Fitch Revises Outlook on Allmerica to Positive; Upgrs P/C Subs to 'A-', Affs Life/Annuity Subs at 'BB'.

CHICAGO -- Fitch Ratings has affirmed its 'BB+' long-term issuer rating on Allmerica Financial Corporation (AFC) and its rating on AFC's senior unsecured notes due 2025. The Rating Outlook has been revised to Positive from Stable. Additionally, Fitch has affirmed its 'BB-' rating on AFC Capital Trust I's (AFC Capital) trust preferred capital securities due 2027 and has revised AFC Capital's Rating Outlook to Positive from Stable.

Fitch has also upgraded its insurer financial strength (IFS) ratings on AFC's property/casualty subsidiaries to 'A-' from 'BBB+' and has affirmed its 'BB' ratings on AFC's life insurance and annuity subsidiaries (see below rating list). The Rating Outlook on these companies is Stable.

Fitch's rating actions reflect its heightened comfort with AFC's ability to generate cash basis and operating earnings-basis interest coverage from its property/casualty subsidiaries. Fitch's ratings on AFC assume minimal dividends from the company's life/annuity subsidiaries. Additionally, Fitch's view of AFC's capitalization conservatively assigns little value to the life/annuity subsidiaries beyond their statutory surplus levels.

The rating actions also reflect Fitch's belief that AFC's life/annuity subsidiaries are increasingly unlikely to represent a potential cash or capital drain to AFC. Fitch believes that AFC's life/annuity subsidiaries will likely be able to continue to pay dividends to AFC in the near-to-mid-term but its ratings on AFC are increasingly based on the property/casualty subsidiaries' contributions to the organization's capital base and on the ability of the property/casualty subsidiaries to fund debt over the long term.

At year-end 2004 AFC's cash-basis interest coverage, including dividends available from its lead property/casualty subsidiary, was approximately 4.1 times (x). In the first quarter of 2005, the company's property/casualty operations generated $62 million of operating earnings, which translates into annualized earnings-based interest coverage of 6x. Between 2004 and 2000, AFC's property/casualty operations generated pretax operating earnings based interest coverage ranging 2.3x to 4.8x.

Fitch views these as reasonable proxies for the company's near-term run-rate earnings and coverage levels. Additionally, Fitch believes that these interest coverage levels, in conjunction with the company's moderate use of long-dated financial leverage, are supportive of AFC's current ratings.

AFC's life/annuity subsidiaries have de-levered materially since the company placed them into run-off in 2002 primarily due to their lack of new sales, policyholder redemptions, and generally improving equity markets that reduced reserve requirements associated with the company's annuity products' guaranteed minimum death benefits (GMDB). Since placing its life/annuity operations into run-off, AFC has implemented programs to reinsure the mortality risk and hedge a portion of the equity market risk associated with its GMDB.

While Fitch believes that the hedging program's effectiveness is largely untested, especially in comparison to the types of equity market conditions experienced in the 2000-2002 timeframe, it views the collective effect of the life/annuity operation's de-levering and reinsurance and hedging programs as significantly reducing the likelihood of AFC having to commit cash or capital to its life/annuity operations.

Fitch's decision to upgrade AFC's property/casualty subsidiaries reflects the benefits of stabilizing conditions within AFC's life/annuity operation. Additionally, at the 'A-' rating level, Fitch views AFC's property/casualty subsidiaries' IFS ratings as corresponding more appropriately to the ratings of other moderately-sized regional property/casualty companies with similar characteristics.

Fitch's ratings on AFC's property/casualty subsidiaries continue to reflect the companies' historically solid underwriting capabilities and good competitive positions in New England and Michigan. Partially offsetting these positives is the companies' relatively high operating leverage, especially in light of AFC's future dividend requirements, and the effects of a high expense ratio.

These ratings were initiated by Fitch as a service to users of Fitch ratings. The ratings are based primarily on publicly available information.

Entity/Type/Action/Rating/Outlook

Allmerica Financial Corp.

--Long-term issuer/Affirm/'BB+'/Positive;

--Senior debt rating/Affirm/'BB+'/Positive.

AFC Capital Trust I

--Capital securities rating/Affirm/'BB-'/Positive.

The Hanover Insurance Company

--Insurer financial strength/Upgrade/'A-'/Stable.

Citizens Insurance Company of America

--Insurer financial strength/Upgrade/'A-'/Stable.

First Allmerica Financial Life Insurance Co.

--Insurer financial strength/Affirm/'BB'/Stable.

Allmerica Financial Life & Annuity Co.

--Insurer financial strength/Affirm/'BB'/Stable.

Allmerica Global Funding LLC $2 billion global note program

--Long-term issuer rating/Affirmed & Withdrawn/'BB'.