SecProbe.io

CORRESP
1
filename1.htm

Response Letter

 [Ropes & Gray LLP Letterhead]

 November 14, 2005

 VIA EDGAR AND COURIER

 Securities and Exchange Commission

 Division of Corporate Finance

450 Fifth Street, N.W.

 Washington, D.C. 20549

 Attention: James Rosenberg

Re:
Allmerica Financial Corporation

Form 10-K for Fiscal Year Ended December 31, 2004

File No. 1-13754

 Dear Mr. Rosenberg:

 On
behalf of Allmerica Financial Corporation (the “Company”), this letter responds to the comments raised by the Staff of the Commission in its letter dated October 21, 2005 to Mr. Frederick H. Eppinger, Jr. with respect to the
Company’s response letter dated October 7, 2005 in response to the prior comments raised by the Staff with respect to the Company’s Form 10-K for the year ended December 31, 2004. As noted below, the Company proposes to revise the
disclosure in its future Form 10-K and Form 10-Q filings. The Company has included the proposed revisions for the Staff’s review as attachments to this letter, and has included such revisions in substantially the form attached hereto in its
Form 10-Q for the quarter ended September 30, 2005, which was filed with the Commission on November 9, 2005.

 Form 10-K for the Year Ended December 31, 2004

 Management’s Discussion and Analysis

 Results of Operations

 Segment Income, page 24

1.
Please refer to prior comment one. We do not agree that your discussion of a “consolidated” segment measure in MD&A complies with Item 10(e) of Regulation S-K.
Also, your assertion that total segment income as presented in MD&A is “comprised of only GAAP components” appears to conflict with disclosure in Note 15 that your calculation of segment income includes statutory underwriting profit or
loss. Please revise your proposed disclosure to remove your discussion of this non-GAAP measure or advise us further. We will, however, not object to your use of consolidated totals for segment income in MD&A in the context of a SFAS 131
reconciliation to net income.

 The Company
respectively continues to disagree and believes that its discussion of “Total segment income(loss)” complies with the

requirements of Item 10(e), is not misleading and is in fact helpful for investors to understand the Company and the business in the same manner as it is
understood and analyzed by management. Nevertheless, in response to the Staff’s comment, the Company will remove the “consolidated” segment measure from its MD&A in future Form 10-K and Form 10-Q filings as illustrated in the
attached document.

 Critical Accounting Policies, page 51

2.
Please refer to prior comments four and five. We believe that quantification of reasonably likely loss reserve outcomes and discussion of the specific factors that led you to
select the best estimate of incurred losses among these outcomes is consistent with the objectives of Management’s Discussion and Analysis. We note that your response excludes quantification of reserve ranges and sensitivity of your reserve
estimates to changes in key assumptions and have the following comments.

•

Your response that you do not “use a loss reserve range when determining your best estimate of reserves” appears to conflict with your proposed disclosure that you
“do not completely rely on only one estimate to determine your loss reserves” and “develop several estimates using generally accepted actuarial projection methodologies that result in various reasonably possible loss reserve
outcomes.” Please expand your proposed disclosure to include a quantification of these reasonably likely loss reserve outcomes.

•

We note that your disclosure does not include discussion or quantification of the specific factors that led you to select the best estimate of incurred losses among these
outcomes, principally the variability arising from changes in specific underlying assumptions, such as claim frequency and severity. Please expand your proposed disclosure to discuss these assumptions and quantify how the variability inherent in
such assumptions was reflected in the calculation of your various loss reserve outcomes.

•

We note that your proposed disclosure includes an aggregate quantification of the impact on segment income from a 1% change in the loss and LAE ratio. Unless this change is
reasonably likely to occur, we do not believe that this information is useful to investors. Please explain the likelihood you associated with this change and your basis for concluding that this disclosure would be meaningful to investors or exclude
it.

 Regarding the first bulleted item, the Company’s management does not develop or utilize a range in
establishing its loss reserves. While several actuarial estimates for each line of business are developed based on accepted actuarial projection methodologies, these estimates are used only by the Company’s actuaries to arrive at a single point
estimate for each significant line of business. These single point estimates by line of business are then provided to senior management. Senior management considers these point estimates, as well as other business trends and environmental factors,
in establishing the appropriate reserve amount. The results of the actuarial projection methodologies are neither provided to nor considered by senior management in their decision making process. Thus, they do not represent a range of outcomes
considered by the members of management responsible for establishing the level of loss reserves. The Company believes that disclosure of these estimates could be confusing, since the financial statements do not reflect their consideration by the
members of management responsible for loss reserves.

 In
order to clarify elements of its reserve process, the Company proposes expanding its disclosure in future filings, as illustrated in the attached document. The additional disclosure includes the statement that “The actuaries provide to
management a point estimate for each significant line of business to summarize their analysis. Management considers these point estimates, as well as other business trends and environmental factors, in establishing the appropriate reserve
amount.” The Company believes that the expanded disclosure clarifies that the Company does not use a loss reserve range when determining loss reserves.

 Regarding the second bulleted item, the Company believes that its expanded and existing disclosure provides an appropriate level of information to
explain the complexity and imprecision of the process of establishing loss reserves, including a discussion of the uncertainties inherent in that process. The Company has explained above its reasons for not expanding its disclosure to include a
quantification of reasonably likely loss reserve outcomes. In addition, the Company notes that the historical development of GAAP loss and LAE reserves over the past ten years is disclosed in its Form 10-K on page 9. The Company proposes expanding
its disclosure in future filings to cross reference this information within the Critical Accounting Policies section of the document. Also, the Company posts its Schedule P for its property and casualty insurance subsidiaries on its web site on an
annual basis. Schedule P presents detailed historical accident year loss development information by line of business.

 Regarding the third bulleted item, the Company believes that a 1% change in the loss and LAE ratio is very likely to occur. For example, as demonstrated
in the table on page 28 of the Company’s Form 10-K, the loss ratios for each significant line of business changed by at least 1% for all but one line of business from 2003 to 2004.

Therefore, the Company believes that quantifying the impact of a 1% change is meaningful and useful disclosure to investors.

 In addition, the Company notes that in its letter dated October 7, 2005, the Company
indicated in response to Comment 2 in the letter of the Staff dated September 9, 2005, that the Company would not exclude catastrophe losses from the statutory loss ratios or the statutory combined ratio, but it would disclose catastrophe loss
information in footnotes to the table. Upon drafting its 10-Q disclosures for the third quarter of 2005, the Company reconsidered the proposed footnote and felt that it was difficult to understand. Accordingly, the Company included the catastrophe
loss information in additional columns within the table, while maintaining the separate disclosure of loss and combined ratios including catastrophe losses.

 We hope that the foregoing has been responsive to the Staff’s comments. To facilitate your review, we are sending to your attention three copies of this response
letter, together with the revised disclosure referred to herein, marked to show changes from the existing disclosure. We are also filing the letter and the revised disclosure via EDGAR. It would be greatly appreciated if you could advise me at the
number below if the foregoing responses are acceptable or if any additional comments or questions will be forthcoming. If you should have any questions about this letter or require any further information, please call me at (617) 951-7936 or my
colleague Julie Jones at (617) 951-7294.

 Very truly yours,

/s/    STEVEN M. HOFFMAN

Steven M. Hoffman

 Enclosures

Cc:
Edward J. Parry III

J. Kendall Huber, Esq.

Warren E. Barnes

Patricia Norton-Gatto

Julie H. Jones, Esq.

 Comment 1

 Results of Operations

 Our consolidated net income includes the results of our four operating segments (segment income) and our interest expense on corporate debt, which we
evaluate on a pre-tax basis. In addition, segment income excludes certain items which we believe are not indicative of our core operations. The income of our segments excludes items such as federal income taxes and net realized investment gains and
losses, including net gains or losses on certain derivative instruments, because fluctuations in these gains and losses are determined by interest rates, financial markets and the timing of sales. Also, segment income excludes net gains and losses
on disposals of businesses, discontinued operations, restructuring costs, extraordinary items, the cumulative effect of accounting changes and certain other items. Although the items excluded from segment income may be significant components in
understanding and assessing our financial performance, we believe segment income enhances an investor’s understanding of our results of operations by identifying net income attributable to the normal operations of the business. However, segment
income should not be construed as a substitute for net income determined in accordance with generally accepted accounting principles (“GAAP”).

 In addition, as a result of adopting Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (“Statement No. 150”) in 2003, we reclassified dividends related to the mandatorily redeemable preferred securities of a subsidiary trust holding solely our junior subordinated
debentures, to interest expense on corporate debt. In accordance with Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (“Statement No. 131”), we
restated prior periods to reflect this presentation.

 Our
consolidated net income was $125.3 million in 2004, compared to $86.9 million in 2003. The increase in 2004 of $38.4 million resulted primarily from an $83.1 million improvement in segment income, partially offset by a $34.7 million increase in the
corresponding federal income tax expense. Also contributing to the increase in net income was a $30.4 million favorable federal income tax settlement and a $13.2 million reduction in restructuring costs. These favorable items were partially offset
by an after tax charge of $57.2 million related to the implementation of Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (“SOP
03-1”).

 Our consolidated net income was $86.9 million in
2003, compared to a net loss of $306.1 million in 2002. Results in 2002 were adversely affected by a loss in the Life Companies segment of $634.7 million, primarily as a result of amortization of deferred acquisition costs following the cessation,
in the fourth quarter of 2002, of sales of our proprietary annuity and life insurance products. The increase in 2003 over 2002 of $393.0 million, therefore, resulted primarily from a $590.7 million net improvement in segment income, principally
related to our Life Companies segment, partially offset by a $222.9 million reduction in the corresponding federal income tax benefit. Also contributing to the increase in net income in 2003 was a $99.8 million change in net realized investment
gains (losses) to a net gain of $10.4 million from a net loss of $89.4 million for 2002. Partially offsetting these increases in net income was a decrease in gains from the retirement of funding agreements and trust instruments supported by funding
obligations of $63.0 million and a change of $30.7 million in (losses) gains on derivative instruments to a net loss of $4.5 million in 2003 from a net gain of $26.2 million in 2002.

 The following table reflects segment income and a reconciliation to consolidated net income.

 For the Years Ended December 31
(In millions)

2004

2003

2002

 Segment income (loss) before federal income taxes:

 Property and Casualty

 Personal Lines

$
134.6

$
34.3

$
40.2

 Commercial Lines

58.0

98.7

124.2

 Other Property and Casualty

5.4

(15.5
)

5.8

 Total Property and Casualty

198.0

117.5

170.2

 Life Companies

11.3

8.7

(634.7
)

 Interest expense on corporate debt

(39.9
)

(39.9
)

(39.9
)

 Total segment income (loss) before federal income taxes

169.4

86.3

(504.4
)

 Federal income tax (expense) benefit on segment income (loss)

(28.6
)

6.1

229.0

 Federal income tax settlement

30.4

—

—

 Net realized investment gains (losses), net of taxes and deferred acquisition cost amortization

16.1

10.4

(89.4
)

 Net gains (losses) on derivative instruments, net of taxes

0.8

(4.5
)

26.2

 (Losses) gains from retirement of funding agreements and trust instruments supported by funding obligations, net of taxes

(0.1
)

3.7

66.7

 Restructuring costs, net of taxes

(5.5
)

(18.7
)

(9.6
)

 Other reorganization expenses, net of taxes

—

—

(4.5
)

 Income (loss) from sale of universal life business, net of taxes

—

3.6

(20.3
)

 Other items, net of taxes

—

—

3.9

 Income (loss) before cumulative effect of change in accounting principle

182.5

86.9

(302.4
)

 Cumulative effect of change in accounting principle, net of taxes

(57.2
)

—

(3.7
)

 Net income (loss)

$
125.3

$
86.9

$
(306.1
)

 Segment Income

 2004 Compared to 2003

 Segment results for the Property and Casualty group increased $80.5 million
in 2004. These results include catastrophe losses of $99.3 million in 2004, compared to $59.4 million in 2003. Catastrophe losses were unusually high in 2004 due to four hurricanes in the Southeast. During 2003, however, we recorded a charge of
$21.9 million resulting from an adverse arbitration decision related to a single large property claim within a voluntary insurance pool that we exited in 1996. Excluding this charge and the impact of the increase in catastrophe losses, segment
income increased $98.5 million as compared to 2003. The increase in segment income is primarily attributable to an estimated $112 million of improved current accident year loss performance due to net premium rate increases across all principal
product lines and to a decrease in non-catastrophe claims activity primarily in personal lines. Additionally, development on prior years’ loss and loss adjustment expense (“LAE”) reserves improved by $33.0 million, excluding the pool
charge described above, from $18.5 million of