440 Lincoln Street
Company Perspectives:
Managing Risk, Managing Assets, Managing to Make a Difference: By maintaining an evenhanded approach to the two crucial elements of financial well-being--risk management and financial security--we offer a richer source of financial solutions to the individuals, families and organizations we serve. The Allmerica Financial companies operate in two primary businesses, asset accumulation and risk management, which are comprised of smaller more specialized enterprises.
Allmerica Financial Corporation is a holding company for a group of financial services companies. After more than a century and a half of selling life insurance, tough times forced the company to exit the sector in order to survive. The core focus is now on its property and casualty end of the insurance business, offering products through The Hanover Insurance Company and Citizens Insurance Company of America. In its other business area, Allmerica vends insurance retirement savings, and investment management products and services.
Mutual Insurer's Deep Roots: 1800s-1995
The history of Allmerica Financial began with the chartering of State Mutual Life Assurance Company in 1844. John Davis, a former Massachusetts governor, founded the Worcester-based entity to sell individual life insurance. From those New England roots, the company grew and diversified. In 1989, a top executive from Fidelity Investments took the helm and set out to turn a regional operation into a national concern.
During the 1990s, State Mutual Life Assurance Company earned recognition as the linchpin of a group of insurance and financial services companies. State Mutual was the fifth oldest life insurer in the United States and ranked among the top 20 mutual life insurance companies in terms of assets. The Hanover Insurance Company and Citizens Insurance Company of America provided property and casualty coverage.
The State Mutual group of businesses began operating under the Allmerica name in 1992. The founding life insurer retained its name but some subsidiary companies and divisions were renamed. In addition to the life and the property/casualty companies, the Allmerica Financial umbrella covered several investment management companies, a registered mutual fund broker-dealer, and a registered investment advisor, according to a 1992 PR Newswire article.
Allmerica Financial posted a fifth straight year of record financial results in 1992. Net income from operations climbed 21 percent to $104 million. The company's financial position enabled development of new products and services.
The company's record-setting ways continued into 1993. Its steadily growing contingency reserve level was indicative of the company's strength relative to its industry. In addition, assets topped the $10 billion mark.
Contributing to the positive results were increased revenues from variable products, growth of the institutional services division, the strength of managed care and claims management services, and solid property/casualty performances.
The policyholder-owned State Mutual had financed its growth and improvements by means of income generated by operations. But as it entered its 150th year of operation in 1994, the company was planning a demutualization. By converting to a stock insurance company, State Mutual gained access to new sources of capital and entry into new financial services markets. Eligible policyholders would receive stock, cash, or policy credits in exchange for their illiquid membership interest. Policies would remain unchanged. The demutualization process required a public hearing, approval by the Massachusetts Commissioner of Insurance, and acceptance by two-thirds of policyholders.
State Mutual's majority ownership of publicly held Allmerica Property and Casualty Companies, Inc. would not change. But State Mutual would become the subsidiary of a new holding company and operate under the name First Allmerica Financial Life Insurance Company.
The initial public offering (IPO) of the holding company Allmerica Financial Corporation took place concurrently with the conversion of State Mutual to a stock company. The IPO offered 11 million shares of common stock at $21 per share, in October 1995.
Selling, Selling, and More Selling: 1996-99
Allmerica's products included personal and commercial lines of property and casualty insurance, plus health insurance and life and retirement savings products to individuals and institutional clients nationwide.
In 1996, First Allmerica began offering a product targeting wealthy couples. The variable universal life policy combined insurance protection and investments in one program. Private banks and trusts would sell the product and well-known money managers would handle investments for people wanted to protect assets destined for their heirs. Sales via banks accounted for about 15 percent of annuity sales, according to American Banker.
Beginning in 1997, O'Brien led the company on an all out selling spree of variable products. Allmerica also moved to settle a class-action lawsuit in 1998. The company had been accused of making erroneous statements concerning life insurance premiums payments, churning, and misrepresenting policy benefits. Allmerica denied the charges, according to Bestwire, but wanted to avoid the time and expense of a lengthy litigation process.
Final approval of the $31 million settlement came in 1999, on 400,000 policies issued from 1978 to May 31, 1998. Injured policyholders could buy discounted life insurance or annuities or have an independent referee determine compensation and benefits, according to the Boston Globe.
Allmerica was not the only insurer to be hit by deceptive practices claims. The country's largest insurer, Prudential Insurance Co. of America, was expected to pay up to $2 billion to eight million policyholders. John Hancock Life Insurance Co. of Boston had also settled on a suit.
Allmerica was hit hard by another kind of claim during 1998. Severe weather in the Midwest, Northeast, and South added up to total catastrophic losses of $90.3 million, compared with $26.5 million in 1997. It was a record loss. During the year, the company embarked on some cost-cutting measures. As it moved into 1999 it also began repurchasing shares of its common stock.
The property and casualty insurance business generated a significant portion of Allmerica's earnings. Property/casualty contributed pretax operating profits of $199.6 million in 1999, up from $149.6 million in 1998. Company-wide cost-cutting efforts had aided efforts, but slim margins and hefty competitors created a difficult environment.
Meanwhile, the company continued to push its variable products, which were linked to underlying investment portfolios. Allmerica's fee income generated in this business line had climbed from $87 million in 1995 to $291 million in 1999.
Eve of Destruction: 2000-04
In 2000, the red hot stock market began to cool. By October 2001, Allmerica was looking at a dark horizon. World Trade Center-related claims alone cost the company $17 million. Investments eroded as the market nose-dived in the wake of the September 11 attacks. Allmerica's profits and stock price plummeted.
Twelve months later, Allmerica was looking for a way out of its life and annuity business. The bear market prevented Allmerica from earning the level of investment it needed to meet the promised level of payoff to holders of variable annuities.
"The firm tripled yearly sales of its annuities between 1997 and 1999 by offering a guaranteed death benefit on annuities, with a minimum annual return of as much as 5 percent," reported Scott Bernard Nelson for the Boston Globe, in October 2002.
When insurers, such as Allmerica, began selling the products, they had a different future in mind than the one that manifested itself. For the first time in history, the market experienced three consecutive years of declining numbers. Plus, the guaranteed death benefit proved to be a hot product. The situation produced a scenario in which Allmerica experienced greater than expected costs and less than expected income. Capital reserves on future claims had to be boosted.
Allmerica President and CEO John F. O'Brien, who put variable annuity sales in the forefront, resigned in October 2002. A new office of the chairman was created to oversee the company until a new leader was found.
Some larger companies had the financial capacity to withstand the pressures on variable annuities. Reinsurance coverage helped, as did product diversity. Also, not all the products on the market had guaranteed the 5 percent return Allmerica had offered.
Rick Miller observed, in an Investment News article in October 2002, Allmerica "just might be worth more dead than alive." Stock traded around the $7-$8 mark, less than 20 percent of its book value.
Colin Devine, an insurance industry analyst for Salomon Smith Barney Inc., told Investment News, "You can chop up this company and sell it and generate a healthy return from where you can buy the stock today."
Allmerica's credit rating was downgraded. Some analysts speculated the development would hurt the property casualty business, which had been holding its own. Allmerica reported a net operating loss of $275.4 million for 2002 and worked diligently to turn things around. Fixed life insurance products were sold to John Hancock Financial Services in 2003. Allmerica retained a large block of variable products on their books but no longer sold them. A reinsurance deal was struck. The reorganization, which followed in the wake of O'Brien's departure, allowed capital to move to hard-pressed areas of the company. In addition, the resurgence of the stock market was a godsend.
Frederick Eppinger was named CEO in August 2003. The CPA-trained turnaround specialist was an executive vice-president overseeing The Hartford's property and casualty divisions. His 100-day plan for the company included an effort to improve the company's financial ratings. The policies being sold and the productivity of the agents selling them would be reviewed. Organizational streamlining, including employment losses, was in the offing. The property/casualty operation would be the core business.
Allmerica returned to profitability in 2003. Net income was $306.1 million. Stock had recovered, climbing to around the $35 mark. Allmerica's financial strength ratings saw upgrades.
Principal Subsidiaries: The Hanover Insurance Company; Citizens Insurance Company of America.
Principal Competitors: American International Group, Inc.; State Farm Insurance Companies.
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