0
million in 2002, as
7
compared to net operating earnings of $143.0 million in 2001. The loss for the
full year of 2002 was principally due to significant charges and increased
expenses related to the Company's decision in the third quarter to restructure
its Allmerica Financial Services business unit. This action included ceasing the
manufacture and sale of proprietary variable annuity and variable life insurance
products and reflected the continued decline in equity market valuations through
the first nine months of the year. Third quarter charges related to this
decision included $487.5 million related to a write-off of deferred policy
acquisition costs, $106.7 million related to guaranteed minimum death benefit
reserves partially offset by a related decrease in deferred acquisition cost
amortization of $67.6 million, and $29.8 million related to the write-off of
certain capitalized hardware and software development costs. In addition, the
full-year loss included a $141.9 million write-off of deferred policy
acquisition costs in the second quarter, higher amortization of deferred policy
acquisition costs in the fourth quarter of $33.7 million, and increased net
guaranteed minimum death benefit costs of $27.5 million for the full year.
In the fourth quarter, individual annuity surrenders increased to $1.2 billion
following the third quarter ratings downgrades, as compared to $427.1 million
for the third quarter of the year and $903.6 million for the first six months of
2002.
Allmerica Asset Management's fourth quarter pre-tax operating earnings were $8.5
million, as compared to $4.2 million in the same period in the prior year. In
the fourth quarter, earnings increased over the prior year primarily due to
increased guaranteed investment contract earnings, which benefited from
favorable movements in interest rates and foreign exchange rates. Full-year
pre-tax operating earnings in 2002 were $24.4 million, versus $20.7 million in
2001. Full-year earnings increased in this segment primarily due to the
inclusion of AMGRO Inc., the Company's property and casualty premium financing
business, partially offset by lower interest margins on guaranteed investment
contracts. Previously, AMGRO had been included as part of the Risk Management
segment.
During the fourth quarter, the Company retired approximately $550 million in
statutory par value of long-term funding agreements at amounts below face value
that resulted in a net increase in statutory surplus of the combined life
insurance subsidiaries of approximately $84 million. Total funding agreements
outstanding at December 31, 2002 were $1.4 billion, as compared to $2.7 billion
at December 31, 2001 and $2.2 billion at September 30, 2002.
Corporate
Corporate segment net expenses were $14.4 million in the fourth quarter of 2002,
as compared to $16.3 million in 2001. Full-year corporate net expenses were
$63.5 million in 2002, versus $63.8 million in 2001.
Investment Results
Net investment income was $137.3 million for the fourth quarter of 2002, as
compared to $154.1 million in the same period in 2001. For the year 2002, net
investment income was $590.2 million, as compared to $655.2 million in 2001. In
both periods, net investment income decreased principally due to lower average
outstanding spread-based assets in the guaranteed
8
investment contract business, lower portfolio yields driven by a shift in the
portfolio to higher credit quality bonds, the effect of defaults on certain
fixed income securities and lower prevailing interest rates.
Fourth quarter pre-tax net realized investment losses were $78.4 million, as
compared to $34.3 million of pre-tax net realized investment losses in 2001.
Full-year 2002 pre-tax net realized investment losses were $162.3 million,
versus $123.9 million of pre-tax net realized investment losses in 2001. In each
period, pre-tax net realized investment losses were principally related to
impairments on fixed income securities. In the current quarter, pre-tax net
realized investment losses from impairments of $122.3 million and losses from
derivative investments of $19.9 million were partially offset by gains of $60.1
million from sales of other fixed income securities. In the fourth quarter of
2001, pre-tax net realized investment losses from impairments of $62.2 million
were partially offset by gains of $36.1 million from the sales of other fixed
income securities. For the year 2002, pre-tax net realized investment losses
from impairments of $238.5 million and losses from derivative investments of
$53.1 million were partially offset by gains of $120.9 million from sales of
other fixed income securities. In 2001, pre-tax net realized investment losses
from impairments of $185.3 million and losses from derivative investments of
$32.9 million were partially offset by gains of $68.4 million from sales of
other fixed income securities.
Balance Sheet and Other
Shareholders' equity was $2.1 billion, or $39.12 per share at December 31, 2002,
as compared to $2.4 billion, or $45.19 per share at December 31, 2001. Excluding
accumulated other comprehensive income, book value was $39.83 per share at the
close of the fourth quarter, as compared to $45.44 per share at December 31,
2001.
In the fourth quarter of 2002, the Company recorded a $78.7 million after tax
increase in its minimum pension liability related to its qualified pension
plans. This increase is reflected as a decrease to accumulated other
comprehensive income.
Total assets were $26.5 billion at December 31, 2002, as compared to $30.3
billion at year-end 2001. Separate account assets were $12.3 billion at December
31, 2002, versus $14.8 billion at December 31, 2001. The declines in total and
separate account assets were principally the result of the decline in the equity
markets throughout 2002 and increased surrenders of individual variable
annuities.
At December 31, 2002, the Company had available tax benefits from net operating
loss carryforwards of approximately $77 million, and alternative minimum tax
credits and other tax credits of approximately $149 million. These items may be
used to offset taxes due on future earnings in either the life insurance or
property and casualty companies.
Improved Life Insurance Company Capital Position
On January 8, 2003, the Company announced a series of transactions, effective
December 31, 2002, that significantly improved the statutory capital positions
of its life insurance companies.
9
Statutory capital is the measure of capital utilized by insurance industry
regulators. The specific transactions included the sale of its fixed universal
life insurance block of business, retirement of long-term funding agreements at
amounts less than statutory carrying values, implementation of a new guaranteed
minimum death benefit mortality reinsurance program, and the redomestication and
reorganization of the internal ownership structure of its life insurance
subsidiaries.
Including the benefit of these actions, total adjusted statutory capital at
December 31, 2002 was approximately $480 million for the combined life insurance
subsidiaries, an increase of 47 percent from the September 30, 2002 level of
$326 million. In addition, the Risk Based Capital (RBC) ratio of Allmerica
Financial Life Insurance and Annuity Company, the lead life insurance company as
of December 31, 2002, increased from 133 percent as of September 30, 2002 to
approximately 250 percent as of December 31, 2002. RBC is a regulatory method of
measuring the minimum amount of capital appropriate for an insurance company.
The first level of regulatory involvement required as a result of RBC levels,
the so-called "Company Action Level", is between 100 percent and 125 percent.
Regulated insurance companies with RBC ratios which fall below the Company
Action Level are required to prepare and submit an RBC plan which is acceptable
to the insurance commissioner of the state of domicile.
Allmerica Financial Corporation will be hosting a conference call to discuss the
Company's fourth quarter results on Tuesday, February 4th at 10:00 a.m. Eastern
Time. Interested investors and others can listen to the call through Allmerica's
web site, located at www.allmerica.com. Web-cast participants should go to the
web site 15 minutes early to register, download, and install any necessary audio
software. A re-broadcast of the conference call will be available on this web
site two hours after the call for one week following its posting.
Allmerica Financial Corporation's Fourth Quarter Statistical Supplement is also
available at www.allmerica.com.
Certain statements in this release may be considered to be forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995.
Use of the words "believes", "anticipates", "expects" and similar expressions is
intended to identify forward-looking statements. The Company cautions investors
that any such forward-looking statements are not guarantees of future
performance, and actual results could differ materially. Investors are directed
to consider the risks and uncertainties in our business that may affect future
performance and that are discussed in readily available documents, including the
Company's annual report and other documents filed by Allmerica with the
Securities and Exchange Commission and which are also available at
www.allmerica.com. These uncertainties include the possibility of adverse
catastrophe experience and severe weather, adverse loss development and adverse
trends in mortality and morbidity, changes in the stock and financial markets,
changes from assumed surrender activities, adverse selection in surrender
patterns, investment impairments, heightened competition, adverse state and
federal legislation or regulation, financial ratings actions, and various other
factors, including the effect of the Company's restructuring actions.
10
Allmerica Financial Corporation is the holding company for a diversified group
of insurance and financial services companies headquartered in Worcester,
Massachusetts.
-30-
CONTACTS: Investors: Media:
Henry P. St. Cyr Michael F. Buckley
(508) 855-2959 (508) 855-3099
hstcyr@allmerica.com mibuckley@allmerica.com
AF-03
02/3/03
11
ALLMERICA FINANCIAL CORPORATION
(In millions, except per share data)
Quarter ended Year ended
December 31 December 31
------------------------------------------------------------
2002 2001 2002 2001
Net income (loss) $14.9 $(70.7) $(306.1) $(3.1)
Net income (loss) per share (1) $0.28 $(1.34) $(5.79) $(0.06)
Weighted average shares 52.9 52.7 52.9 53.1
The following is a reconciliation from net operating income (loss) to net income (loss) per share:
PER SHARE DATA (DILUTED) (1)
Quarter ended December 31 Year ended December 31
------------------------------------------------------------------------------------------
2002 2001 2002 2001
------------------------------------------------------------------------------------------
$ Per Share $ Per Share $ Per Share $ Per Share
------------------------------------------------------------------------------------------
Net operating income (loss) (2) $ 21.9 $ 0.42 $ 34.0 $ 0.64 $(275.4) $(5.21) $164.5 $ 3.10
Net realized investment losses, net
of taxes and amortization (45.8) (0.87) (12.6) (0.24) (89.4) (1.69) (78.8) (1.48)
Gains (losses) on derivatives, net
of taxes (3) 6.5 0.12 (24.4) (0.46) 26.2 0.50 (22.9) (0.43)
Gain from retirement of trust
instruments supported by funding
obligations, net of taxes (4) 66.7 1.26 -- -- 66.7 1.26 -- --
Contingency payment from sale of
defined contribution business, net
of taxes -- -- -- -- 2.3 0.04 -- --
Loss from sale of universal life
business, net of taxes (5) (20.3) (0.38) -- -- (20.3) (0.38) -- --
Restructuring and reorganization
costs, net of taxes (6) (14.1) (0.27) (1.8) (0.03) (14.1) (0.27) (1.8) (0.03)
Loss from selected property and
casualty exited agencies, policies,
groups, and programs, net of taxes -- -- (44.4) (0.84) -- -- (44.4) (0.84)
(7)
Voluntary pool environmental losses,
net of taxes (8) -- -- (21.5) (0.41) -- -- (21.5) (0.41)
Sales practice litigation, net of
taxes (9) -- -- -- -- 1.6 0.03 5.0 0.09
---------- ----------- ---------- ----------- ----------- ---------- ---------- ----------
Income (loss) from continuing
operations before accounting change 14.9 0.28 (70.7) (1.34) (302.4) (5.72) 0.1 --
Cumulative effect of change in
accounting principle, net of taxes -- -- -- -- (3.7) (0.07) (3.2) (0.06)
(10)
---------- ----------- ---------- ----------- ----------- ---------- ---------- ----------
Net income (loss) $ 14.9 $ 0.28 $(70.7) $ (1.34) $(306.1) $(5.79) $ (3.1) $(0.06)
========== =========== ========== =========== =========== ========== ========== ==========
(1) Basic net income (loss) per share was $0.28 and $(1.34) for the quarters
ended December 31, 2002 and 2001, respectively, and $(5.79) and $(0.06) for
the years ended December 31, 2002 and 2001, respectively. Per share data
for the quarter ended December 31, 2001, and the year ended December 31,
2002 represents basic income (loss) per share due to antidiluition.
12
(2) Represents net income (loss) adjusted for certain items which management
believes are not indicative of the Company's core operations. Net operating
income (loss) excludes net realized investment gains (losses) and certain
gains (losses) on derivative instruments because fluctuations in these
gains and losses are determined by interest rates, financial markets and
the timing of sales; and 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, which, in each case, are neither normal nor recurring.
Although the items excluded from net operating income (loss) may be
significant components in understanding and assessing the Company's
financial performance, management believes net operating income (loss)
enhances an investor's understanding of the Company's results of operations
by highlighting net income (loss) attributable to the normal, recurring
operations of the business, consistent with industry practice. However, net
operating income (loss) should not be construed as a substitute for net
income (loss) determined in accordance with generally accepted accounting
principles.
(3) Gains (losses) on derivatives, net of taxes, primarily represent an
accounting charge for hedge ineffectiveness on certain derivatives in
accordance with SFAS No. 133.
(4) Represents gains on the early retirement of the Company's funding agreement
obligations at amounts lower than carrying value.
(5) On December 31, 2002, the Company signed an agreement to sell substantially
all of its fixed universal life insurance block of business to John Hancock
Life Insurance Company.
(6) Represents costs related to a restructuring and reorganization of Allmerica
Financial Services in 2002 and the restructuring of the Company's
information technology support groups in 2001.
(7) Represents expected losses from selected property and casualty exited
agencies, policies, groups, and programs. In 2001, the Company evaluated
its approximately 2500 agencies in the Risk Management segment. The result
of this process was the identification of approximately 690 agencies that
did not meet certain profitability standards or were not strategically
aligned with the Company. For these agents, the Company either terminated
the relationship or restricted the agent's access to certain types of
policies. In addition, certain groups and specialty programs were
discontinued.
(8) From 1950 to 1982, the Company voluntarily participated in an excess and
casualty reinsurance pool along with several other major property and
casualty carriers. The pool was dissolved in 1982 and has been in run-off
since that time. During the fourth quarter of 2001, the pool obtained an
independent actuarial review of its current reserve position, which
indicated a significant reserve deficiency, primarily as a result of
adverse development of asbestos claims. As a result of this study, the
Company recognized an increase in reserves of $33 million, gross of taxes,
based on the Company's participation in the reserve deficiency.
(9) In 2002 and 2001, the Company recognized a benefit of $1.6 million and $5.0
million, net of taxes, respectively, as a result of refining cost estimates
related to settlement, in 1998, of a sales practice class action lawsuit.
(10) Cumulative effect of change in accounting principle, net of taxes,
represents the adoption of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets", in 2002 and Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", in 2001.
All figures reported are unaudited.
13