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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)



 
/x/
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
 SECURITIES EXCHANGE ACT OF 1934


For the Quarterly Period Ended March 31, 2000

or




FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000

OR
/ /
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
 SECURITIES EXCHANGE ACT OF 1934


Commission file number 1-11840

THE ALLSTATE CORPORATION
(Exact name of registrant as specified in its charter)



Delaware


(State(State of Incorporation)
 
36-3871531


(I.R.S.(I.R.S. Employer
 Identification No.)
 
2775 Sanders Road
Northbrook, Illinois


(Address(Address of principal
 executive offices)
 
 
 
60062


(Zip(Zip Code)

Registrant's Telephone Number, Including Area Code: REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:847/402-5000


REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES /x/ /x/  NO / /
AS OF APRIL 30,JULY 31, 2000, THE REGISTRANT HAD 744,627,533734,225,699 COMMON SHARES, $.01 PAR VALUE, OUTSTANDING.





THE ALLSTATE CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
 March 31,JUNE 30, 2000





 
 
 
 
PAGE
PartPART I
 
FINANCIAL INFORMATION
 
 

Item 1.
 

Financial Statements
 
 
 
 

Condensed Consolidated Statements of Operations for the Three Month
 and Six Month Periods Ended March 31,June 30, 2000 and 1999 (unaudited)
 
1
3
 
 

Condensed Consolidated Statements of Financial Position as of March 31,June 30, 2000 (unaudited) and December 31, 1999
 
2
4
 
 

Condensed Consolidated Statements of Cash Flows for the ThreeSix Month Periods Ended March 31,June 30, 2000 and 1999 (unaudited)
 
3
5
 
 

Notes to Condensed Consolidated Financial Statements (unaudited)
 
4
6
 
 

Independent Accountants' Review Report
 
11
16

Item 2.
 

Management's Discussion and Analysis of Financial Condition and Results of Operations
 
12
17
 
PART II
Part II
 
 
 
OTHER INFORMATION
 
 
 
  

Item 1.
 

Legal Proceedings
 
26
32

Item 5.4.
 
Other Information
Submission of Matters to a Vote of Security Holders
 
26
32

Item 6.
 

Exhibits and Reports on Form 8-K
 
26
33




2




PART I. FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



 
 
Three Months Ended

March 31,
 
(In millions except per share data)

 
2000
 
1999
 
 
 
(Unaudited)

 
Revenues
 
 
 
 
 
 
 
Property-liability insurance premiums earned
 
$
5,471
 
$
4,852
 
Life and annuity premiums and contract charges
 
 
541
 
 
385
 
Net investment income
 
 
1,090
 
 
971
 
Realized capital gains and losses
 
 
184
 
 
599
 
 
 
 
 
 
 
 
7,286
 
 
6,807
 
 
 
 
 
Costs and expenses
 
 
 
 
 
 
 
Property-liability insurance claims and claims expense
 
 
4,138
 
 
3,321
 
Life and annuity contract benefits
 
 
745
 
 
606
 
Amortization of deferred policy acquisition costs
 
 
890
 
 
793
 
Operating costs and expenses
 
 
650
 
 
552
 
Restructuring and related charges
 
 
28
 
 
—
 
Interest expense
 
 
47
 
 
30
 
 
 
 
 
 
 
 
6,498
 
 
5,302
 
 
 
 
 
Income from operations before income tax expense and dividends on preferred securities
 
 
788
 
 
1,505
 
 
Income tax expense
 
 
 
 
 

216
 
 
 
 
 

461
 
 
 
 
 
 
Income before dividends on preferred securities
 
 
572
 
 
1,044
 
 
Dividends on preferred securities of subsidiary trusts
 
 
 
 
 

(11
 
)
 
 
 

(9
 
)
 
 
 
 
Net income
 
$
561
 
$
1,035
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Net income per share—basic
 
$
0.73
 
$
1.27
 
 
 
 
 
Weighted average shares—basic
 
 
767.6
 
 
813.6
 
 
 
 
 
Net income per share—diluted
 
$
0.73
 
$
1.27
 
 
 
 
 
Weighted average shares—diluted
 
 
772.1
 
 
817.0
 
 
 
 
 


 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
(In millions except per share data)

 
2000
 
1999
 
2000
 
1999
 
 
 
(Unaudited)

 
(Unaudited)

 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property-liability insurance premiums earned
 
$
5,481
 
$
4,903
 
$
10,952
 
$
9,755
 
 
Life and annuity premiums and contract charges
 
 
511
 
 
369
 
 
1,052
 
 
754
 
 
Net investment income
 
 
1,129
 
 
1,014
 
 
2,219
 
 
1,985
 
 
Realized capital gains and losses
 
 
62
 
 
306
 
 
246
 
 
905
 
 
 
 
 
 
 
 
 
 
7,183
 
 
6,592
 
 
14,469
 
 
13,399
 
 
 
 
 
 
 
Costs and expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property-liability insurance claims and claims expense
 
 
4,198
 
 
3,531
 
 
8,336
 
 
6,852
 
 
Life and annuity contract benefits
 
 
742
 
 
598
 
 
1,487
 
 
1,204
 
 
Amortization of deferred policy acquisition costs
 
 
860
 
 
797
 
 
1,750
 
 
1,590
 
 
Operating costs and expenses
 
 
682
 
 
525
 
 
1,332
 
 
1,077
 
 
Restructuring and related charges
 
 
5
 
 
—
 
 
33
 
 
—
 
 
Interest expense
 
 
58
 
 
28
 
 
105
 
 
58
 
 
 
 
 
 
 
 
 
 
6,545
 
 
5,479
 
 
13,043
 
 
10,781
 
 
 
 
 
 
 
Gain on disposition of operations
 
 
—
 
 
10
 
 
—
 
 
10
 
Income from operations before income tax expense and dividends on preferred securities
 
 
638
 
 
1,123
 
 
1,426
 
 
2,628
 
Income tax expense
 
 
168
 
 
343
 
 
384
 
 
804
 
 
 
 
 
 
 
Income before dividends on preferred securities
 
 
470
 
 
780
 
 
1,042
 
 
1,824
 
Dividends on preferred securities of subsidiary trusts
 
 
(11
)
 
(10
)
 
(22
)
 
(19
)
 
 
 
 
 
 
Net income
 
$
459
 
$
770
 
$
1,020
 
$
1,805
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share—basic
 
$
0.62
 
$
0.96
 
$
1.35
 
$
2.23
 
 
 
 
 
 
 
 
 
Weighted average shares—basic
 
 
742.3
 
 
807.2
 
 
755.0
 
 
810.4
 
 
 
 
 
 
 
 
 
Net income per share—diluted
 
$
0.61
 
$
0.95
 
$
1.34
 
$
2.22
 
 
 
 
 
 
 
 
 
Weighted average shares—diluted
 
 
747.8
 
 
810.5
 
 
760.0
 
 
813.7
 
 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements.
3
1



THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION



($ in millions except par value data)

 
March 31,

2000
 
December 31,

1999
 
 
 
(Unaudited)

 
 
 
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Fixed income securities, at fair value (amortized cost $55,357 and $55,293)
 
$
55,832
 
$
55,286
 
Equity securities, at fair value (cost $4,666 and $4,565)
 
 
6,795
 
 
6,738
 
Mortgage loans
 
 
4,248
 
 
4,068
 
Short-term
 
 
2,087
 
 
2,422
 
Other
 
 
1,139
 
 
1,131
 
 
 
 
 
Total investments
 
 
70,101
 
 
69,645
 
 

Cash
 
 
 
 
 

290
 
 
 
 
 

254
 
 
Premium installment receivables, net
 
 
3,945
 
 
3,927
 
Deferred policy acquisition costs
 
 
4,157
 
 
4,119
 
Reinsurance recoverables, net
 
 
2,279
 
 
2,209
 
Accrued investment income
 
 
913
 
 
812
 
Deferred income taxes
 
 
80
 
 
211
 
Property and equipment, net
 
 
956
 
 
916
 
Other assets
 
 
2,610
 
 
2,169
 
Separate Accounts
 
 
14,875
 
 
13,857
 
 
 
 
 
Total assets
 
$
100,206
 
$
98,119
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Reserve for property-liability insurance claims and claims expense
 
$
17,708
 
$
17,814
 
Reserve for life-contingent contract benefits
 
 
7,927
 
 
7,597
 
Contractholder funds
 
 
26,132
 
 
25,199
 
Unearned premiums
 
 
7,545
 
 
7,671
 
Claim payments outstanding
 
 
833
 
 
860
 
Other liabilities and accrued expenses
 
 
5,371
 
 
4,705
 
Short-term debt
 
 
249
 
 
665
 
Long-term debt
 
 
2,186
 
 
2,186
 
Separate Accounts
 
 
14,875
 
 
13,857
 
 
 
 
 
Total liabilities
 
 
82,826
 
 
80,554
 
 
 
 
 
Commitments and Contingent Liabilities (Notes 3 and 5)
 
 
 
 
 
 
 
 

Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
 
 
 
 
 

964
 
 
 
 
 

964
 
 
 
Shareholders' equity
 
 
 
 
 

 
 
 
 
 
 

 
 
 
Preferred stock, $1 par value, 25 million shares authorized, none issued
 
 
—
 
 
—
 
Common stock, $.01 par value, 2 billion shares authorized and 900 million issued, 751 million and 787 million shares outstanding
 
 
9
 
 
9
 
Additional capital paid-in
 
 
2,654
 
 
2,664
 
Retained income
 
 
17,160
 
 
16,728
 
Deferred ESOP expense
 
 
(216
)
 
(216
)
Treasury stock, at cost (149 million and 113 million shares)
 
 
(4,692
)
 
(3,929
)
Accumulated other comprehensive income:
 
 
 
 
 
 
 
Unrealized net capital gains
 
 
1,529
 
 
1,369
 
Unrealized foreign currency translation adjustments
 
 
(28
)
 
(24
)
 
 
 
 
Total accumulated other comprehensive income
 
 
1,501
 
 
1,345
 
 
 
 
 
Total shareholders' equity
 
 
16,416
 
 
16,601
 
 
 
 
 
Total liabilities and shareholders' equity
 
$
100,206
 
$
98,119
 
 
 
 
 


($ In millions except par value data)

 
June 30,
2000
 
December 31,
1999
 
 
 
(Unaudited)

 
 
 
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
Fixed income securities, at fair value (amortized cost $57,608 and $55,293)
 
$
57,985
 
$
55,286
 
 
Equity securities, at fair value (cost $4,640 and $4,565)
 
 
6,436
 
 
6,738
 
 
Mortgage loans
 
 
4,359
 
 
4,068
 
 
Short-term
 
 
2,709
 
 
2,422
 
 
Other
 
 
1,166
 
 
1,131
 
 
 
 
 
 
 
Total investments
 
 
72,655
 
 
69,645
 
Cash
 
 
238
 
 
254
 
Premium installment receivables, net
 
 
3,962
 
 
3,927
 
Deferred policy acquisition costs
 
 
4,295
 
 
4,119
 
Reinsurance recoverables, net
 
 
2,262
 
 
2,209
 
Accrued investment income
 
 
850
 
 
812
 
Deferred income taxes
 
 
88
 
 
211
 
Property and equipment, net
 
 
989
 
 
916
 
Other assets
 
 
3,177
 
 
2,169
 
Separate Accounts
 
 
14,894
 
 
13,857
 
 
 
 
 
 
 
Total assets
 
$
103,410
 
$
98,119
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Reserve for property-liability insurance claims and claims expense
 
$
17,386
 
$
17,814
 
Reserve for life-contingent contract benefits
 
 
7,990
 
 
7,597
 
Contractholder funds
 
 
27,224
 
 
25,199
 
Unearned premiums
 
 
7,639
 
 
7,671
 
Claim payments outstanding
 
 
880
 
 
860
 
Other liabilities and accrued expenses
 
 
6,997
 
 
4,705
 
Short-term debt
 
 
213
 
 
665
 
Long-term debt
 
 
3,098
 
 
2,186
 
Separate Accounts
 
 
14,894
 
 
13,857
 
 
 
 
 
 
 
Total liabilities
 
 
86,321
 
 
80,554
 
 
 
 
 
 
 
Commitments and Contingent Liabilities (Notes 3 and 5)
 
 
 
 
 
 
 
Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
 
 
964
 
 
964
 
Shareholders' equity
 
 
 
 
 
 
 
Preferred stock, $1 par value, 25 million shares authorized, none issued
 
 
—
 
 
—
 
Common stock, $.01 par value, 2 billion shares authorized and 900 million issued, 734 million and 787 million shares outstanding
 
 
9
 
 
9
 
Additional capital paid-in
 
 
2,646
 
 
2,664
 
Retained income
 
 
17,492
 
 
16,728
 
Deferred ESOP expense
 
 
(186
)
 
(216
)
Treasury stock, at cost (166 million and 113 million shares)
 
 
(5,083
)
 
(3,929
)
Accumulated other comprehensive income:
 
 
 
 
 
 
 
 
Unrealized net capital gains
 
 
1,281
 
 
1,369
 
 
Unrealized foreign currency translation adjustments
 
 
(34
)
 
(24
)
 
 
 
 
 
 
Total accumulated other comprehensive income
 
 
1,247
 
 
1,345
 
 
 
 
 
 
 
Total shareholders' equity
 
 
16,125
 
 
16,601
 
 
 
 
 
 
 
Total liabilities and shareholders' equity
 
$
103,410
 
$
98,119
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements.
4
2





THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



 
 
Three Months Ended

March 31,
 
(In millions)

 
2000
 
1999
 
 
 
(Unaudited)

 
Cash flows from operating activities
 
 
 
 
 
 
 
Net income
 
$
561
 
$
1,035
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation, amortization and other non-cash items
 
 
10
 
 
(6
)
Realized capital gains and losses
 
 
(184
)
 
(599
)
Interest credited to contractholder funds
 
 
356
 
 
320
 
Changes in:
 
 
 
 
 
 
 
Policy benefit and other insurance reserves
 
 
(215
)
 
(36
)
Unearned premiums
 
 
(126
)
 
(22
)
Deferred policy acquisition costs
 
 
(37
)
 
(43
)
Premium installment receivables, net
 
 
(18
)
 
(101
)
Reinsurance recoverables, net
 
 
20
 
 
(52
)
Income taxes payable
 
 
219
 
 
407
 
Other operating assets and liabilities
 
 
20
 
 
(187
)
 
 
 
 
Net cash provided by operating activities
 
 
606
 
 
716
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
 
 
 
Proceeds from sales
 
 
 
 
 
 
 
Fixed income securities
 
 
7,996
 
 
4,239
 
Equity securities
 
 
2,083
 
 
2,975
 
Investment collections
 
 
 
 
 
 
 
Fixed income securities
 
 
671
 
 
1,219
 
Mortgage loans
 
 
89
 
 
48
 
Investment purchases
 
 
 
 
 
 
 
Fixed income securities
 
 
(8,936
)
 
(7,067
)
Equity securities
 
 
(2,196
)
 
(2,343
)
Mortgage loans
 
 
(269
)
 
(193
)
Change in short-term investments, net
 
 
710
 
 
651
 
Change in other investments, net
 
 
(33
)
 
(7
)
Purchases of property and equipment, net
 
 
(98
)
 
(49
)
 
 
 
 
Net cash provided by (used in) investing activities
 
 
17
 
 
(527
)
 
 
 
 
Cash flows from financing activities
 
 
 
 
 
 
 
Change in short-term debt, net
 
 
(416
)
 
(67
)
Contractholder fund deposits
 
 
2,070
 
 
1,006
 
Contractholder fund withdrawals
 
 
(1,347
)
 
(865
)
Dividends paid
 
 
(120
)
 
(111
)
Treasury stock purchases
 
 
(794
)
 
(252
)
Other
 
 
20
 
 
32
 
 
 
 
 
Net cash used in financing activities
 
 
(587
)
 
(257
)
 
 
 
 
Net increase (decrease) in cash
 
 
36
 
 
(68
)
Cash at beginning of period
 
 
254
 
 
258
 
 
 
 
 
Cash at end of period
 
$
290
 
$
190
 
 
 
 
 


 
 
Six months ended
June 30,
 
($ in millions)

 
2000
 
1999
 
 
 
(Unaudited)

 
Cash flows from operating activities
 
 
 
 
 
 
 
 
Net income
 
$
1,020
 
$
1,805
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation, amortization and other non-cash items
 
 
(13
)
 
(7
)
 
 
Realized capital gains and losses
 
 
(246
)
 
(905
)
 
 
Gain on disposition of operations
 
 
—
 
 
(10
)
 
 
Interest credited to contractholder funds
 
 
705
 
 
660
 
 
 
Changes in:
 
 
 
 
 
 
 
 
 
 
Policy benefit and other insurance reserves
 
 
(579
)
 
(245
)
 
 
 
Unearned premiums
 
 
(33
)
 
109
 
 
 
 
Deferred policy acquisition costs
 
 
(175
)
 
(88
)
 
 
 
Premium installment receivables, net
 
 
(35
)
 
(119
)
 
 
 
Reinsurance recoverables, net
 
 
38
 
 
(23
)
 
 
 
Income taxes payable
 
 
322
 
 
243
 
 
 
 
Other operating assets and liabilities
 
 
(11
)
 
(289
)
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
 
993
 
 
1,131
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
 
 
 
 
Proceeds from sales
 
 
 
 
 
 
 
 
 
Fixed income securities
 
 
15,181
 
 
8,775
 
 
 
Equity securities
 
 
4,288
 
 
5,225
 
 
Investment collections
 
 
 
 
 
 
 
 
 
Fixed income securities
 
 
1,285
 
 
3,375
 
 
 
Mortgage loans
 
 
186
 
 
173
 
 
Investment purchases
 
 
 
 
 
 
 
 
 
Fixed income securities
 
 
(18,989
)
 
(14,140
)
 
 
Equity securities
 
 
(3,917
)
 
(4,571
)
 
 
Mortgage loans
 
 
(473
)
 
(453
)
 
Change in short-term investments, net
 
 
1,017
 
 
785
 
 
Change in other investments, net
 
 
(61
)
 
(12
)
 
Purchases of property and equipment, net
 
 
(172
)
 
(104
)
 
 
 
 
 
 
 
 
Net cash used in investing activities
 
 
(1,655
)
 
(947
)
 
 
 
 
Cash flows from financing activities
 
 
 
 
 
 
 
 
Change in short-term debt, net
 
 
(452
)
 
(174
)
 
Proceeds from issuance of long-term debt
 
 
912
 
 
2
 
 
Contractholder fund deposits
 
 
4,366
 
 
2,439
 
 
Contractholder fund withdrawals
 
 
(2,755
)
 
(1,712
)
 
Dividends paid
 
 
(250
)
 
(233
)
 
Treasury stock purchases
 
 
(1,233
)
 
(551
)
 
Other
 
 
58
 
 
41
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) financing activities
 
 
646
 
 
(188
)
 
 
 
 
Net decrease in cash
 
 
(16
)
 
(4
)
Cash at beginning of period
 
 
254
 
 
258
 
 
 
 
 
Cash at end of period
 
$
238
 
$
254
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements.
5
3




THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
(Unaudited)
1. Basis of Presentation
       The accompanying condensed consolidated financial statements include the accounts of The Allstate Corporation and its wholly owned subsidiaries, primarily Allstate Insurance Company ("AIC"), a property-liability insurance company with various property-liability and life and savings subsidiaries, including Allstate Life Insurance Company (collectively referred to as the "Company" or "Allstate").
       The condensed consolidated financial statements and notes as of March 31,June 30, 2000, and for the three month and six month periods ended March 31,June 30, 2000 and 1999 are unaudited. The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in Appendix A of the 2000 Notice of Annual Meeting and Proxy Statement and the Annual Report on Form 10-K for 1999. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.
Pending accounting standards
    To
conform    In June 1999, the Financial Accounting Standards Board ("FASB") delayed the effective date of Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 replaces existing pronouncements and practices with a single, integrated accounting framework for derivatives and hedging activities. This statement requires that all derivatives be recognized on the 2000 presentation, certain amountsbalance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the prior years'fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Additionally, the change in fair value of a derivative which is not effective as a hedge will be immediately recognized in earnings.
    The delay was effected through the issuance of SFAS No. 137, which extends the SFAS No. 133 requirements to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, which amends the accounting and reporting standards of SFAS 133 for certain derivative instruments and certain hedging activities. As such, the Company expects to adopt the provisions of SFAS No. 133 and SFAS No. 138 as of January 1, 2001. The impact of these statements is dependent upon the Company's derivative positions and market conditions existing at the date of adoption. Based on existing interpretations of the requirements of SFAS No. 133, the impact of adoption is not expected to be material to the results of operations or financial statements and notes have been reclassified.position of the Company.
2. Earnings per share
       Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common and dilutive potential common shares outstanding. For Allstate, dilutive potential common shares consist of outstanding stock options and shares issuable under its mandatorily redeemable preferred securities.
   6
    The computations of basic and diluted earnings per share are presented in the following table.



 
 
Three Months Ended March 31,
(in millions, except per share data)

 
2000
 
1999
Numerator:
 
 
 
 
 
 
Net income applicable to common shareholders
 
$
561
 
$
1,035
 
 
 
Denominator:
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
767.6
 
 
813.6
Effect of potential dilutive securities:
 
 
 
 
 
 
Stock options
 
 
1.8
 
 
3.4
Shares issuable under FELINE PRIDES contract
 
 
2.7
 
 
—
 
 
 
 
 
 
4.5
 
 
3.4
 
 
 
 
 
 
 
 
 
 
Weighted average common and dilutive potential common

shares outstanding
 
 
772.1
 
 
817.0
 
 
 
Earnings per share:
 
 
 
 
 
 
Basic
 
$
.73
 
$
1.27
Diluted
 
$
.73
 
$
1.27

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions, except per share data)
 
2000
 
1999
 
2000
 
1999
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to common shareholders
 
$
459
 
$
770
 
$
1,020
 
$
1,805
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
742.3
 
 
807.2
 
 
755.0
 
 
810.4
 
Effect of potential dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options
 
 
2.3
 
 
3.3
 
 
2.0
 
 
3.3
 
 
Shares issuable under FELINE PRIDES contract
 
 
3.2
 
 
—
 
 
3.0
 
 
—
 
 
 
 
 
 
 
 
5.5
 
 
3.3
 
 
5.0
 
 
3.3
 
 
 
 
 
 
Weighted average common and dilutive potential common shares outstanding
 
 
747.8
 
 
810.5
 
 
760.0
 
 
813.7
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
.62
 
$
.96
 
$
1.35
 
$
2.23
 
Diluted
 
 
.61
 
 
.95
 
 
1.34
 
 
2.22
       Options to purchase 12.315.8 million Allstate common shares, with exercise prices ranging from $22.63$25.88 to $50.72, were outstanding at March 31,June 30, 2000 but were not included in the computation of diluted earnings per share for the three month period ended June 30, 2000 since inclusion of thosethese options would have an anti-dilutive effect as the options' exercise prices exceeded the average market price of Allstate common shares in the first three monthsmonth period ended June 30, 2000. For the six month period ended June 30, 2000, options to purchase 16.1 million Allstate common shares, with exercise prices ranging from $23.72 to $50.72, were outstanding at June 30, 2000 and not included in the six month period computation of
4




2000. diluted earnings per share due to anti-dilutive effects. At March 31,June 30, 1999, 3.2 million outstanding stock options were excluded from both the three month and six month periods ended June 30, 1999 diluted earnings per share computationcomputations due to anti-dilutive effects.
3. Reserve for Property-Liability Insurance Claims and Claims Expense
       The Company establishes reserves for claims and claims expense on reported and unreported claims of insured losses. These reserve estimates are based on known facts and interpretation of circumstances, including the Company's experience with similar cases and historical trends involving claim payment patterns, loss payments, pending levels of unpaid claims and product mix, as well as other factors including court decisions, economic conditions and public attitudes. The effects of inflation are implicitly considered in the reserving process.
   7
    The establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain process. Allstate regularly updates its reserve estimates as new facts become known and further events occur which may impact the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reflected in the results of operations in the period such changes are determined to be needed.
       Catastrophes are an inherent risk of the property-liability insurance business which have contributed, and will continue to contribute, to material year-to-year fluctuations in the Company's results of operations and financial position. The level of catastrophe losses experienced in any year cannot be predicted and could be material to the results of operations, liquidity and financial position.
       Reserves for environmental, asbestos and other mass tort exposures comprise reserves for reported claims, incurred but not reported claims and related expenses. Establishing net loss reserves for these types of claims is subject to uncertainties that are greater than those presented by other types of claims. Among the complications are a lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure, unresolved legal issues regarding policy coverage, availability of reinsurance and the extent and timing of any such contractual liability. The legal issues concerning the interpretation of various insurance policy provisions and whether these losses are, or were ever intended to be covered, are complex. Courts have reached different and sometimes inconsistent conclusions as to when losses are deemed to have occurred and which policies provide coverage; what types of losses are covered; whether there is an insured obligation to defend; how policy limits are determined; how policy exclusions are applied and interpreted; and whether environmental and asbestos clean-up costs represent insured property damage. Management believes these issues are not likely to be resolved in the near future.
       In 1986, the general liability policy form used by Allstate and others in the property-liability industry was amended to introduce an "absolute pollution exclusion," which excluded coverage for environmental damage claims and added an asbestos exclusion. Most general liability policies issued prior to 1987 contain annual aggregate limits for product liability coverage, and policies issued after 1986 also have an annual aggregate limit on all coverages. Allstate's experience to date is that these policy form changes have effectively limited its exposure to environmental and asbestos claim risks. Allstate's reserves for environmental and asbestos claims were $1.25$1.23 billion and $1.26 billion at March 31,June 30, 2000 and December 31, 1999, net of reinsurance recoverables of $438$428 million and $448 million, respectively.
       Management believes its net loss reserves for environmental, asbestos and other mass tort claims are appropriately established based on available facts, technology, laws and regulations. However, due to the inconsistencies of court coverage decisions, plaintiffs' expanded theories of liability, the risks inherent in major litigation and other uncertainties, the ultimate cost of these claims may vary materially from the amounts currently recorded, resulting in an increase in the loss reserves. In addition, while the Company believes that improved actuarial techniques and databases have assisted in its ability to estimate environmental, asbestos and other mass tort net loss reserves, these refinements may subsequently prove to
5




be inadequate indicators of the extent of probable loss. Due to the uncertainties and factors described above, management believes it is not practicable to develop a meaningful range for any such additional net loss reserves that may be required.
8
4. Reinsurance
       Property-liability insurance premiums and life and annuity premiums and contract charges are net of the following reinsurance ceded for the three months ended
March 31:ceded:



(In millions)

 
2000
 
1999
Property-liability premiums
 
$
67
 
$
102
Life and annuity premiums and contract charges
 
 
85
 
 
39

 
 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
(In millions)
 
2000
 
1999
 
2000
 
1999
Property-liability premiums
 
$
68
 
$
100
 
$
135
 
$
202
Life and annuity premiums and contract charges
 
 
89
 
 
56
 
 
174
 
 
95
       Property-liability insurance claims and claims expense and life and annuity contract benefits are net of the following reinsurance recoveries for the three months
ended March 31:recoveries:



(In millions)

 
2000
 
1999
Property-liability insurance claims and claims expense
 
$
114
 
$
98
Life and annuity contract benefits
 
 
66
 
 
35

 
 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
(In millions)
 
2000
 
1999
 
2000
 
1999
Property-liability insurance claims and claims expense
 
$
27
 
$
73
 
$
141
 
$
171
Life and annuity contract benefits
 
 
48
 
 
31
 
 
114
 
 
66
5. Regulation and Legal Proceedings
Regulation
       The Company's insurance businesses are subject to the effects of a changing social, economic and regulatory environment. Public and regulatory initiatives have varied and have included efforts to adversely influence and restrict premium rates, restrict the Company's ability to cancel policies, impose underwriting standards and expand overall regulation. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.
Legal proceedings
       Allstate and plaintiffs' representatives have agreed to settle certain civil suits filed in California, including a class action, related to the 1994 Northridge, California earthquake. The settlement received final approval from the Superior Court of the State of California for the County of Los Angeles on June 11, 1999. The plaintiffs in these civil suits challenged licensing and engineering practices of certain firms Allstate retained and alleged that Allstate systematically pressured engineering firms to improperly alter their reports to reduce the loss amounts paid to some insureds with earthquake claims. Under the terms of the settlement, Allstate sent noticenotices to approximately 11,500 homeowners insurance customers inviting them to participate in a court-administered program which may allow for review of their claims by an independent engineer and an independent adjusting firm to ensure that they have been compensated for all structural damage from the 1994 Northridge earthquake covered under the terms of their Allstate policies. It is anticipated that approximately 2,500 of these customers will ultimately participate in this independent review process. Allstate has agreed to retain an independent consultant to review, among other things, Allstate's practices and procedures for handling catastrophe claims, and has helped fund a charitable foundation devoted to consumer education on loss prevention
9
and consumer protection and other insurance issues. The Company does not expect that the effect of the proposed settlement will exceed the amounts currently reserved. During August 1999, a group of objectors filed an appeal from the order approving the settlement. That appeal is pending.
       In April 1998, Federal Bureau of Investigation agents executed search warrants at three Allstate offices for documents relating to the handling of certain claims for losses resulting from the Northridge earthquake. Allstate is cooperating with the investigation, which is being directed by the United States
6




Attorney's Office for the Central District of California. At present, the Company cannot determine the impact of resolving the investigation.
    For the past several years, the Company has been distributing to certain PP&C&C claimants, documents regarding the claims process and the role that attorneys may play in that process. Suits challenging the use of these documents have been filed against the Company, including purported class action suits. In addition to these suits, the Company has received inquires from states' attorneys general, bar associations and departments of insurance. In certain states, the Company has continued to use these documents after agreeing to make certain modifications. The Company is vigorously defending its rights to use these documents. The outcome of these disputes is currently uncertain.
    There are currently a number of state and nationwide putative class action lawsuits pending in various state courts seeking actual and punitive damages from Allstate alleging breach of contract and fraud because of its specification of after-market (non-original equipment manufacturer) replacement parts in the repair of insured vehicles. Plaintiffs in these suits allege that after-market parts are not "of like kind and quality" as required by the insurance policies. The lawsuits are in various stages of development with no class action having been certified.development. The Company is vigorously defending these lawsuits. The outcome of these disputes is currently uncertain.
    The Company has pending several state and nationwide putative class action lawsuits in various state courts seeking actual and punitive damages from Allstate alleging breach of contract and fraud for failing to pay inherent diminished value to insureds under a collision, comprehensive, or uninsured motorist property damage provision of an auto policy. Inherent diminished value is defined by plaintiffs as the difference between the market value of the insured automobile before an accident and the market value after repair. Plaintiffs allege that they are entitled to the payment of inherent diminished value under the terms of the contract. These lawsuits are in various stages of development with no class action having been certified.
Allstatedevelopment. The Company is vigorously defending these lawsuits. The outcome of these disputes is currently uncertain.
    There are a number of state and nationwide putative class action lawsuits pending in various state and federal courts challenging the legal propriety of Allstate's medical bill review processes on a number of grounds, including, among other things, the manner in which Allstate determines reasonableness and necessity. These lawsuits, which to a large degree mirror similar lawsuits filed against other carriers in the industry, allege these processes result in a breach of the insurance policy as well as fraud. The Company denies those allegations and is vigorously defending both its processes and these lawsuits. The outcome of these disputes isin currently uncertain.
    Allstate is defending lawsuits, including three putative class actions, regarding worker classification. Two of these suits, involving certified classes of California agents, relate to the classification of California exclusive agents as independent contractors. These suits were filed after Allstate's reorganization of its California agency programs in 1996. The plaintiffs, among other things, seek a determination that they
10
have been treated as employees notwithstanding agent contracts that specify that they are independent contractors for all purposes. Another suit relates to the classification of staff working in agency offices. In this putative class action, plaintiffs seek damages under the Employee Retirement Income Security Act and the Racketeer Influenced and Corrupt Organizations Act alleging that 10,000 agency secretaries were terminated as employees by Allstate and rehired by agencies through outside staffing vendors for the purpose of avoiding the payment of employee benefits. Allstate is vigorously defending these lawsuits. The outcome of these disputes is currently uncertain.
    Various other legal and regulatory actions are currently pending that involve Allstate and specific aspects of its conduct of business, including some related to the Northridge earthquake, and like other members of the insurance industry, the Company is the target of an increasing number of class action law suits. These class actions are based on a variety of issues including insurance and claim settlement practices. At this time, based on their present status, it is the opinion of management that the ultimate liability, if any, in one or more of these other actions in excess of amounts currently reserved is not expected to have a material effect on the results of operations, liquidity or financial position of the Company.
11
7





6. Business Segments
       Summarized financial performance data for each of the Company's reportable segments for the three months ended March 31, are as follows:



(In millions)

 
2000
 
1999
 
Income from operations before income taxes and other items
 
 
 
 
 
 
 
Property-Liability
 
 
 
 
 
 
 
Underwriting income (loss)
 
 
 
 
 
 
 
PP&C
 
$
22
 
$
367
 
Discontinued Lines and Coverages
 
 
(5
)
 
(1
)
 
 
 
 
Total underwriting income
 
 
17
 
 
366
 
Net investment income
 
 
424
 
 
420
 
Realized capital gains and losses
 
 
184
 
 
530
 
 
 
 
 
Property-Liability income from operations before income taxes
 
 
625
 
 
1,316
 
 
Life and Savings
 
 
 
 
 

 
 
 
 
 
 

 
 
 
Premiums and contract charges
 
 
541
 
 
385
 
Net investment income
 
 
637
 
 
536
 
Realized capital gains and losses
 
 
22
 
 
69
 
Contract benefits
 
 
745
 
 
606
 
Operating costs and expenses
 
 
250
 
 
177
 
Restructuring charges
 
 
2
 
 
—
 
 
 
 
 
Life and Savings income from operations before income taxes
 
 
203
 
 
207
 
 
Corporate and Other
 
 
 
 
 

 
 
 
 
 
 

 
 
 
Net investment income
 
 
29
 
 
15
 
Realized capital gains and losses
 
 
(22
)
 
—
 
Operating costs and expenses
 
 
47
 
 
33
 
 
 
 
 
Corporate and Other loss from operations before income taxes and dividends on preferred securities
 
 
(40
)
 
(18
)
 
 
 
 
Consolidated income from operations before income taxes and other items
 
$
788
 
$
1,505
 
 
 
 
 

 
 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
 
(In millions)
 
2000
 
1999
 
2000
 
1999
 
Income from operations before income taxes and other items
 
 
 
 
 
 
 
 
 
 
 
 
 
Property-Liability
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PP&C
 
$
(49
)
$
214
 
$
(27
)
$
581
 
 
Discontinued Lines and Coverages
 
 
(3
)
 
30
 
 
(8
)
 
29
 
 
 
 
 
 
 
 
 
Total underwriting income (loss)
 
 
(52
)
 
244
 
 
(35
)
 
610
 
 
Net investment income
 
 
439
 
 
439
 
 
863
 
 
859
 
 
Realized capital gains and losses
 
 
142
 
 
224
 
 
326
 
 
754
 
 
Gain on disposition of operations
 
 
—
 
 
10
 
 
—
 
 
10
 
 
 
 
 
 
 
 
 
Property-Liability income from operations before income taxes
 
 
529
 
 
917
 
 
1,154
 
 
2,233
 
Life and Savings
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and contract charges
 
 
511
 
 
369
 
 
1,052
 
 
754
 
 
Net investment income
 
 
665
 
 
552
 
 
1,302
 
 
1,088
 
 
Realized capital gains and losses
 
 
(66
)
 
83
 
 
(44
)
 
152
 
 
Contract benefits
 
 
742
 
 
598
 
 
1,487
 
 
1,204
 
 
Operating costs and expenses
 
 
225
 
 
189
 
 
475
 
 
366
 
 
Restructuring charges
 
 
(13
)
 
—
 
 
(11
)
 
—
 
 
 
 
 
 
 
 
 
Life and Savings income from operations before income taxes
 
 
156
 
 
217
 
 
359
 
 
424
 
Corporate and Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
25
 
 
23
 
 
54
 
 
38
 
 
Realized capital gains and losses
 
 
(14
)
 
(1
)
 
(36
)
 
(1
)
 
Operating costs and expenses
 
 
58
 
 
33
 
 
105
 
 
66
 
 
 
 
 
 
 
 
 
Corporate and Other loss from operations before income taxes and dividends on preferred securities
 
 
(47
)
 
(11
)
 
(87
)
 
(29
)
 
 
 
 
 
 
 
 
 
Consolidated income from operations before income taxes and other items
 
$
638
 
$
1,123
 
$
1,426
 
$
2,628
 
 
 
 
 
 
 
 
 
812




       Summarized revenues for each of the Company's business segments for the three months ended March 31, are as follows:



(In millions)

 
2000
 
1999
Revenues
 
 
 
 
 
 
Property-Liability
 
 
 
 
 
 
Premiums earned
 
 
 
 
 
 
PP&C
 
$
5,470
 
$
4,845
Discontinued Lines and Coverages
 
 
1
 
 
7
 
 
 
Total premiums earned
 
 
5,471
 
 
4,852
Net investment income
 
 
424
 
 
420
Realized capital gains and losses
 
 
184
 
 
530
 
 
 
Total Property-Liability
 
 
6,079
 
 
5,802
 
Life and Savings
 
 
 
 
 

 
 
 
 
 
 

 
Premiums and contract charges
 
 
541
 
 
385
Net investment income
 
 
637
 
 
536
Realized capital gains and losses
 
 
22
 
 
69
 
 
 
Total Life and Savings
 
 
1,200
 
 
990
 
Corporate and Other
 
 
 
 
 

 
 
 
 
 
 

 
Net investment income
 
 
29
 
 
15
Realized capital gains and losses
 
 
(22
)
 
—
 
 
 
Total Corporate and Other
 
 
7
 
 
15
 
 
 
Consolidated Revenues
 
$
7,286
 
$
6,807
 
 
 


 
 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
 
(In millions)
 
2000
 
1999
 
2000
 
1999
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Property-Liability
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums earned
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PP&C
 
$
5,479
 
$
4,903
 
$
10,949
 
$
9,748
 
 
Discontinued Lines and Coverages
 
 
2
 
 
—
 
 
3
 
 
7
 
 
 
 
 
 
 
 
 
Total premiums earned
 
 
5,481
 
 
4,903
 
 
10,952
 
 
9,755
 
Net investment income
 
 
439
 
 
439
 
 
863
 
 
859
 
Realized capital gains and losses
 
 
142
 
 
224
 
 
326
 
 
754
 
 
 
 
 
 
 
 
 
Total Property-Liability
 
 
6,062
 
 
5,566
 
 
12,141
 
 
11,368
 
Life and Savings
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and contract charges
 
 
511
 
 
369
 
 
1,052
 
 
754
 
Net investment income
 
 
665
 
 
552
 
 
1,302
 
 
1,088
 
Realized capital gains and losses
 
 
(66
)
 
83
 
 
(44
)
 
152
 
 
 
 
 
 
 
 
 
Total Life and Savings
 
 
1,110
 
 
1,004
 
 
2,310
 
 
1,994
 
Corporate and Other
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
25
 
 
23
 
 
54
 
 
38
 
Realized capital gains and losses
 
 
(14
)
 
(1
)
 
(36
)
 
(1
)
 
 
 
 
 
 
 
 
Total Corporate and Other
 
 
11
 
 
22
 
 
18
 
 
37
 
 
 
 
 
 
 
 
 
 
Consolidated Revenues
 
$
7,183
 
$
6,592
 
$
14,469
 
$
13,399
 
 
 
 
 
 
 
 
 
7. Comprehensive Income
       The components of other comprehensive income on a pretax and after-tax basis for the three months ended March 31, are as follows:



(In millions)

 
2000
 
1999
 
 
 
Pretax
 
Tax
 
After-tax
 
Pretax
 
Tax
 
After-tax
 
Unrealized capital gains and losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
 
$
455
 
$
(159
)
$
296
 
$
(311
)
$
109
 
$
(202
)
Less: reclassification adjustments
 
 
209
 
 
(73
)
 
136
 
 
541
 
 
(189
)
 
352
 
 
 
 
 
 
 
 
 
Unrealized net capital gains (losses)
 
 
246
 
 
(86
)
 
160
 
 
(852
)
 
298
 
 
(554
)
Unrealized foreign currency translation adjustments
 
 
(6
)
 
2
 
 
(4
)
 
2
 
 
(1
)
 
1
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
$
240
 
$
(84
)
 
156
 
$
(850
)
$
297
 
 
(553
)
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
561
 
 
 
 
 
 
 
 
1,035
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
$
717
 
 
 
 
 
 
 
$
482
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Three Months Ended June 30,
 
 
 
2000
 
1999
 
(In millions)
 
Pretax
 
Tax
 
After-tax
 
Pretax
 
Tax
 
After-tax
 
Unrealized capital gains and losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
 
$
(369
)
$
129
 
$
(240
)
$
(490
)
$
171
 
$
(319
)
 
Less: reclassification adjustments
 
 
12
 
 
(4
)
 
8
 
 
367
 
 
(129
)
 
238
 
 
 
 
 
 
 
 
 
Unrealized net capital gains (losses)
 
 
(381
)
 
133
 
 
(248
)
 
(857
)
 
300
 
 
(557
)
Unrealized foreign currency translation adjustments
 
 
(9
)
 
3
 
 
(6
)
 
—
 
 
—
 
 
—
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
$
(390
)
$
136
 
 
(254
)
$
(857
)
$
300
 
 
(557
)
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
459
 
 
 
 
 
 
 
 
770
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
$
205
 
 
 
 
 
 
 
$
213
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13
 
 
Six Months Ended June 30,
 
 
 
2000
 
1999
 
(In millions)
 
Pretax
 
Tax
 
After-tax
 
Pretax
 
Tax
 
After-tax
 
Unrealized capital gains and losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
 
$
86
 
$
(30
)
$
56
 
$
(801
)
$
280
 
$
(521
)
 
Less: reclassification adjustments
 
 
221
 
 
(77
)
 
144
 
 
908
 
 
(318
)
 
590
 
 
 
 
 
 
 
 
 
Unrealized net capital gains (losses)
 
 
(135
)
 
47
 
 
(88
)
 
(1,709
)
 
598
 
 
(1,111
)
Unrealized foreign currency translation adjustments
 
 
(15
)
 
5
 
 
(10
)
 
2
 
 
(1
)
 
1
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
$
(150
)
$
52
 
 
(98
)
$
(1,707
)
$
597
 
 
(1,110
)
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
1,020
 
 
 
 
 
 
 
 
1,805
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
$
922
 
 
 
 
 
 
 
$
695
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8. Company Restructuring
       On November 10, 1999, the Company announced a series of strategic initiatives to aggressively expand its selling and service capabilities. The Company also announced that it is implementing a program to reduce current annual expenses by approximately $600 million. The reduction in expenses will come from field realignment, the reorganization of employee agents to a single exclusive agency independent contractor program, the closing of certain facilities, and from reduced employee related expenses and professional services as a result of reductions in force, attrition and consolidations. The reduction will
9




result in the elimination of approximately 4,000 current non-agent positions, exclusive of selected hires to staff new initiatives, across all employment grades and categories by the end of 2000, or approximately 10% of the Company's non-agent work force.
       As the result of the cost reduction program, Allstate established a $69 million restructuring reserve during the fourth quarter of 1999 for certain employee termination costs and qualified exit costs. The employee termination costs accrued as part of the restructuring reserve primarily reflected severance and the incremental cost of enhanced post-retirement benefits. The exit costs accrued primarily related to lease termination costs and post-exit rent expenses.
       The following table illustrates the inception to date change in the restructuring liability at March 31,June 30, 2000:



($ in million)

 
Employee Costs
 
Exit Costs
 
Total
 
Balance at December 31, 1999
 
$
59
 
$
10
 
$
69
 
Payments applied against the liability
 
 
(12
)
 
—
 
 
(12
)
Incremental post-retirement benefits classified with OPEB liability
 
 
(5
)
 
—
 
 
(5
)
 
 
 
 
 
Balance at March 31, 2000
 
$
42
 
$
10
 
$
52
 
 
 
 
 
 

(In millions)
 
Employee
Costs
 
Exit
Costs
 
Total
 
Balance at December 31, 1999
 
$
59
 
$
10
 
$
69
 
 
Payments applied against the liability
 
 
(21
)
 
(3
)
 
(24
)
 
Incremental post-retirement benefits classified with OPEB liability
 
 
(5
)
 
—
 
 
(5
)
 
 
 
 
 
Balance at June 30, 2000
 
$
33
 
$
7
 
$
40
 
 
 
 
 
 
 
 
       The payments applied against the restructuring liability for employee costs primarily reflect severance.severance and payments applied for exit costs generally have consisted of post-exit rent expenses and contract termination penalties. As of March 31,June 30, 2000, 5111,303 non-agent employees have been involuntarily terminated and approximately 1,3001,100 non-agent positions have been eliminated through net attrition pursuant to the restructuring plan. As of March 31,June 30, 2000, 2211,308 exclusive agent employees have severed
14
their employment with the Company at their election pursuant to the plan to reorganize exclusive agents to a single independent contractor program.
       An additional $28$33 million of pretax restructuring related costs ($1821 million after-tax), primarily consistingnet of agent separation costsrelated non-cash settlement and retention
bonuses,curtailment accounting gains as required under SFAS No. 88 and SFAS No. 106 on Allstate's retirement plans in the amount of $165 million, were expensed as incurred during the first six months of 2000. The gross expenses recognized primarily consisted of agent separation and reorganization costs, retention bonuses, and employee termination costs not qualifying for accrual at the time of the restructuring plan adoption.
    The non-cash retirement plans' settlement and curtailment gains, as required under financial accounting standards, were recorded in the second quarter of 2000.2000 in connection with the reorganization of agents to a single independent contractor program, and the termination of non-agent employees. The $165 million accounting adjustment includes a settlement gain of $86 million resulting from the accelerated recognition of deferred net actuarial gains that arose due to favorable investment experience and demographic changes in the retirement plans. The $165 million accounting adjustment also includes a curtailment gain of $79 million due to the accelerated recognition of unrecognized prior service cost and the reduction in the projected benefit obligation as a result of agents separating from the Company.
    As a result of agent separations through June 30, 2000 relating to the agent reorganization plan, the pension plan is making ongoing benefit payments that will total approximately $490 million, which along with the curtailment gain and other normal pension activity, has reduced the Company's aggregate projected benefit obligation on its pension plans to approximately $2.4 billion. The Company's total aggregate prepaid pension asset, which primarily reflects the plans' funded status and unamortized net actuarial gains, on all of its pension plans as of June 30, 2000 was approximately $368 million. The increase in the prepaid pension asset from $210 million reported as of December 31, 1999 primarily reflects the SFAS No. 88 settlement and curtailment gains.
    The Company anticipates that additional pretax restructuring related charges including the impact of approximately $72 million willfurther potential non-cash pension curtailment gains or charges, may be expensed
as incurredrealized throughout the remainder of 2000 for agent planas the reorganization costs, retention and relocation bonuses, consulting and legal fees, training expensesof agents to one independent contractor program is finalized and other miscellaneous costs.related costs are estimable. The Company does not anticipate that further restructuring related charges throughout the remainder of 2000 will be material to Allstate's results of operations. All planned restructuring actions are anticipated to be completed by the end of 2000.
9. Issuance of Debt
    In May 2000, the Company issued $900 million of 7.875% senior notes due 2005, the net proceeds of which will be used for general corporate purposes including share repurchases and possible acquisitions.
    In June 2000, Allstate filed a shelf registration statement with the Securities and Exchange Commission ("SEC") under which up to $2 billion of debt securities, preferred stock, trust preferred securities or debt warrants may be issued. No securities had been issued under this registration statement as of June 30, 2000. In addition, the Company has $350 million of capacity remaining on a shelf registration statement filed with the SEC in August 1998, under which debt securities, preferred stock, trust preferred securities or debt warrants may be issued.
15
10





INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders of
The Allstate Corporation:
       We have reviewed the accompanying condensed consolidated statement of financial position of The Allstate Corporation and subsidiaries as of March 31,June 30, 2000, and the related condensed consolidated statements of operations for the three-month and six-month periods ended June 30, 2000 and 1999, and the condensed consolidated statements of cash flows for the three-monthsix-month periods ended March 31,June 30, 2000 and 1999. These financial statements are the responsibility of the Company's management.
       We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
       Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
       We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated statement of financial position of The Allstate Corporation and subsidiaries as of December 31, 1999, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for the year then ended, not presented herein. In our report dated February 25, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 1999 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.
Deloitte && Touche LLP
Chicago, Illinois

May 11,August 7, 2000
16
11




ITEM 2:   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED MARCH 31,JUNE 30, 2000 AND 1999
    The following discussion highlights significant factors influencing results of operations and changes in financial position of The Allstate Corporation (the "Company" or "Allstate"). It should be read in conjunction with the condensed consolidated financial statements and notes thereto found under Part I. Item 1 contained herein and with the discussion, analysis, consolidated financial statements and notes thereto in Part I. Item 1 and Part II. Item 7 and Item 8 of The Allstate Corporation Annual Report on Form 10-K for 1999 and in Appendix A of the 2000 Notice of Annual Meeting and Proxy Statement.
CONSOLIDATED REVENUES



 
 
Three Months Ended

March 31,
($ in millions)

 
2000
 
1999
Property-Liability insurance premiums
 
$
5,471
 
$
4,852
Life and Savings premiums and contract charges
 
 
541
 
 
385
Net investment income
 
 
1,090
 
 
971
Realized capital gains and losses
 
 
184
 
 
599
 
 
 
Total revenues
 
$
7,286
 
$
6,807
 
 
 


 
 
Three Months
Ended
June 30,
 
Six Months
Ended
June 30,
($ in millions)

 
2000
 
1999
 
2000
 
1999
Property-Liability insurance premiums
 
$
5,481
 
$
4,903
 
$
10,952
 
$
9,755
Life and Savings premiums and contract charges
 
 
511
 
 
369
 
 
1,052
 
 
754
Net investment income
 
 
1,129
 
 
1,014
 
 
2,219
 
 
1,985
Realized capital gains and losses
 
 
62
 
 
306
 
 
246
 
 
905
 
 
 
 
 
 
Total revenues
 
$
7,183
 
$
6,592
 
$
14,469
 
$
13,399
 
 
 
 
 
 
 
       Consolidated revenues for the firstsecond quarter of 2000 increased 7.0%9.0% over the same period of 1999, and for the six months ended June 30, 2000 revenues increased 8.0% over the first quartersix months of 1999, primarily reflecting1999. These increases reflect growth in both the Property-Liability insurance premiums earned and Life and Savings premiumssegments and contract charges,increased investment income, partially offset by decreased realized capital gains and losses.
CONSOLIDATED NET INCOME



 
 
Three Months Ended

March 31,
($ in millions except per share data)

 
2000
 
1999
Net income
 
$
561
 
$
1,035
Net income per share (Basic)
 
 
.73
 
 
1.27
Net income per share (Diluted)
 
 
.73
 
 
1.27
Realized capital gains and losses, net of tax
 
 
109
 
 
381
Restructuring and related charges, net of tax
 
 
18
 
 
—

 
 
Three Months
Ended
June 30,
 
Six Months
Ended
June 30,
($ in millions except per share data)

 
2000
 
1999
 
2000
 
1999
Net income
 
$
459
 
$
770
 
$
1,020
 
$
1,805
Net income per share (Basic)
 
 
.62
 
 
.96
 
 
1.35
 
 
2.23
Net income per share (Diluted)
 
 
.61
 
 
.95
 
 
1.34
 
 
2.22
Realized capital gains and losses, net of tax
 
 
38
 
 
184
 
 
147
 
 
565
       Net income for the firstsecond quarter of 2000 was $561$459 million, or $.73$.61 per diluted share, compared with $1.04 billion,$770 million, or $1.27$.95 per diluted share, for the firstsecond quarter of 1999. Net income for the six months ended June 30, 2000 was $1.02 billion, or $1.34 per diluted share, compared to the first six months of 1999 net income of $1.81 billion, or $2.22 per diluted share. The decrease during both periods reflects growth in Property-Liability insurance premiums and Life and Savings premiums and contract charges being more than offset by increased Property-Liability claims and claims expenses
including increasedhigher catastrophe losses from multiple storms, increased auto loss costs and decreased realized capital gains and losses.
17
PROPERTY-LIABILITY OPERATIONS
Overview
       The Company's Property-Liability operations consist of two business segments: Personal Property and Casualty ("PP&C"&C") and Discontinued Lines and Coverages ("Discontinued Lines and Coverages"). PP&C&C is principally engaged in the sale of property and casualty insurance, primarily private passenger auto and homeowners insurance to individuals in both the United States, and to a lesser extent, other countries. Discontinued Lines and Coverages consists of business no longer written by Allstate, including results from environmental, asbestos and other mass tort exposures and other commercial business in run-off.
12




This segment also included mortgage pool insurance business, which the Company exited in 1999. Such groupings of financial information are consistent with that used internally for evaluating segment performance and determining the allocation of resources.
       Underwriting results for each of the Property-Liability business segments are discussed separately below. Unaudited summarized financial data and key operating ratios for Allstate's Property-Liability operations are presented in the following table.



 
 
Three Months Ended

March 31,
($ in millions, except ratios)

 
2000
 
1999
Premiums written
 
$
5,379
 
$
4,839
 
 
 
 

Premiums earned
 
 
 
$
 

5,471
 
 
 
$
 

4,852
Claims and claims expense
 
 
4,138
 
 
3,321
Operating costs and expenses
 
 
1,290
 
 
1,165
Restructuring and related charges
 
 
26
 
 
—
 
 
 
Underwriting income
 
 
17
 
 
366
Net investment income
 
 
424
 
 
420
Realized capital gains and losses, after-tax
 
 
119
 
 
344
Income tax expense on operations
 
 
99
 
 
212
 
 
 
Net income
 
$
461
 
$
918
 
 
 
 

Catastrophe losses
 
 
 
$
 

382
 
 
 
$
 

126
 
 
 
Operating ratios
 
 
 
 
 
 
Claims and claims expense ("loss") ratio
 
 
75.6
 
 
68.5
Expense ratio
 
 
24.1
 
 
24.0
 
 
 
Combined ratio
 
 
99.7
 
 
92.5
 
 
 
Effect of catastrophe losses on combined ratio
 
 
7.0
 
 
2.6
 
 
 
Effect of restructuring and related charges on combined ratio
 
 
0.5
 
 
—
 
 
 


 
 
Three Months
Ended
June 30,
 
Six Months
Ended
June 30,
 
($ in millions, except ratios)

 
2000
 
1999
 
2000
 
1999
 
Premiums written
 
$
5,581
 
$
5,027
 
$
10,960
 
$
9,866
 
 
 
 
 
 
 
 
 
Premiums earned
 
$
5,481
 
$
4,903
 
$
10,952
 
$
9,755
 
Claims and claims expense
 
 
4,198
 
 
3,531
 
 
8,336
 
 
6,852
 
Operating costs and expenses
 
 
1,317
 
 
1,128
 
 
2,607
 
 
2,293
 
Restructuring and related charges
 
 
18
 
 
—
 
 
44
 
 
—
 
 
 
 
 
 
 
Underwriting income (loss)
 
 
(52
)
 
244
 
 
(35
)
 
610
 
Net investment income
 
 
439
 
 
439
 
 
863
 
 
859
 
Realized capital gains and losses, after-tax
 
 
91
 
 
142
 
 
210
 
 
486
 
Loss on disposition of operations, after-tax
 
 
—
 
 
(14
)
 
—
 
 
(14
)
Income tax expense on operations
 
 
85
 
 
170
 
 
184
 
 
382
 
 
 
 
 
 
 
Net income
 
$
393
 
$
641
 
$
854
 
$
1,559
 
 
 
 
 
 
 
 
 
Catastrophe losses
 
$
367
 
$
276
 
$
749
 
$
402
 
 
 
 
 
 
 
 
 
Operating ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Claims and claims expense ("loss") ratio
 
 
76.6
 
 
72.0
 
 
76.1
 
 
70.2
 
 
Expense ratio
 
 
24.3
 
 
23.0
 
 
24.2
 
 
23.5
 
 
 
 
 
 
 
 
Combined ratio
 
 
100.9
 
 
95.0
 
 
100.3
 
 
93.7
 
 
 
 
 
 
 
 
 
 
Effect of catastrophe losses on combined ratio
 
 
6.7
 
 
5.6
 
 
6.8
 
 
4.1
 
 
 
 
 
 
 
 
 
Underwriting Results
       PP&CPP&C   In 1999, the Company announced a series of strategic initiatives to aggressively expand selling and service capabilities to its customers. These initiatives include the creation of a platform that provides consumers with sales and service capabilities through the Internet and direct call centers, as well as through locally established Allstate agencies. Other initiatives include the introduction of new competitive pricing and underwriting techniques, new agency and claim technology and enhanced marketing and advertising. As of May 1, 2000, theThe Company has started to implementimplemented these strategies in the state of Oregon.three states; Oregon, Louisiana and Colorado. As a result, residents of Oregonthese states can now use the Internet and atwo direct call centercenters to obtain an auto insurance premium quote based on new competitive pricing and
18
underwriting techniques, to bind auto coverage and to access customer service.
Additionally, management expects to start implementing these strategies in the states of Colorado and Louisiana in July 2000. By year end, management expects to have initiated implementation in a total of 15 states, representing approximately 40% of the U.S. population. The remaining states will be implemented in 2001, or as the strategies receive regulatory approval in each state. The multi-access technology needed to support these initiatives will continue to be enhanced as additional states are added and as customer needs evolve in the future. The Company believes successful implementation of these initiatives will result in selling and customer service advantages in an increasingly competitive marketplace.
13




       Unaudited summarized financial data and key operating ratios for Allstate's PP&C&C segment are presented in the following table.



 
 
Three Months Ended

March 31,
($ in millions, except ratios)

 
2000
 
1999
Premiums written
 
$
5,379
 
$
4,832
 
 
 
 

Premiums earned
 
 
 
$
 

5,470
 
 
 
$
 

4,845
Claims and claims expense
 
 
4,134
 
 
3,318
Other costs and expenses
 
 
1,288
 
 
1,160
Restructuring and related charges
 
 
26
 
 
—
 
 
 
Underwriting income
 
$
22
 
$
367
 
 
 
 

Catastrophe losses
 
 
 
$
 

382
 
 
 
$
 

126
 
 
 
Operating ratios
 
 
 
 
 
 
Claims and claims expense ("loss") ratio
 
 
75.6
 
 
68.5
Expense ratio
 
 
24.0
 
 
23.9
 
 
 
Combined ratio
 
 
99.6
 
 
92.4
 
 
 
Effect of catastrophe losses on combined ratio
 
 
7.0
 
 
2.6
 
 
 
Effect of restructuring and related charges on combined ratio
 
 
0.5
 
 
—
 
 
 


 
 
Three Months
Ended
June 30,
 
Six Months
Ended
June 30,
($ in millions, except ratios)

 
2000
 
1999
 
2000
 
1999
Premiums written
 
$
5,580
 
$
5,027
 
$
10,959
 
$
9,859
 
 
 
 
 
 
 
Premiums earned
 
$
5,479
 
$
4,903
 
$
10,949
 
$
9,748
Claims and claims expense
 
 
4,196
 
 
3,565
 
 
8,330
 
 
6,883
Other costs and expenses
 
 
1,314
 
 
1,124
 
 
2,602
 
 
2,284
Restructuring and related charges
 
 
18
 
 
—
 
 
44
 
 
—
 
 
 
 
 
Underwriting income (loss)
 
$
(49
)
$
214
 
$
(27
)
$
581
 
 
 
 
 
 
 
Catastrophe losses
 
$
367
 
$
276
 
$
749
 
$
402
 
 
 
 
 
 
 
Operating ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
Claims and claims expense ("loss") ratio
 
 
76.6
 
 
72.7
 
 
76.1
 
 
70.6
 
Expense ratio
 
 
24.3
 
 
22.9
 
 
24.1
 
 
23.4
 
 
 
 
 
 
Combined ratio
 
 
100.9
 
 
95.6
 
 
100.2
 
 
94.0
 
 
 
 
 
 
 
 
Effect of catastrophe losses on combined ratio
 
 
6.7
 
 
5.6
 
 
6.8
 
 
4.1
 
 
 
 
 
 
 
       PP&C&C sells primarily private passenger auto and homeowners insurance to individuals through the exclusive Allstate agency channel, and with the 1999 acquisition of CNA personal lines,insurance, an expanded independent agency channel. The Company has historically separated the voluntary personal auto insurance business into two categories for underwriting purposes: the standard market and the non-standard market. Generally, standard auto customers are expected to have lower risks of loss than non-standard customers. The Company distinguishes between these risk categories using factors unique to each customer such as the driving records of the various drivers on the policy, the existence of prior insurance coverage, the type of car owned or the customer's financial stability. The Company is implementing a refined pricing program that uses its underwriting experience for these factors to price auto coverage for each customer using a unique tier-based pricing model. Tier-based pricing allows a much broader range of premiums to be offered to customers within the two existing categories of risks. As a result, management believes that tier-based pricing will allow the Company to compete more effectively and operate more profitably. The Company's ability to implement these strategies is generally subject to regulatory approval. The Company's underwriting strategy for homeowners is to target customers whose risk of loss provides the best opportunity for profitable growth. This includes managing exposure on policies in areas where the potential loss from catastrophes exceeds acceptable levels.
       The Company's marketing strategy is to provide sales and service to new and existing customers in the distribution channel of their choice. With the implementation of its strategic initiatives in each state, the Company will provideprovides products in four major channels of distribution. Customers will be able to access Allstate products through exclusive agencies, direct call centers and the Internet, which will
19
provide consistent pricing and enhanced customer service. CNA personal lines and Deerbrook Insurance Companyinsurance products will be accessible through independent agencies.agencies, as well as Allstate products which are currently available through independent agencies in certain markets. Management expects the execution of this strategy, in conjunction with the execution of new underwriting and pricing strategies, to improve the Company's opportunity for profitable growth.
14





       PP&C&C premiums written for the firstsecond quarter of 2000 and the first six months of 2000 increased 11.3%11.0% and 11.2%, respectively, compared to the same periodperiods in 1999. Of the 11.3% increase, 9.0% was due toExcluding the acquisition of CNA personal linesinsurance during the fourth quarter of 1999, premium written increased 1.0% during the second quarter of 2000 and 1.7% during the first six months of 2000 over the same periods in 1999. The remaining increase was due to growth in standard auto and homeowners policies in force (unit sales).
       Standard auto premiums written increased 11.9%14.1% to $3.16$3.12 billion in the firstsecond quarter of 2000, from $2.83$2.74 billion for the same three month period in 1999. During the first six months of 2000, standard auto premiums increased 13.0% as compared to the first six months of last year. The increase in both periods was primarily due to the acquisition of CNA personal linesinsurance during 1999 and a 2.1%an increase in renewal policies in force partially offset by a decrease of 1.5% in average premiums due to rate decreases.decreases taken in the prior year. Excluding the impact of the CNA personal insurance acquisition, standard auto premiums increased 1.8% in the second quarter and 1.3% in the first six months of 2000 compared to the same periods in 1999. Policies in force increased 2.1% at June 30, 2000 as compared to June 30, 1999 levels. Average premiums decreased 0.1% in the second quarter and 0.8% during the first six months of the year as compared to the same periods in 1999. Favorable loss trends, competitive considerations and regulatory pressures in some states have affected the Company's ability to maintain rates at historical levels. The Company has also filed rate changes in connection with the implementation of its new underwriting and pricing guidelines which are expected to adversely impact average premium growth in 2000 as compared to the prior year, while improving profitability.
    In
addition, the Company is subject to regulated rate and coverage reductions in the state of New Jersey which became effective beginning in March of 1999. Excluding New Jersey, total
standard    Non-standard auto premiums written increased 14.2%decreased 8.1% to $804 million in the second quarter of 2000, from $875 million for the same period in 1999, and 3.1% during the first quartersix months of 2000 as compared to the first quartersix months of 1999. The impactsThese decreases were driven by decreases in new policies in force and average premiums. Policies in force decreased 0.9% at June 30, 2000 as compared to June 30, 1999 levels. Average premiums decreased 3.0% in the second quarter and 2.9% during the first six months of the year as compared to the same periods in 1999, despite rate reductions on premiums written in New Jersey are believed
to be fully realized one year after implementation, whereas impacts of regulated coverage reductions on losses will begin to be determinable in 2001.
    Non-standard
auto premiums written increased 2.0% to $876 millionincreases during the current and prior year. Decreases in the firstnon-standard premiums were primarily due to the Company's implementation of programs during the second quarter of 2000 from $859 million for the same period in 1999. The growth was
driven by a 6.5% increase in policies in force, partially offset by a 2.3% decrease in average premiums. The Company is currently implementing programs to address the emergence of adverse profitability trendstrends. These programs vary by state and include underwriting changes such as additional down payment requirements, higher rate increases, and other administrative changes. These programs began to impact results during the current quarter as policies in non-standard autoforce decreased, and average premiums decreased as a result of policyholders selecting less coverage and the mix of premiums written during 1999.the period. These programs are expected to continue to adversely impact written premium growth in the near term while improving profitability of the non-standard business in the future.
       Homeowners premiums written for the firstsecond quarter were $864 million,$1.08 billion, an increase of 23.4%21.7% over the firstsecond quarter 1999 premiums of $700$891 million. For the first half of 2000, homeowners premiums written were $1.95 billion, an increase of 22.4% compared to the same period last year. The increase was driven by the acquisition of CNA personal lines, a 3.3%insurance, an increase in renewal policies in force and a 3.2%an increase in average renewal premium. Higher averageExcluding the impacts of the CNA personal insurance acquisition, homeowners premiums werewritten increased 9.4% during the second quarter and 9.0% for the first six months of 2000 compared to the same periods in 1999. Policies in force increased 3.0% during the year. Average premiums increased 4.4% during the quarter, and 3.9% during the first
20
six months of the year as compared to the same periods last year, primarily due to increases in rates taken during 1999 and the first quarterhalf of 2000.
       For the firstsecond quarter of 2000, PP&C had&C experienced an underwriting loss of $49 million versus underwriting income of $22$214 million versus $367for the second quarter of 1999. For the six month period ended June 30, 2000, PP&C experienced an underwriting loss of $27 million compared to underwriting income of $581 million for the first quarterhalf of 1999.last year. Underwriting income decreased during both periods as earned premium growth was more than offset by unseasonably higher catastrophe losses from multiple storms occurring during the quarter and by increased auto loss costs. Auto lossLoss costs were impacted by higher auto claim frequency and increased claim severity due to inflationary pressures in medical and autoother repair costs. However, auto injury claim severity growth was below the growth of relevant cost indices related to medical services.
       The restructuring and related charges incurred during the second quarter and first quarterhalf of 2000 were the result of actions taken to further implement the cost reduction program announced on November 10, 1999. The impact on the PP&C&C segment was $26$18 million, or $17$12 million after-tax during the quarter, and related specifically to$44 million, or $29 million after-tax during the reorganizationfirst half of its multiple employee
agency programs to a single exclusive agency independent contractor program and the elimination of certain employee positions. As of March 31, 2000, 221 exclusive agent employees have elected
to sever their employment with the Company pursuant to the reorganization.year. See Note 8 to the consolidated financial statements for a more detailed discussion of these charges.
       Catastrophe Losses and Catastrophe Management   Catastrophe losses for the firstsecond quarter of 2000 were $382$367 million compared with $126$276 million for the same period in 1999. For the first half of 2000, catastrophe losses were $749 million compared to $402 million for the same period last year. The level of catastrophe losses experienced in any year cannot be predicted and could be material to results of operations and financial position. While management believes the Company's catastrophe management initiatives have
15




reduced the potential magnitude of possible future losses, the Company continues to be exposed to catastrophes that may materially impact results of operations and financial position.
       The establishment of appropriate reserves for losses incurred from catastrophes, as for all outstanding Property-Liability claims, is an inherently uncertain process. Catastrophe reserve estimates are regularly reviewed and updated, using the most current information and estimation techniques. Any resulting adjustments, which may be material, are reflected in current operations.
       Allstate has limited, over time, its aggregate insurance exposures in certain regions prone to catastrophes. These limits include restrictions on the amount and location of new business production, limitations on the availability of certain policy coverages, policy brokering and increased participation in catastrophe pools. Allstate has also requested and received rate increases and has expanded its use of increased hurricane and earthquake deductibles in certain regions prone to catastrophes. However, the initiatives are somewhat mitigated by requirements of state insurance laws and regulations, as well as by competitive considerations.
       For Allstate, areas of potential catastrophe losses due to hurricanes include major metropolitan centers near the eastern and gulf coasts of the United States. Allstate Floridian Insurance Company ("Floridian") and Allstate Floridian Indemnity Company ("AFI") sell and service Allstate's Florida residential property policies, and have access to reimbursements and exposure to assessments from the Florida Hurricane Catastrophe Fund. In addition, Floridian and AFI are subject to assessments from the Florida Windstorm Underwriting Association and the Florida Property and Casualty Joint Underwriting Association, organizations created to provide coverage for catastrophic losses to property owners unable to obtain coverage in the private insurance market.
       Exposure to certain potential losses from earthquakes in California is limited by the Company's participation in the California Earthquake Authority ("CEA"). Other areas in the United States for whichwhere Allstate faces exposure to potential earthquake losses include areas surrounding the New Madrid fault system in the Midwest and faults in and surrounding Seattle, Washington and Charleston, South
21
Carolina. Allstate continues to evaluate alternative business strategies to more effectively manage its exposure to catastrophe losses in these and other areas.
    The Company, in the normal course of business, may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims.
       Discontinued Lines and Coverages   Unaudited summarized underwriting results for the Discontinued Lines and Coverages segment are presented in the following table.



 
 
Three Months Ended

March 31,
($ in millions)

 
2000
 
1999
Underwriting loss
 
$
5
 
$
1
 
 
 


 
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
($ in millions)
 
2000
 
1999
 
2000
 
1999
Underwriting income (loss)
 
$
(3
)
$
30
 
$
(8
)
$
29
 
 
 
 
 
 
       Discontinued Lines and Coverages consists of business no longer written by Allstate, including results from environmental, asbestos and other mass tort exposures and other commercial business in run-off. This segment also included mortgage pool insurance business, which the Company exited in 1999.
Net Investment Income and Realized Capital Gains and Losses, After-tax
       Net Investment Income   Net investment income increased slightly to $424was $439 million in the firstsecond quarter of 2000, compared to $420consistent with $439 million in the firstsecond quarter of last year, as increased income from partnership interests and income from funds received in connection with the CNA acquisition were offset by the impact of dividends paid to The Allstate Corporation during the preceding twelve months and decreased income from partnership interests. During the first half of 2000, net investment income increased slightly to $863 million, compared to $859 million in the same period last year, as increased income from funds received in connection with the CNA acquisition and positive cash flows were partially offset by the impact of dividends paid to The Allstate Corporation during the preceding twelve months.
16




       Realized Capital Gains and Losses, After-tax   Realized capital gains, and losses, after-tax for the firstsecond quarter of 2000 were $119$91 million versus $344$142 million for the same period in 1999. During the first half of 2000, realized capital gains, after-tax were $210 million compared to $486 million in the first six months of last year. Period to period fluctuations in realized capital gains are largely the result of timing of sales decisions reflecting management's decision on positioning the investment portfolio, as well as assessments of individual securities and overall market conditions.
LIFE AND SAVINGS OPERATIONS
Overview
       Life and Savings markets primarily life insurance, savings and group pension products. Life insurance products consist of traditional products, including term and whole life, interest-sensitive life, immediate annuities with life contingencies, variable life and indexed life insurance. Savings products include deferred annuities and immediate annuities without life contingencies. Group pension products include contracts with fixed or indexed rates and fixed terms, such as guaranteed investment contracts, funding agreements and deferred and immediate annuities, or retirement annuities. The segment also uses several brand identities. Generally, Allstate brand products are sold through exclusive agencies, specialized brokers and direct response marketing. Products of other brands such as Glenbrook Life and Annuity, Northbrook Life, Lincoln Benefit Life and American Heritage Life ("AHL") are sold through both exclusive and independent agencies, securities firms, banks, direct response and worksite marketing. The products offered in each brand are of similar types, with the exception of AHL, which also includes health and disability insurance in addition to life and annuity products.
   22
    Unaudited summarized financial data for Allstate's Life and Savings segment are presented in the following table.



 
 
Three Months Ended

March 31,
($ in millions)

 
2000
 
1999
Statutory premiums and deposits
 
$
3,009
 
$
1,511
 
 
 
Investments
 
$
36,000
 
$
32,088
Separate Accounts assets
 
 
14,875
 
 
10,466
 
 
 
Investments, including Separate Accounts assets
 
$
50,875
 
$
42,554
 
 
 
GAAP Premiums
 
$
334
 
$
214
Contract charges
 
 
207
 
 
171
Net investment income
 
 
637
 
 
536
Contract benefits
 
 
393
 
 
295
Credited interest
 
 
352
 
 
311
Operating costs and expenses
 
 
235
 
 
163
Restructuring and related charges
 
 
2
 
 
—
 
 
 
Operating income before tax
 
 
196
 
 
152
Income tax expense
 
 
69
 
 
53
 
 
 
Operating income(1)
 
 
127
 
 
99
Realized capital gains and losses, after-tax(2)
 
 
4
 
 
37
 
 
 
Net income
 
$
131
 
$
136
 
 
 



 
 
Three Months
Ended
June 30,
 
Six Months
Ended
June 30
($ in millions)
 
2000
 
1999
 
2000
 
1999
Statutory premiums and deposits
 
$
3,233
 
$
2,035
 
$
6,242
 
$
3,546
 
 
 
 
 
 
Investments
 
$
37,585
 
$
32,039
 
$
37,585
 
$
32,039
Separate Accounts assets
 
 
14,894
 
 
11,248
 
 
14,894
 
 
11,248
 
 
 
 
 
Investments, including Separate Accounts assets
 
$
52,479
 
$
43,287
 
$
52,479
 
$
43,287
 
 
 
 
 
 
GAAP Premiums
 
$
294
 
$
186
 
$
628
 
$
400
Contract charges
 
 
217
 
 
183
 
 
424
 
 
354
Net investment income
 
 
665
 
 
552
 
 
1,302
 
 
1,088
Contract benefits
 
 
372
 
 
266
 
 
765
 
 
561
Credited interest
 
 
370
 
 
332
 
 
722
 
 
643
Operating costs and expenses
 
 
223
 
 
175
 
 
458
 
 
338
Restructuring and related charges
 
 
(13
)
 
—
 
 
(11
)
 
—
 
 
 
 
 
Operating income before tax
 
 
224
 
 
148
 
 
420
 
 
300
Income tax expense
 
 
79
 
 
49
 
 
148
 
 
102
 
 
 
 
 
Operating income(1)
 
 
145
 
 
99
 
 
272
 
 
198
Realized capital gains and losses, after-tax(2)
 
 
(44
)
 
43
 
 
(40
)
 
80
 
 
 
 
 
Net income
 
$
101
 
$
142
 
$
232
 
$
278
 
 
 
 
 
 

(1)
The supplemental operating information presented above allows for a more complete analysis of results of operations. The net effects of realized capital gains and losses have been excluded due to the volatility between periods and because such data is often excluded when evaluating the overall financial performance of insurers. Operating income should not be considered as a substitute for any GAAP measure of performance. Our method of calculating operating income may be different from the method used by other companies and therefore comparability may be limited.

(2)
Net of the effect of related amortization of deferred policy acquisition costs.
1723






Operating Results
       Statutory Premiums and Deposits   Statutory premiums and deposits, which include premiums and deposits for all products, are used to analyze sales trends. The following table summarizes statutory premiums and deposits by product line.



 
 
Three Months Ended

March 31,
($ in millions)

 
2000
 
1999
Life products
 
 
 
 
 
 
Interest-sensitive
 
$
236
 
$
277
Traditional
 
 
95
 
 
74
Other
 
 
133
 
 
60
 
 
 
Total life products
 
 
464
 
 
411
 
Annuity products
 
 
 
 
 

 
 
 
 
 
 

 
Fixed
 
 
1,053
 
 
476
Variable
 
 
983
 
 
382
 
Group pension products
 
 
 
 
 

509
 
 
 
 
 

242
 
 
 
Total
 
$
3,009
 
$
1,511
 
 
 


 
 
Three Months
Ended
June 30,
 
Six Months
Ended
June 30,
($ in millions)
 
2000
 
1999
 
2000
 
1999
Life products
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-sensitive
 
$
260
 
$
289
 
$
496
 
$
566
 
Traditional
 
 
106
 
 
85
 
 
201
 
 
159
 
Other
 
 
143
 
 
60
 
 
276
 
 
120
 
 
 
 
 
 
Total life products
 
 
509
 
 
434
 
 
973
 
 
845
Annuity products
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed
 
 
996
 
 
585
 
 
2,049
 
 
1,061
 
Variable
 
 
1,115
 
 
588
 
 
2,098
 
 
970
Group pension products
 
 
613
 
 
428
 
 
1,122
 
 
670
 
 
 
 
 
 
Total
 
$
3,233
 
$
2,035
 
$
6,242
 
$
3,546
 
 
 
 
 
 
 
       Total statutory premiums and deposits increased to $3.01$3.23 billion in the firstsecond quarter of 2000, an increase of 99.1%58.9% compared with the same period last year. During the first six months of the year primarilystatutory premiums and deposits increased 76.0% to $6.24 billion over the same period of 1999. These increases were due to the acquisition of AHL during 1999, and higher sales of variable and fixed annuities. Of the 99.1% increase, 11.1% was due toExcluding the acquisition of AHL, statutory premiums increased 48.8% during the fourthsecond quarter and 65.6% during the first six months of 2000, compared to the same periods in 1999. Variable annuity sales in the second quarter of 2000 increased 89.6% over the second quarter of 1999, and sales in the first six months of 2000 increased 116.3% over the first six months of 1999. Variable annuity sales increased 157.3%
over the first quarter of 1999,in both periods were primarily driven by $432 million$1.00 billion of sales during the first six months of 2000 from the alliancejoint venture with Putnam Investments which began in May of 1999. Fixed annuity sales forin the firstsecond quarter of 2000 increased 121.2%70.3% over the prior year second quarter, and sales in the first quartersix months of 2000 increased 93.1% over the first six months of 1999. Fixed annuity sales in both periods increased due to increasedgrowth in sales in the independent agent and banking distribution channels. Period to period fluctuations in sales of group pension products, including funding agreements, are largely due to management's actions based on the assessment of market opportunities.
       GAAP Premiums and Contract Charges   Under generally accepted accounting principles ("GAAP"), premiums represent revenue generated from traditional life products with significant mortality risk. Revenues for interest-sensitive life insurance and fixed and variable annuity contracts, for which deposits are treated as liabilities, are reflected as contract charges. Immediate annuities may be purchased with a life contingency whereby the mortality risk is a significant factor, therefore GAAP
24
revenues generated on these contracts are recognized as premiums. The following table summarizes GAAP premiums and contract charges.
 
 
Three Months
Ended
June 30,
 
Six Months
Ended
June 30,
($ in millions)
 
2000
 
1999
 
2000
 
1999
Premiums
 
 
 
 
 
 
 
 
 
 
 
 
 
Traditional life
 
$
99
 
$
80
 
$
191
 
$
157
 
Immediate annuities with life contingencies
 
 
60
 
 
42
 
 
167
 
 
111
 
Other
 
 
135
 
 
64
 
 
270
 
 
132
 
 
 
 
 
 
 
Total premiums
 
 
294
 
 
186
 
 
628
 
 
400
Contract Charges
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-sensitive life
 
 
145
 
 
121
 
 
284
 
 
245
 
Variable annuities
 
 
55
 
 
49
 
 
110
 
 
84
 
Other
 
 
17
 
 
13
 
 
30
 
 
25
 
 
 
 
 
 
 
Total contract charges
 
 
217
 
 
183
 
 
424
 
 
354
 
 
 
 
 
 
 
Total Premiums and Contract Charges
 
$
511
 
$
369
 
$
1,052
 
$
754
 
 
 
 
 
 
 
18







 
 
Three Months Ended

March 31,
($ in millions)

 
2000
 
1999
Premiums
 
 
 
 
 
 
Traditional life
 
$
92
 
$
77
Immediate annuities with life contingencies
 
 
109
 
 
69
Other
 
 
133
 
 
68
 
 
 
Total premiums
 
 
334
 
 
214
 
Contract Charges
 
 
 
 
 

 
 
 
 
 
 

 
Interest-sensitive life
 
 
144
 
 
128
Variable annuities
 
 
55
 
 
35
Other
 
 
8
 
 
8
 
 
 
Total contract charges
 
 
207
 
 
171
 
 
 
Total Premiums and Contract Charges
 
$
541
 
$
385
 
 
 


       For the firstsecond quarter of 2000, total premiums increased 56.1%58.1% to $334 million. Of$294 million, and 57.0% to $628 million for the 56.1% increase, 32.2% was duefirst six months of 2000, compared to the same periods last year. Excluding the acquisition of AHL.AHL, total premiums increased 18.8% during the quarter and 21.5% during the first six months of 2000 compared to the same periods in 1999.
       Total contract charges increased 21.1%18.6% during the second quarter of 2000, and 19.8% during the first six months of the year, as compared to the same periods of 1999, due to increases in variable annuity deposits, appreciation of account balances and the acquisition of AHL. Excluding the acquisition of AHL, total contract charges increased 9.3% during the second quarter and 11.0% during the first six months of 2000 compared to the same periods in 1999.
    Operating Income  Operating income increased 46.5% to $145 million in the second quarter of 2000 as compared to the firstsecond quarter of 1999, dueand 37.4% to increased variable annuity fees and the acquisition of AHL. Of
the 21.1% increase, 8.2% was due to the acquisition of AHL.
    Operating Income  Operating income increased 28.3% to $127$272 million induring the first quartersix months of 2000 as compared to the first quarterhalf of 1999, as1999. These increases were due to increased investment and mortality margins and increased contract charges were partially offset by higher expenses.charges.
       Investment margin, which represents the excess of investment income earned over interest credited to policyholders and contractholders, increased 16.6%21.6% during the current year second quarter as compared to the prior year second quarter, and 19.1% in the first six months of 2000 compared to the first six months of 1999. These increases were due primarily to increases in asset balances from new sales. The difference between average investment yields and interest credited during the quarter remained relatively
constant withwas comparable to the same period in 1999.
       Mortality margin, which represents premiums and cost of insurance charges in excess of related policy benefits, increased 18.0%7.8% during the firstsecond quarter of 2000 as compared to the firstsecond quarter of 1999. During the first six months of 2000, the mortality margin improved 13.0% as compared to the first half of 1999. The increase,increases, which positively impactsimpact operating income, waswere the result of increased premiums and cost of insurance charges (as noted above) and favorable reserve releases as amortality loss trends.
    The restructuring and related charges incurred during the second quarter and first half of 2000 were the result of mortality gainsactions taken to further implement the cost reduction program announced on structured settlement annuities.
    Increased
expensesNovember 10, 1999. The impact on the Life and Savings segment was a credit of $13 million, or $9 million after-tax during the quarter, and a credit of $11 million, or $8 million after-tax during the first quarterhalf of 2000 as comparedthe year. See Note 8 to the prior year first quarter were due to higher employee related costs and higher amortization expenseconsolidated financial statements for a more detailed discussion of deferred
acquisition costs.these charges.
25
Net Investment Income and Realized Capital Gains and Losses, After-tax
       Net Investment Income   Net investment income increased 18.8%20.5% in the second quarter of 2000 and 19.7% in the first quarterhalf of 2000 as compared with the same periodperiods last year, due to higher investment balances from increased cash flows from operations and the acquisition of AHL. Investment balances at March 31,June 30, 2000, excluding Separate Accounts and unrealized gains on fixed income securities, grew 16.9%20.4% from the same periodtime last year.
19




    Realized Capital Gains and Losses, After-tax   Realized capital gains and losses, after-tax forFor the three month period ended March 31,June 30, 2000, realized capital losses, after-tax were $4$44 million compared to $37realized capital gains of $43 million for second quarter of 1999. For the six months ended June 30, 2000, realized capital losses, after-tax were $40 million, compared to realized capital gains of $80 million for the first quarterhalf of 1999. Period to period fluctuations in realized capital gains are largely the result of timing of sales decisions reflecting management's decision on positioning the investment portfolio, as well as assessments of individual securities and overall market conditions.
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
       Allstate's capital resources consist of shareholders' equity, mandatorily redeemable preferred securities and debt, representing funds deployed or available to be deployed to support business operations. These resources are summarized in the following table.



($ in millions)

 
March 31,

2000
($ in millions)
 
June 30,
2000
 
December 31,
1999
 
Common stock and retained earnings
 
$
14,878
 
$
15,256
 
Accumulated other comprehensive income
 
 
1,247
 
 
1,345
 
 
 
 
 
 
Total shareholders' equity
 
 
16,125
 
 
16,601
 
Mandatorily redeemable preferred securities
 
 
964
 
 
964
 
Debt
 
 
3,311
 
 
2,851
 
 
 
 
 
 
Total capital resources
 
$
20,400
 
$
20,416
 
 
 
 
 
 
 
Ratio of debt to total capital resources(1)
 
 
18.6
%
 
16.3
%
 
December 31,

1999
 
Common stock and retained earnings
 
$
14,915
 
$
15,256
 
Accumulated other comprehensive income
 
 
1,501
 
 
1,345
 
 
 
 
 
Total shareholders' equity
 
 
16,416
 
 
16,601
 
Mandatorily redeemable preferred securities
 
 
964
 
 
964
 
Debt
 
 
2,435
 
 
2,851
 
 
 
 
 
Total capital resources
 
$
19,815
 
$
20,416
 
 
 
 
 
Ratio of debt to total capital resources(1)
 
 
14.7
%
 
16.3
%


(1)
When analyzing the Company's ratio of debt to total capital resources, various formulas are used. In this presentation, debt includes 50% of the mandatorily redeemable preferred securities.

       Shareholders' Equity   Shareholders' equity decreased in the firstsecond quarter of 2000 when compared to year-end 1999, as net income and increased unrealized capital gains werewas more than offset by the impacts of share repurchases. During the firstsecond quarter of 2000, the Company repurchased 3718 million shares of its common stock at a cost of $794$439 million as part of its stock repurchase programs. The current $2 billion stock repurchase program. This program is 17%39.4% complete at March 31,June 30, 2000. For the first six months of 2000, the Company purchased a total of 55 million shares at a cost of $1.23 billion as part of the current repurchase program, which commenced in February 2000, and is expected to be completed by December 31, 2000.complete the preceding $2 billion program.
       Debt   Debt decreasedincreased in the firstsecond quarter of 2000 when compared to year-end 1999, due primarily to a decrease in
short-term debt. Additionally, on April 26, 2000, the Company issuedissuance of $900 million of 7.875% Senior Notes due in 2005 utilizing itsduring May 2000, partially offset by decreased short-term debt. The debt issued in April utilized the existing shelf registration filed with the Securities and Exchange Commission ("SEC") in August 1998. The proceeds of this issuance will bewere used for general corporate purposes, including stock repurchases and possible acquisitions. As
of April 30,repurchases.
    At July 31, 2000, the Company may issue up to an additional $350 million of additional debt securities, preferred stock, trust preferred securities or debt warrants utilizing the shelf registration statement filed with the SEC in August 1998. In addition, the Company filed a new shelf registration statement with
26
the SEC in June 2000, under which up to $2 billion of debt securities, preferred stock, trust preferred securities or debt warrants may be issued. No securities have been issued under this shelf registration.registration statement.
The Company has access to additional borrowing as follows:
••
Allstate has a commercial paper program with an authorized borrowing limit of up to $1.00 billion to cover its short-term cash needs. At March 31,June 30, 2000 the Company had outstanding commercial paper borrowings of $249$213 million.

••
Allstate maintains two credit facilities totaling $1.55 billion as a potential source of funds to meet short-term liquidity requirements, including a $1.50 billion, five-year revolving line of credit expiring in 2001 and a $50 million, one-year revolving line of credit expiring in 2001. In order to borrow on the five-year line of credit, Allstate Insurance Company ("AIC"), a wholly owned subsidiary of the Company, is required to maintain a specified statutory surplus level, and the Company's debt to equity ratio (as defined in the agreement) must not exceed a designated level. These requirements are
20



currently being met and management expects to continue to meet them in the future. There were no borrowings under these lines of credit during the first quarterhalf of 2000. Total borrowings under the combined commercial paper program and the Allstate lines of credit are limited to $1.55 billion.
•
AHL
maintains a line of credit totaling $60 million as a potential source of funds to meet short-term liquidity requirements. At March 31, 2000, there were no borrowings
under this line of credit.


Financial Ratings and Strength
    The American Heritage Life Insurance Company's insurance claims-paying ability rating has been upgraded by Standard & Poor's to AA+ (Superior).
       The Company's and its major subsidiaries' debt, commercial paper and claims-paying ability ratings from Moody's, Standard & Poor's and A.M. Best rating agencies were unchanged during the second quarter of 2000 as compared to the preceding quarter. These ratings are influenced by many factors including the amount of financial leverage (i.e., debt), exposure to risks such as catastrophes, as well as the current level of operating leverage.
Liquidity
       Allstate is a holding company whose principal operating subsidiaries include AIC and AHL. The Company's principal sources of funds are dividend payments from AIC, intercompany borrowings, funds from the settlement of Company benefit plans and funds that may be raised periodically from the issuance of additional debt, including commercial paper, or stock. The payment of dividends by AIC is limited by Illinois insurance law to formula amounts based on statutory net income and statutory surplus, as well as the timing and amount of dividends paid in the preceding twelve months. Based on 1999 statutory net income, the maximum amount of dividends AIC will be able tocan pay at any point in time during 2000 without prior Illinois Department of Insurance approval at a given point in time
beginning in May 2000 is $1.96 billion, less dividends paid during the preceding twelve months measured at that point in time. Based on the dividends paid during the preceding twelve months, AIC will have the capacity to pay up to $499 million in dividends during the third quarter of 2000, of which $276 million was paid during July, and an additional $1.46 billion during the fourth quarter of 2000. Allstate's principal uses of funds are the payment of dividends to shareholders, share repurchases, intercompany lending to its insurance affiliates, debt service, additional investments in its subsidiaries and acquisitions.
       Surrenders and withdrawals for Life and Savings during the quarter and six month periods ended March 31,June 30, 2000, were $894 million,$1.07 billion and $1.97 billion respectively, compared to $667$619 million and $1.29 billion respectively for the same periodperiods in 1999. As the Company's interest-sensitive life policies and annuity contracts in-force grow and age, the dollar amount of surrenders and withdrawals will likely increase. While the overall amount of surrenders may increase in the future, a significant increase in the level of surrenders relative to total contractholder account balances is not anticipated.
27
INVESTMENTS
INVESTMENTS
       The composition of the investment portfolio at March 31,June 30, 2000, is presented in the table below.



 
 
Property- Liability
 
Life and Savings
 
Corporate

and Other
 
Total
 
($ in millions)

 
 
 
Percent

to Total
 
 
 
Percent

to Total
 
 
 
Percent

to Total
 
 
 
Percent

to Total
 
Fixed income securities(1)
 
$
25,123
 
76.3
%
$
29,601
 
82.2
%
$
1,108
 
94.5
%
$
55,832
 
79.6
%
Equity securities
 
 
6,122
 
18.6
 
 
672
 
1.9
 
 
1
 
0.1
 
 
6,795
 
9.7
 
Mortgage loans
 
 
174
 
0.5
 
 
4,074
 
11.3
 
 
—
 
—
 
 
4,248
 
6.1
 
Short-term
 
 
1,499
 
4.6
 
 
525
 
1.5
 
 
63
 
5.4
 
 
2,087
 
3.0
 
Other
 
 
11
 
—
 
 
1,128
 
3.1
 
 
—
 
—
 
 
1,139
 
1.6
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
32,929
 
100.0
%
$
36,000
 
100.0
%
$
1,172
 
100.0
%
$
70,101
 
100.0
%
 
 
 
 
 
 
 
 
 
 


 
 
Property-Liability
 
Life and Savings
 
Corporate
and Other
 
Total
 
($ in millions)
 
 
 
Percent
to Total
 
 
 
Percent
to Total
 
 
 
Percent
to Total
 
 
 
Percent
to Total
 
Fixed income securities(1)
 
$
26,059
 
77.2
%
$
30,846
 
82.1
%
$
1,080
 
84.0
%
$
57,985
 
79.8
%
Equity securities
 
 
5,794
 
17.1
 
 
627
 
1.7
 
 
15
 
1.2
 
 
6,436
 
8.9
 
Mortgage loans
 
 
167
 
0.5
 
 
4,192
 
11.1
 
 
—
 
—
 
 
4,359
 
6.0
 
Short-term
 
 
1,755
 
5.2
 
 
764
 
2.0
 
 
190
 
14.8
 
 
2,709
 
3.7
 
Other
 
 
10
 
—
 
 
1,156
 
3.1
 
 
—
 
—
 
 
1,166
 
1.6
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
33,785
 
100.0
%
$
37,585
 
100.0
%
$
1,285
 
100.0
%
$
72,655
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Fixed income securities are carried at fair value. Amortized cost for these securities was $25.04$25.91 billion, $29.16$30.59 billion and $1.16$1.11 billion for Property-Liability, Life and Savings, and Corporate and Other, respectively.

       Total investments increased to $70.10$72.66 billion at March 31,June 30, 2000 from $69.65 billion at December 31, 1999. Property-Liability investments were $32.93$33.78 billion at March 31,June 30, 2000 as compared to $32.94 billion at December 31, 1999. Life and Savings investments at March 31,June 30, 2000, increased $1.56$3.15 billion to $36.00$37.59 billion from $34.44 billion at December 31, 1999. The increase in investments was primarily attributable to amounts invested from positive cash flows generated from the Life and Savings operations and increasedhigher unrealized capital gains on fixed income securities, partially offset by decreased cash flows generated froma $1 billion reduction in the Property-Liability operations.Corporate and Other segment during the first six months of 2000 to fund the stock repurchase program.
21





       Approximately 94.0%94.3% of the Company's fixed income securities portfolio is rated investment grade, which is defined by the Company as a security having an NAIC rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company internal rating.
PENDING ACCOUNTING STANDARDS
       In June 1999, the Financial Accounting Standards Board ("FASB") delayed the effective date of Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SAFSSFAS No. 133 replaces existing pronouncements and practices with a single, integrated accounting framework for derivatives and hedging activities. This statement requires that all derivatives be recognized on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Additionally, the change in fair value of a derivative which is not effective as a hedge will be immediately recognized in earnings. The delay was effected through the issuance of SFAS No. 137, which extends the effective date of SFAS No. 133 requirements to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, which amends the accounting and reporting standards of SFAS 133 for certain derivative instruments and certain hedging activities. As such, the Company expects to adopt the provisions of SFAS No. 133 and SFAS No. 138 as of January 1, 2001. The impact of this statementthese statements is dependent upon the Company's derivative positions and market conditions existing at the date of adoption. Based on existing interpretations of the requirements of SFAS No. 133, as amended, the impact at adoption is not expected to be material to the results of operations or financial position of the Company.
28
FORWARD-LOOKING STATEMENTS AND RISK FACTORS AFFECTING ALLSTATE
       This document contains "forward-looking statements" that anticipate results based on management's plans that are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
       Forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like "plans," "expects," "will," "anticipates," "estimates," "intends," "believes" and other words with similar meanings. These statements may address, among other things, our strategy for growth, product development, regulatory approvals, market position, expenses, financial results and reserves. Forward-looking statements are based on management's current expectations of future events. We cannot guarantee that any forward-looking statement will be accurate. However, we believe that our forward-looking statements are based on reasonable, current expectations and assumptions. We assume no obligation to update any forward-looking statements as a result of new information or future events or developments.
       If the expectations or assumptions underlying our forward-looking statements prove inaccurate or if risks or uncertainties arise, actual results could differ materially from those communicated in our forward-looking statements. In addition to the normal risks of business, Allstate is subject to significant risk factors, including those listed below which apply to it as an insurance business.
••
The implementation of Allstate's multi-access distribution model involves risks and uncertainties that could have a material adverse effect on Allstate's results of operations, liquidity or financial position. More specifically, the following factors could affect Allstate's ability to successfully implement various aspects of its new multi-access distribution model:

—-
The success of Allstate's proposed direct response call centers may be adversely affected by the limited pool of individuals suited and trained to do such work in any geographic area, particularly in light of the current low unemployment rate. The absence of seasoned staff could be a factor impeding the training of staff and the roll-out of the call centers because they represent a new initiative by Allstate involving virtually all new hires.

—-
Allstate's reorganization of its multiple employee agency programs into a single exclusive agency independent contractor program may have a temporary negative impact on written premium. As the
22



reorganization
proceeds, many agents will be deciding whether to convert to independent contractor status and remain with Allstate; to convert to independent contractor status and sell their economic
interest in their book of businesses to an Allstate-approved buyer; or to retire or otherwise voluntarily separate from Allstate. The distractions of this decision making process and the possible
departure of some agents may lead to decreased sales. In addition, possible litigation regarding the reorganization could diminish the gains in efficiency and cost-effectiveness that Allstate expects to realize from the transition to one program.


—-
Allstate's reorganization of its multiple employee agency programs into a single exclusive agency independent contractor program, as well as its plans to sell and service its products through direct response call centers and the Internet, are dependent upon its ability to adapt current computer systems and to develop and implement new systems.

••
There is inherent uncertainty in the process of establishing property-liability loss reserves, particularly reserves for the cost of environmental, asbestos and other mass tort claims. This uncertainty arises from a number of factors, including ongoing interpretation of insurance policy provisions by courts, inconsistent decisions in lawsuits regarding coverage and expanded theories of liability. In addition, on-going changes in claims settlement practices can lead to changes in loss payment patterns. Moreover, while management believes that improved actuarial techniques and databases have assisted in estimating environmental, asbestos and other mass tort net loss reserves, these refinements may subsequently prove to be inadequate indicators of the extent of probable loss. Consequently, ultimate losses could materially exceed established loss reserves and have a material adverse effect on our results of operations, liquidity or financial position.

••
Allstate has experienced, and continuesexpects to expectcontinue to experience, catastrophe losses. While we believe that our catastrophe management initiatives have reduced the potential magnitude of
29


possible future losses, Allstate continues to be exposed to catastrophes that could have a material adverse impact on results of operations, liquidity or financial position. Catastrophic events in the future may indicate that the techniques and data that are used to predict the probability of catastrophes and the extent of the resulting losses are inaccurate.

••
Changes in market interest rates can have adverse effects on Allstate's investment portfolio, investment income and product sales. Increases in market interest rates have an adverse impact on the value of the investment portfolio by decreasing unrealized capital gains.gains on fixed income securities. In addition, increases in market interest rates as compared to rates offered on some of the Life and Savings segment's products could make those products less attractive and therefore decrease sales. Declining market interest rates could have an adverse impact on Allstate's investment income as Allstate reinvests proceeds from positive cash flows from operations and maturing and called investments in new investments that could be yielding less than the portfolio's average rate. Despite recent increases, current market interest rates are lower than the Allstate portfolio average rate.


••
In order to meet the anticipated cash flow requirements of its obligations to policyholders, from time to time Allstate adjusts the effective duration of the assets and liabilities of the Life and Savings segment's investment portfolio. Those adjustments may have an impact on the value of the investment portfolio and on investment income.

••
The insurance business is subject to extensive regulation—regulation—particularly at the state level. Many of these restrictions affect Allstate's ability to operate and grow its businesses in a profitable manner. In particular, the PP&C&C segment's implementation of a tiered-based pricing model for its private passenger auto business is subject to state regulation of auto insurance rates.

••
Recently, the competitive pricing environment for private passenger auto insurance has put pressure on the PP&C&C segment's premium growth and profit margins. However, because industry participants have begun to raise auto insurance rates, generally, Allstate's management believes that this pressure is abating and that industry participants may begin to raise auto insurance rates, generally, in 2000. However,abating. Nevertheless, because Allstate's PP&C&C segment's loss ratio compares favorably to the industry, state regulatory authorities may resist our efforts to raise rates or to maintain them at current levels.

••
Allstate is a holding company with no significant business operations of its own. Consequently, to a large extent, its ability to pay dividends and meet its debt payment obligations is dependent on dividends from its subsidiaries, primarily AIC.

••
State insurance regulatory authorities require insurance companies to maintain specified levels of
23



statutory capital and surplus. In addition, competitive pressures require Allstate's subsidiaries to maintain financial strength or claims-paying ability ratings. These restrictions affect Allstate's ability to pay shareholder dividends and use its capital in other ways.


••
There is uncertainty involved in estimating the availability of reinsurance and the collectibility of reinsurance recoverables. This uncertainty arises from a number of factors, including segregation by the industry generally of reinsurance exposure into separate legal entities.

••
The Life and Savings segment distributes some of its products under agreements with other financial services entities. Termination of such agreements due to changes in control of these non-affiliated entities could have a detrimental effect on the segment's sales. This risk may be increased due to the recent enactment of the Gramm-Leach-Bliley Act of 1999, which eliminates many federal and state law barriers to affiliations among banks, securities firms, insurers and other financial service providers.

••
In November 1999, Allstate announced a program to reduce expenses by approximately $600 million, to be fully realized beginning in 2001. These expense reductions are dependent on the elimination of certain employee positions, the consolidation of Allstate's operations and facilities, and the reorganization of its multiple employee agency programs to a single exclusive
30
agency independent contractor program. The savings are to be invested in technology, competitive pricing and advertising.

••
Allstate maintains a $1.50 billion, five-year revolving line of credit and a $50 million one-year revolving line of credit as potential sources of funds to meet short-term liquidity requirements. In order to borrow on the five-year line of credit, AIC is required to maintain a specified statutory surplus level and the Allstate debt to equity ratio (as defined in the credit agreement) must not exceed a designated level. The ability of Allstate and AIC to meet the requirements is dependent upon their financial condition. If AIC were to sustain significant losses from catastrophes, Allstate and AIC's ability to borrow on the lines of credit could be diminished or eliminated during a period when they might be most in need of capital resources and liquidity.

••
Changes in the severity of claims have an impact on the profitability of Allstate's business. Changes in injury claim severity are driven primarily by inflation in the medical sector of the economy. Changes in auto physical damage claim severity are driven primarily by inflation in auto repair costs, auto parts prices and used car prices. Changes in loss costs for homeowners policies are driven by inflationary pressures in the construction industry, in the cost of building materials and in home furnishings.

••
For its non-standard auto insurance business, Allstate is implementing programs to address the emergence of adverse profitability trends. These programs include additional down-payment requirements, new underwriting guidelines and new rating plans. Allstate expects these programs to have a temporary adverse impact on written premium growth; however,growth. Consequently, they may impede efforts to recruit new agents. However, they should improve profitability over time.

••
A number of enacted and pending legislative measures may lead to increased consolidation and increased competition in the financial services industry. At the federal level, these measures include the recently enacted Gramm-Leach-Bliley Act of 1999, which eliminates many federal and state law barriers to affiliations among banks, securities firms, insurers and other financial service providers. At the state level, these measures include legislation to permit mutual insurance companies to convert to a hybrid structure known as a mutual holding company, thereby allowing insurance companies owned by their policyholders to become stock insurance companies owned (through one or more intermediate holding companies) at least 51% by their policyholders and potentially up to 49% by stockholders. Also several large mutual life insurers have used or are expected to use existing state laws and regulations governing the conversion of mutual insurance companies into stock insurance companies (demutualization). These measures may also increase competition for capital among financial service providers.

••
Deferred annuities and interest-sensitive life insurance products receive favorable policyholder taxation under current tax laws and regulations. Any legislative or regulatory changes that adversely alter this treatment are likely to negatively affect the demand for these products.

••
Due
to legislative and regulatory reform of the auto insurance system in New Jersey that included regulated rate reductions and coverage changes effective
for new policies written and renewals processed on and after March 22, 1999, Allstate New Jersey Insurance Company, a wholly owned Allstate subsidiary, experienced decreased average premiums in
1999 and the first quarter of 2000.
24



Management
expects that these reforms will also lead to improved loss experience in the future. However, it is possible that losses may increase or that any decrease in losses will not be commensurate
with the reductions in premiums.
•
The adoptions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"Activities," as amended, is not expected to be material to the results of operations of the Company. However, the impact is dependent upon market conditions and our holdings existing at the date of adoption, which for Allstate will be January 1, 2001.

••
Financial strength ratings have become an increasingly important factor in establishing the competitive position of insurance companies and may generally be expected to have an effect on an insurance company's business. On an ongoing basis, rating organizations review the financial performance and condition of insurers. Downgrades in one or more of the ratings of the Allstate companies could have a material adverse effect on Allstate's business, financial condition and results of operations.

31
25PART II.  Other Information
Item 1.  Legal Proceedings







PART II.
 
OTHER INFORMATION
 

Item 1.
 
 
 

Legal Proceedings
 

The discussion "Regulation and Legal Proceedings" in Part I, Item 1, Note 5 of this Form 10-Q is incorporated herein by reference. That discussion updates the discussion "Regulation and Legal Proceedings" beginning on page A-27 of Allstate's 2000
Notice of Annual Meeting and Proxy Statement.
 

Item 5.
 
 
 

Other Information
 

Item 6.
 
 
 

Exhibits and Reports on Form 8-K
 

 
 
 
 

(a)  Exhibits
 

 
 
 
 

An Exhibit Index has been filed as part of this report on Page E-1.
 

 
 
 
 

(b)  Reports on Form 8-K.
 

 
 
 
 

Registrant filed a Current Report on Form 8-K on January 13, 2000 (Items 5 and 7).


The discussion "Regulation and Legal Proceedings" in Part I, Item 1, Note 5 of this Form 10-Q is incorporated herein by reference. That discussion updates the discussion "Regulation and Legal Proceedings" beginning on page A-27 of Allstate's 2000 Notice of Annual Meeting and Proxy Statement.
26Item 4.  Submission of Matters to a Vote of Security Holders
On May 18, 2000, Allstate held its annual meeting of stockholders. Thirteen directors were elected for terms expiring at the 2001 annual meeting of stockholders. In addition, the stockholders ratified the appointment of Deloitte & Touche LLP as independent auditors for 2000. The stockholders did not approve stockholder proposals regarding cumulative voting in the election of directors and endorsement of the CERES principles.
    Election of Directors.
Nominee
 
Votes for
 
Votes Withheld
F. Duane Ackerman
 
604,470,325
 
13,370,730
James G. Andress
 
604,143,447
 
13,697,608
Warren L. Batts
 
603,379,606
 
14,461,449
Edward A. Brennan
 
600,295,342
 
17,545,713
James M. Denny
 
603,213,369
 
14,627,686
W. James Farrell
 
604,023,754
 
13,817,301
Ronald T. LeMay
 
604,120,812
 
13,720,243
Edward M. Liddy
 
601,982,624
 
15,858,431
Michael A. Miles
 
603,893,482
 
13,947,573
H. John Riley, Jr.
 
604,702,463
 
13,138,592
Joshua I. Smith
 
603,842,267
 
13,998,788
Judith A. Sprieser
 
604,347,405
 
13,493,650
Mary Alice Taylor
 
604,440,768
 
13,400,287
    Ratify appointment of Deloitte & Touche as the Company's auditors for 2000.
Votes For
 
Votes Against
 
Votes Abstained
609,379,919
 
4,713,041
 
3,760,095
    Stockholder proposal for cumulative voting in the election of directors.
Votes For
 
Votes Against
 
Votes Abstained
 
Broker Non-votes
182,391,562
 
325,256,800
 
10,646,678
 
99,558,015
    Stockholder proposal for endorsement of CERES principles.
Votes For
 
Votes Against
 
Votes Abstained
 
Broker Non-votes
48,910,096
 
432,007,325
 
37,377,619
 
99,558,015
32
Item 6.  Exhibits and Reports on Form 8-K





(a)
Exhibits
    An Exhibit Index has been filed as part of this report on Page E-1.
(b)
Reports on Form 8-K.
    Registrant filed a Current Report on Form 8-K on April 27, 2000 (Items 5 and 7)
    Registrant filed a Current Report on Form 8-K on May 4, 2000 (Items 5 and 7)
    Registrant filed a Current Report on Form 8-K on June 14, 2000 (Items 5 and 7)
    Registrant filed a Current Report on Form 8-K on June 16, 2000 (Items 5 and 7)
33
SIGNATURE
    Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





 THE ALLSTATE CORPORATION
The Allstate Corporation
(Registrant)

August 7, 2000


By:
 

May 11, 1999
 

By
 
 
 

/s/ /s/ SAMUEL H. PILCH     
Samuel H. Pilch, Controller
 

 
 

(Principal(Principal Accounting Officer and duly
authorized Officer of Registrant)


2734








Exhibit No.
 
Description
 
Sequentially
Numbered Page
3(ii
)
By-Laws as amended effective May 18, 2000.
E-2
4
 
Registrant hereby agrees to furnish the Commission, upon request, with the instruments defining the rights of holders of each issue of long-term debt of the Registrant and its consolidated subsidiaries.
 
 —
 
15
 
 
 
Acknowledgment of awareness from Deloitte && Touche LLP dated May 11,August 7, 2000, concerning unaudited interim financial information.
 
 
 

 E-25
 
27
 
 
 
Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only and not filed.
 
 
 

 E-26









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