A.M. Best Lowers Financial Strength and Debt Ratings of Allmerica Financial Corp. Members.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--July 30, 2002

A.M. Best Co. has lowered the financial strength ratings from A (Excellent) to A- (Excellent) of Allmerica Financial Corporation's (Worcester, MA) (NYSE: AFC) life/health insurance companies.

In addition, AFC's senior debt ratings were downgraded from "a-" to "bbb+" with a negative outlook; the capital securities rating was downgraded from "bbb+" to "bbb" with a negative outlook; and the commercial paper rating was lowered from AMB-1 to AMB-2. The A (Excellent) financial strength ratings for the property and casualty operations have been affirmed, but a negative outlook has been assigned.

The rating actions reflect the considerable decline in statutory capitalization that has been recorded since year-end 2000 at the life insurance companies and the weakened operating and investment results recorded recently on both a statutory and GAAP basis. A.M. Best also recognizes the risk associated with the life group's concentrated market profile, which is primarily focused in variable products.

Both risk-adjusted and statutory capitalization at the life companies have been weakened by losses from operations in the last two years (including losses from the strain of new business writings) and continuing investment losses. Following a considerable decline in statutory surplus in 2001, surplus levels remained relatively flat through the second quarter of 2002 after additional capital contributions were received from its property/casualty affiliates, which offset realized losses recorded during the quarter. However, A.M. Best believes that the current market environment will make it difficult for Allmerica's life operations to rebuild their capital position to historical levels.

The life business profile, which is characterized by a large concentration of revenue production tied to separate account products, has been affected by the prolonged downturn in the equity markets. Reduced operating earnings due to lower asset-based fees and increased reserves related to guaranteed minimum death benefits--which increase during declining financial markets--have been recorded. In addition, during second quarter 2002, Allmerica recorded a $142 million pre-tax deferred acquisition costs (DAC) write-off, which was the main contributor to AFC's second quarter 2002 GAAP loss. A.M. Best believes that additional DAC write-offs may occur if unfavorable equity market conditions continue. Net income has also been impacted by the deterioration in credit markets, which have caused realized losses and impairments on investments.

The A- (Excellent) rating continues to recognize the favorable market share that AFC's life operations enjoy as a leader in the variable annuity marketplace. These products are offered through diverse distribution channels. Despite challenging market conditions, AFC has recorded positive growth in its core variable annuity products in the first half of 2002.

AFC's financial leverage--excluding funding agreements--is moderate with a debt plus trust preferred to capital ratio of 17.3% at the end of June 2002. The holding company currently maintains sufficient liquidity to cover its fixed obligations and shareholder dividends. AFC has been able to satisfy its cash needs from its profitable property/casualty subsidiaries; however, these subsidiaries are now faced with the need to provide cash to the holding company as well as to support surplus levels of the life companies. Excess surplus in the property/casualty operation has noticeably decreased in recent years. With continued uncertainty in life operations, a conflict between maintaining adequate capital in the life operating companies and holding company cash will continue to exist for the near term.

While the property/casualty group's operating performance is anticipated to improve significantly relative to 2001--absent adverse loss reserve development--A.M. Best is concerned that AFC's dividend requirements of the group may potentially result in capitalization falling short relative to that supporting its current rating. Therefore, a negative outlook has been assigned to the A (Excellent) rating of AFC's Property and Casualty Companies.

For a complete listing of companies with affected financial strength and debt ratings, please visit http://www.ambest.com/press/allmerica2.pdf.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.