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FOR IMMEDIATE RELEASE
OLDWICK, N.J. - APRIL 15, 2003 12:00 AM (EDT)
A.M. Best Co. has upgraded the financial strength ratings to B- (Fair) from C++ (Marginal) of Allmerica Financial Corporation's [NYSE:AFC] (Worcester, MA) life insurance companies and affirmed the financial strength rating of B++ (Very Good) of its property/casualty companies. Additionally, Allmerica's senior debt ratings were downgraded to "bb" from "bb+", the capital securities rating to "b+" from "bb-", while the commercial paper rating was affirmed at AMB-4. All of Allmerica's financial strength and long-term debt ratings were removed from under review with negative implications and assigned stable outlooks.
These rating actions reflect the stabilization in the statutory capitalization of the life insurance operations and a reduction in the risk based capital requirement agreement with the Massachusetts Department of Insurance that has significantly diminished the risk of regulatory action. Over the past several months, Allmerica has completed several strategic initiatives that have stabilized the life companies' capital position including: the sale of its universal life insurance block, the reinsurance of the mortality risk in its variable annuity block, earnings derived from surrender charges associated with the variable annuity book, the retirement of
funding agreements at a discount and a modest capital contribution from Allmerica.
While the capitalization of the life group has stabilized, concern still remains relative to the orderly run-off of the remaining variable products and the ongoing exposure to general account credit risk through its large, albeit declining, investment in below-investment grade bonds relative to capital. A.M. Best will continue to monitor the run-off of the life operations to evaluate surrender activity and its impact on reducing the life companies' net amount at risk.
The property/casualty companies' rating was affirmed, in part, because the capital and regulatory concerns at the life operations have abated. However, A.M. Best continues to have concerns regarding the property/casualty companies' weakened, albeit secure, capitalization levels and the dependence of the holding company on the property/casualty operations for liquidity. In 2002, the property/casualty companies' underwriting and operating performance significantly improved relative to 2001. However, in 2002, operating results were offset by a $74 million pension liability charge. In addition to the pension charge, the property/casualty companies paid $92 million of dividends to the parent in July 2002, resulting in a 10% decline in statutory surplus in 2002 and continued escalation of its underwriting leverage measures. Substantial dividend payments to support the life companies and the holding company's obligations have reduced the group's capitalization over the past several years.
In 2003, A.M. Best anticipates the property/casualty companies will have generally good underwriting and operating performance, although profitability may be adversely affected by higher, more normalized catastrophe experience and the potential for continued unfavorable loss reserve development, particularly in personal auto lines relating to higher loss costs associated with Michigan personal injury protection business. Given management's operating plan for 2003 and concurrent with the expectation that no dividends will be paid to the parent in 2003 and that pension charges will be more moderate, A.M. Best is guardedly optimistic that the property/casualty group's underwriting leverage measures and capitalization will improve in 2003.
Allmerica's financial leverage of 19% is moderate. However, of greater importance is the financial flexibility and liquidity at the parent, which is limited. Allmerica has sufficient cash and short-term securities to cover its fixed obligations in 2003. However, in May 2003, the company's bank credit facility expires and is not being renewed, reducing their sources of short-term liquidity. Therefore, Allmerica is more dependent on the property/casualty companies for cash. The property/casualty companies cannot upstream dividends without regulatory approval prior to July 2003. However, the holding company has sufficient cash to meet its 2003 obligations. Allmerica's cash needs in 2004 will likely be sourced from the property/casualty companies, limiting capital accumulation. Given these issues, the long-term debt ratings were downgraded.
For a complete list of Allmerica Financial Corporation's debt and financial strength ratings, please visit Allmerica.
A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source.