Allmerica Downgraded

A.M. Best Co. downgraded Worcester, Mass.-based Allmerica Financial Corporation’s (AFC) property/casualty operations from “A-” to “B++.” The company’s life and annuity operations were also downgraded to “C++” from “B+.” In addition, AFC’s senior debt ratings were downgraded from “bbb-” to “bb+”, the capital securities rating from “bb” to “bb-,” while the commercial paper rating was lowered from AMB-3 to AMB-4. All of AFC’s financial strength and long-term debt ratings remain under review with negative implications.

Allmerica’s life insurance operations are now being significantly restructured with a focus on distribution of third-party products. Concurrently, all proprietary products of AFC’s life operations are no longer being sold.

The rating actions are primarily related to a precipitous decline in capital and financial condition of the life insurance subsidiaries, First Allmerica Financial Life Insurance Company (FAFLIC) and Allmerica Financial Life & Annuity Company (AFLIAC). The current financial profile and capital levels of the life companies are not consistent with a secure rating, and FAFLIC is currently in need of significant improvement to its surplus in order to comply with an agreement with the Massachusetts Department of Insurance (DOI) to maintain a minimum annual risk-based capital (RBC) of 225 percent.

On a stand-alone basis, the property/casualty operations are adequately capitalized. However, A.M. Best is concerned that the line of separation between AFC’s life operations and property/casualty operations is clouded and that a conflict exists between capital support for the run-off of the life operations and maintenance of excellent capital levels and financial strength ratings of the property/casualty subsidiaries. While there are various financial ties between the life companies and the holding company and property/casualty companies, the DOI agreement is the most significant.

The operating performance of the property/casualty insurance operations has significantly improved relative to 2001, and good results are expected into 2003. However, despite the favorable trends and strength of these operations, A.M. Best is concerned about potential negative qualitative effects on the property/casualty operations due to the situation of the life business. These companies have been—and will continue to be—the sole support of holding company obligations. Prior to any adjustments, AFC’s financial leverage—excluding funding agreements—is moderate. However, leverage increases significantly when equity and deferred acquisition costs associated with the life business are excluded. Currently, there are sufficient assets at the holding company to pay fixed obligations into 2003. However, the holding company’s financial flexibility is considerably lower than just a few months ago. The financial strength and debt rating downgrades partially reflect the fact that the financial profile has deteriorated, providing a cloud of uncertainty and concern over the holding company and property/casualty operations as the difficulties of the life companies play out.

Topics Property Property Casualty Casualty