UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010March 31, 2011
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-11840
THE ALLSTATE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
| 36-3871531 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
2775 Sanders Road, Northbrook, Illinois | 60062 |
(Address of principal executive offices) | (Zip Code) |
(847) 402-5000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X No ___
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | X | Accelerated filer | ___ |
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Non-accelerated filer | ___ (Do not check if a smaller reporting company) | Smaller reporting company | ___ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ___ No X
As of October 22, 2010,April 18, 2011, the registrant had 538,183,935522,960,958 common shares, $.01 par value, outstanding.
THE ALLSTATE CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2010March 31, 2011
PART I | FINANCIAL INFORMATION | PAGE |
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Item 1. | Financial Statements |
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| Condensed Consolidated Statements of Operations for the Three-Month | 1 |
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| Condensed Consolidated Statements of Financial Position as of | 2 |
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| Condensed Consolidated Statements of Cash Flows for the | 3 |
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| Notes to Condensed Consolidated Financial Statements (unaudited) | 4 |
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| Report of Independent Registered Public Accounting Firm |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Highlights |
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| Consolidated Net Income |
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| Property-Liability Highlights |
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| Allstate Protection Segment |
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| Discontinued Lines and Coverages Segment |
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| Property-Liability Investment Results |
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| Allstate Financial Highlights |
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| Allstate Financial Segment |
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| Investments Highlights |
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| Investments |
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| Capital Resources and Liquidity Highlights |
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| Capital Resources and Liquidity |
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Item 4. | Controls and Procedures |
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PART II | OTHER INFORMATION |
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Item 1. | Legal Proceedings |
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Item 1A. | Risk Factors |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 6. | Exhibits |
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THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in millions, except per share data) |
| Three Months Ended |
| Nine Months Ended |
| Three months ended | ||||||
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| September 30, |
| September 30, |
| March 31, | ||||||
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| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2011 |
| 2010 |
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| (unaudited) |
| (unaudited) |
| (unaudited) | ||||||
Revenues |
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Property-liability insurance premiums | $ | 6,499 | $ | 6,535 | $ | 19,515 | $ | 19,677 | $ | 6,448 | $ | 6,503 |
Life and annuity premiums and contract charges |
| 548 |
| 482 |
| 1,637 |
| 1,460 |
| 569 |
| 544 |
Net investment income |
| 1,005 |
| 1,084 |
| 3,104 |
| 3,368 |
| 982 |
| 1,050 |
Realized capital gains and losses: |
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Total other-than-temporary impairment losses |
| (99) |
| (539) |
| (637) |
| (1,735) |
| (156) |
| (250) |
Portion of loss recognized in other comprehensive income |
| (68) |
| 147 |
| (91) |
| 301 |
| (27) |
| (5) |
Net other-than-temporary impairment losses recognized in earnings |
| (167) |
| (392) |
| (728) |
| (1,434) |
| (183) |
| (255) |
Sales and other realized capital gains and losses |
| 23 |
| (127) |
| (215) |
| 884 |
| 279 |
| (93) |
Total realized capital gains and losses |
| (144) |
| (519) |
| (943) |
| (550) |
| 96 |
| (348) |
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| 8,095 |
| 7,749 |
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| 7,908 |
| 7,582 |
| 23,313 |
| 23,955 |
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Costs and expenses |
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Property-liability insurance claims and claims expense |
| 4,603 |
| 4,573 |
| 14,109 |
| 14,295 |
| 4,476 |
| 4,792 |
Life and annuity contract benefits |
| 445 |
| 382 |
| 1,372 |
| 1,176 |
| 454 |
| 442 |
Interest credited to contractholder funds |
| 445 |
| 496 |
| 1,358 |
| 1,636 |
| 418 |
| 463 |
Amortization of deferred policy acquisition costs |
| 1,006 |
| 1,023 |
| 2,969 |
| 3,649 |
| 1,051 |
| 1,014 |
Operating costs and expenses |
| 828 |
| 744 |
| 2,446 |
| 2,247 |
| 838 |
| 829 |
Restructuring and related charges |
| 9 |
| 35 |
| 33 |
| 112 |
| 9 |
| 11 |
Interest expense |
| 91 |
| 106 |
| 275 |
| 291 |
| 92 |
| 92 |
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| 7,427 |
| 7,359 |
| 22,562 |
| 23,406 |
| 7,338 |
| 7,643 |
Gain on disposition of operations |
| 9 |
| 2 |
| 12 |
| 6 | ||||
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Income from operations before income tax expense |
| 490 |
| 225 |
| 763 |
| 555 | ||||
(Loss) gain on disposition of operations |
| (23) |
| 1 | ||||||||
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Income tax expense |
| 123 |
| 4 |
| 131 |
| 219 | ||||
Income from operations before income tax expense (benefit) |
| 734 |
| 107 | ||||||||
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Income tax expense (benefit) |
| 215 |
| (13) | ||||||||
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Net income | $ | 367 | $ | 221 | $ | 632 | $ | 336 | $ | 519 | $ | 120 |
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Earnings per share: |
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Net income per share - Basic | $ | 0.68 | $ | 0.41 | $ | 1.17 | $ | 0.62 | $ | 0.98 | $ | 0.22 |
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Weighted average shares - Basic |
| 540.9 |
| 539.9 |
| 540.6 |
| 539.5 |
| 531.0 |
| 540.5 |
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Net income per share - Diluted | $ | 0.68 | $ | 0.41 | $ | 1.16 | $ | 0.62 | $ | 0.97 | $ | 0.22 |
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Weighted average shares - Diluted |
| 543.0 |
| 541.5 |
| 542.7 |
| 540.5 |
| 533.6 |
| 541.8 |
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Cash dividends declared per share | $ | 0.20 | $ | 0.20 | $ | 0.60 | $ | 0.60 | $ | 0.21 | $ | 0.20 |
See notes to condensed consolidated financial statements.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ in millions, except par value data) |
| September 30, |
| December 31, |
| March 31, |
| December 31, |
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| 2010 |
| 2009 |
| 2011 |
| 2010 |
Assets |
| (unaudited) |
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Investments: |
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Fixed income securities, at fair value (amortized cost $80,786 and $81,243) | $ | 83,193 | $ | 78,766 | ||||
Equity securities, at fair value (cost $3,447 and $4,845) |
| 3,707 |
| 5,024 | ||||
Investments |
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Fixed income securities, at fair value (amortized cost $79,292 and $78,786) | $ | 80,242 | $ | 79,612 | ||||
Equity securities, at fair value (cost $3,792 and $4,228) |
| 4,437 |
| 4,811 | ||||
Mortgage loans |
| 6,961 |
| 7,935 |
| 6,582 |
| 6,679 |
Limited partnership interests |
| 3,454 |
| 2,744 |
| 4,077 |
| 3,816 |
Short-term, at fair value (amortized cost $2,776 and $3,056) |
| 2,776 |
| 3,056 | ||||
Short-term, at fair value (amortized cost $1,986 and $3,279) |
| 1,986 |
| 3,279 | ||||
Other |
| 2,123 |
| 2,308 |
| 2,287 |
| 2,286 |
Total investments |
| 102,214 |
| 99,833 |
| 99,611 |
| 100,483 |
Cash |
| 500 |
| 612 |
| 641 |
| 562 |
Premium installment receivables, net |
| 4,981 |
| 4,839 |
| 4,842 |
| 4,839 |
Deferred policy acquisition costs |
| 4,671 |
| 5,470 |
| 4,697 |
| 4,769 |
Reinsurance recoverables, net |
| 6,597 |
| 6,355 |
| 6,589 |
| 6,552 |
Accrued investment income |
| 847 |
| 864 |
| 885 |
| 809 |
Deferred income taxes |
| 670 |
| 1,870 |
| 612 |
| 784 |
Property and equipment, net |
| 922 |
| 990 |
| 912 |
| 921 |
Goodwill |
| 874 |
| 875 |
| 874 |
| 874 |
Other assets |
| 1,799 |
| 1,872 |
| 2,159 |
| 1,605 |
Separate Accounts |
| 8,459 |
| 9,072 |
| 8,603 |
| 8,676 |
Total assets | $ | 132,534 | $ | 132,652 | $ | 130,425 | $ | 130,874 |
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Liabilities |
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Reserve for property-liability insurance claims and claims expense | $ | 19,294 | $ | 19,167 | $ | 19,494 | $ | 19,468 |
Reserve for life-contingent contract benefits |
| 13,955 |
| 12,910 |
| 13,552 |
| 13,482 |
Contractholder funds |
| 48,936 |
| 52,582 |
| 46,834 |
| 48,195 |
Unearned premiums |
| 10,001 |
| 9,822 |
| 9,563 |
| 9,800 |
Claim payments outstanding |
| 733 |
| 742 |
| 761 |
| 737 |
Other liabilities and accrued expenses |
| 5,945 |
| 5,726 |
| 6,369 |
| 5,564 |
Long-term debt |
| 5,909 |
| 5,910 |
| 5,908 |
| 5,908 |
Separate Accounts |
| 8,459 |
| 9,072 |
| 8,603 |
| 8,676 |
Total liabilities |
| 113,232 |
| 115,931 |
| 111,084 |
| 111,830 |
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Commitments and Contingent Liabilities (Note 10) |
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Equity |
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Preferred stock, $1 par value, 25 million shares authorized, none issued |
| — |
| — |
| -- |
| -- |
Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 538 million and 537 million shares outstanding |
| 9 |
| 9 | ||||
Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 524 million and 533 million shares outstanding |
| 9 |
| 9 | ||||
Additional capital paid-in |
| 3,165 |
| 3,172 |
| 3,156 |
| 3,176 |
Retained income |
| 31,781 |
| 31,492 |
| 32,377 |
| 31,969 |
Deferred ESOP expense |
| (45) |
| (47) |
| (42) |
| (44) |
Treasury stock, at cost (362 million and 363 million shares) |
| (15,755) |
| (15,828) | ||||
Treasury stock, at cost (376 million and 367 million shares) |
| (16,173) |
| (15,910) | ||||
Accumulated other comprehensive income: |
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Unrealized net capital gains and losses: |
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Unrealized net capital losses on fixed income securities with OTTI |
| (200) |
| (441) |
| (167) |
| (190) |
Other unrealized net capital gains and losses |
| 1,919 |
| (1,072) |
| 1,186 |
| 1,089 |
Unrealized adjustment to DAC, DSI and insurance reserves |
| (427) |
| 643 |
| 60 |
| 36 |
Total unrealized net capital gains and losses |
| 1,292 |
| (870) |
| 1,079 |
| 935 |
Unrealized foreign currency translation adjustments |
| 54 |
| 46 |
| 79 |
| 69 |
Unrecognized pension and other postretirement benefit cost |
| (1,227) |
| (1,282) |
| (1,173) |
| (1,188) |
Total accumulated other comprehensive income (loss) |
| 119 |
| (2,106) | ||||
Total accumulated other comprehensive loss |
| (15) |
| (184) | ||||
Total shareholders’ equity |
| 19,274 |
| 16,692 |
| 19,312 |
| 19,016 |
Noncontrolling interest |
| 28 |
| 29 |
| 29 |
| 28 |
Total equity |
| 19,302 |
| 16,721 |
| 19,341 |
| 19,044 |
Total liabilities and equity | $ | 132,534 | $ | 132,652 | $ | 130,425 | $ | 130,874 |
See notes to condensed consolidated financial statements.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions) |
| Nine Months Ended |
| Three months ended | ||||
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| March 31, | ||||||
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| 2010 |
| 2009 |
| 2011 |
| 2010 |
Cash flows from operating activities |
| (unaudited) |
| (unaudited) | ||||
Net income | $ | 632 | $ | 336 | $ | 519 | $ | 120 |
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation, amortization and other non-cash items |
| 55 |
| (87) |
| 31 |
| 16 |
Realized capital gains and losses |
| 943 |
| 550 |
| (96) |
| 348 |
Gain on disposition of operations |
| (12) |
| (6) | ||||
Loss (gain) on disposition of operations |
| 23 |
| (1) | ||||
Interest credited to contractholder funds |
| 1,358 |
| 1,636 |
| 418 |
| 463 |
Changes in: |
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Policy benefits and other insurance reserves |
| 143 |
| (460) |
| (58) |
| 188 |
Unearned premiums |
| 172 |
| 6 |
| (248) |
| (261) |
Deferred policy acquisition costs |
| (138) |
| 471 |
| 72 |
| 30 |
Premium installment receivables, net |
| (137) |
| (108) |
| 3 |
| 24 |
Reinsurance recoverables, net |
| (229) |
| (101) |
| (117) |
| (72) |
Income taxes |
| 178 |
| 1,175 |
| 200 |
| 73 |
Other operating assets and liabilities |
| 58 |
| 103 |
| (21) |
| 36 |
Net cash provided by operating activities |
| 3,023 |
| 3,515 |
| 726 |
| 964 |
Cash flows from investing activities |
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Proceeds from sales |
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Fixed income securities |
| 17,345 |
| 16,098 |
| 8,363 |
| 4,930 |
Equity securities |
| 4,262 |
| 4,636 |
| 642 |
| 1,990 |
Limited partnership interests |
| 387 |
| 293 |
| 113 |
| 146 |
Mortgage loans |
| 121 |
| 140 |
| 26 |
| 3 |
Other investments |
| 98 |
| 429 |
| 63 |
| 37 |
Investment collections |
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Fixed income securities |
| 3,672 |
| 3,947 |
| 1,201 |
| 1,122 |
Mortgage loans |
| 784 |
| 1,093 |
| 88 |
| 263 |
Other investments |
| 96 |
| 99 |
| 77 |
| 18 |
Investment purchases |
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Fixed income securities |
| (20,712) |
| (22,694) |
| (10,207) |
| (7,099) |
Equity securities |
| (2,721) |
| (5,991) |
| (144) |
| (556) |
Limited partnership interests |
| (1,040) |
| (674) |
| (334) |
| (185) |
Mortgage loans |
| (55) |
| (23) |
| (26) |
| (1) |
Other investments |
| (99) |
| (54) |
| (58) |
| (43) |
Change in short-term investments, net |
| 104 |
| 5,437 |
| 1,649 |
| 411 |
Change in other investments, net |
| (464) |
| (144) |
| (119) |
| (49) |
Purchases of property and equipment, net |
| (48) |
| (24) | ||||
Disposition of operations |
| 7 |
| 12 |
| (1) |
| -- |
Purchases of property and equipment, net |
| (114) |
| (143) | ||||
Net cash provided by investing activities |
| 1,671 |
| 2,461 |
| 1,285 |
| 963 |
Cash flows from financing activities |
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Proceeds from issuance of long-term debt |
| — |
| 1,003 | ||||
Repayment of long-term debt |
| (1) |
| (1) | ||||
Contractholder fund deposits |
| 2,297 |
| 3,252 |
| 596 |
| 828 |
Contractholder fund withdrawals |
| (6,779) |
| (9,485) |
| (2,122) |
| (2,569) |
Dividends paid |
| (322) |
| (434) |
| (107) |
| (107) |
Treasury stock purchases |
| (5) |
| (3) |
| (305) |
| (5) |
Shares reissued under equity incentive plans, net |
| 26 |
| 2 |
| 9 |
| 14 |
Excess tax benefits on share-based payment arrangements |
| (7) |
| (6) |
| (3) |
| (2) |
Other |
| (15) |
| 8 |
| -- |
| 6 |
Net cash used in financing activities |
| (4,806) |
| (5,664) |
| (1,932) |
| (1,835) |
Net (decrease) increase in cash |
| (112) |
| 312 | ||||
Net increase in cash |
| 79 |
| 92 | ||||
Cash at beginning of period |
| 612 |
| 415 |
| 562 |
| 612 |
Cash at end of period | $ | 500 | $ | 727 | $ | 641 | $ | 704 |
See notes to condensed consolidated financial statements.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
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 investment subsidiaries, including Allstate Life Insurance Company (“ALIC”) (collectively referred to as the “Company” or “Allstate”).
The condensed consolidated financial statements and notes as of September 30, 2010,March 31, 2011, and for the three-month and nine-month periods ended September 30,March 31, 2011 and 2010 and 2009 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.2010. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.
To conform to the current year presentation, certain amounts in the prior year condensed consolidated financial statements and notes have been reclassified.
Adopted accounting standards
Disclosures about Fair Value Measurements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance which expands disclosure requirements relating to fair value measurements. The guidance adds requirements for disclosing amounts of and reasons for significant transfers into and out of Levels 1 and 2 and requires gross rather than net disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The guidance also provides clarification that fair value measurement disclosures are required for each class of assets and liabilities. Disclosures about the valuation techniques and inputs used to measure fair value for measurements that fall in either Level 2 or Level 3 are also required. The Company adopted the provisions of the new guidance as of March 31, 2010, except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which are required for fiscal years beginning after December 15, 2010. Disclosures are not required for earlier periods presented for comparative purposes. The new guidance affects disclosures only; and therefore, the adoption had no impact on the Company’s results of operations or financial position.
Consolidation of Variable Interest Entities
In June 2009, the FASB issued new accounting guidance which requires an entity to perform a qualitative analysis to determine whether it holds a controlling financial interest (i.e., is a primary beneficiary) in a variable interest entity (“VIE”). The analysis identifies the primary beneficiary of a VIE as the entity that has both the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. The Company adopted the new guidance as of January 1, 2010. The adoption resulted in the consolidation of four VIEs for which the Company concluded it is the primary beneficiary as of January 1, 2010.
Two of the consolidated VIEs hold investments managed by Allstate Investment Management Company (“AIMCO”), a subsidiary of the Company. Consolidation as of January 1, 2010 resulted in an increase in total assets of $696 million, an increase in total liabilities of $679 million, an increase in retained income of $7 million and an increase in noncontrolling interest of $10 million. During the first quarter of 2010, the Company sold substantially all its variable interests in these two VIEs. As a result, the Company deconsolidated the VIEs as of March 26, 2010. The Condensed Consolidated Statement of Operations for the nine months ended September 30, 2010 reflects the effect of the consolidation for the portion of the period the Company was the primary beneficiary, which was not material.
The adoption also resulted in the consolidation of two insurance company affiliates, Allstate Texas Lloyds and Allstate County Mutual Insurance Company, that underwrite homeowners and auto insurance polices, respectively, and reinsure all of their net business to AIC. Consolidation as of January 1, 2010 resulted in an increase in total assets of $38 million, an increase in total liabilities of $34 million, an increase in retained income of $3 million and an increase in unrealized net capital gains and losses of $1 million.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In the normal course of investing activities, the Company invests in variable interests issued by VIEs. These variable interests include structured investments such as residential mortgage-backed securities, commercial mortgage-backed securities and asset-backed securities as well as limited partnerships, special purpose entities and trusts. For these variable interests, the Company concluded it is not the primary beneficiary due to the amount of the Company’s interest in the VIEs and the Company’s lack of power to direct the activities that are most significant to the economic performance of the VIEs. The Company’s maximum exposure to loss on these interests is limited to the amount of the Company’s investment, including future funding commitments, as applicable.
Embedded Credit Derivatives Scope Exception
In March 2010, the FASB issued accounting guidance clarifying the scope exception for embedded credit derivative features, including those in certain collateralized debt obligations and synthetic collateralized debt obligations. Embedded credit derivative features related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another continue to qualify for the scope exception. Other embedded credit derivative features must be analyzed for potential bifurcation and separate accounting as a derivative, with periodic changes in fair value recorded in net income. The adoption of the new guidance as of July 1, 2010 resulted in the bifurcation of the credit default swaps embedded in synthetic collateralized debt obligations purchased after January 1, 2007, and the related net unrealized capital losses were reclassified from accumulated other comprehensive income to retained income. The cumulative effect of adoption, net of related deferred policy acquisition costs (“DAC”), deferred sales inducement costs (“DSI”) and tax adjustments, was a $19 million increase in unrealized net capital gains and losses, a $9 million decrease in total assets and a $28 million decrease in retained income.
Pending accounting standards
Consolidation Analysis Considering Investments Held through Separate Accounts
In April 2010, the FASBFinancial Accounting Standards Board (“FASB”) issued guidance clarifying that an insurer is not required to combine interests in investments held in a qualifying separate account with its interests in the same investments held in the general account when performing a consolidation evaluation. The guidance is effective for fiscal years and interim periods beginning after December 15, 2010 with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company’s resultsas of operations or financial position.
Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses
In July 2010, the FASB issued guidance requiring expanded disclosures relating to the credit quality of financing receivables and the related allowances for credit losses. The new guidance requires a greater level of disaggregated information, as well as additional disclosures about credit quality indicators, past due information and modifications of its financing receivables. The new guidance is effective for reporting periods ending after December 15, 2010. The new guidance affects disclosures only; and therefore, the adoption will haveJanuary 1, 2011 had no impact on the Company’s results of operations or financial position.
Disclosure of Supplementary Pro Forma Information for Business Combinations
In December 2010, the FASB issued disclosure guidance for entities that enter into business combinations that are material. The guidance specifies that if an entity presents comparative financial statements, the entity should disclose proforma revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The guidance expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination. The Company will apply the guidance to any business combinations entered into on or after January 1, 2011.
Pending accounting standards
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB issued guidance modifying the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. The guidance specifies that incremental directthe costs of contract acquisition attributable tomust be based on successful effortsefforts. The guidance also specifies that advertising costs should be included as deferred acquisition costs. The guidance also specifies that deferred acquisition costs include advertising costs only when the direct-response advertising accounting criteria are met. If application of the guidance would result in the capitalization of acquisition costs that had not been capitalized prior to adoption, the entity may elect not to capitalize those additional costs. The new guidance is effective for reporting periods beginning after December 15, 2011 and should be applied prospectively, with retrospective application permitted. If application of the guidance would result in the capitalization of acquisition costs that had not previously been capitalized prior to adoption, the entity may elect not to capitalize those additional costs. The Company is in the process of evaluating the impact of adoption on the Company’s results of operations and financial position.
Criteria for Classification as a Troubled Debt Restructuring (“TDR”)
In April 2011, the FASB issued clarifying guidance related to determining whether a loan modification or restructuring should be classified as a TDR. The additional guidance provided pertains to the two criteria used to determine whether a TDR exists, specifically whether the creditor has granted a concession and whether the debtor is experiencing financial difficulties. The new guidance is effective for reporting periods beginning on or after June 15, 2011 with early adoption permitted. The guidance related to the identification of a TDR is to be applied retrospectively to the beginning of the annual period of adoption. The measurement of impairment on a TDR
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
identified under this guidance is effective prospectively. Disclosures about the credit quality of financing receivables and the allowance for credit losses previously deferred for TDRs, is also effective for reporting periods beginning on or after June 15, 2011. The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations and financial position.
2. Earnings per share
Basic earnings per share is computed using the weighted average number of common shares outstanding, including unvested participating restricted stock units. Diluted earnings per share is computed using the weighted
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
average number of common and dilutive potential common shares outstanding. For the Company, dilutive potential common shares consist of outstanding stock options and unvested non-participating restricted stock units.
The computation of basic and diluted earnings per share for the three months ended March 31 is presented in the following table.
($ in millions, except per share data) |
| Three months ended |
| Nine months ended |
| 2011 |
| 2010 | ||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
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Numerator: |
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| ||||||||
Net income | $ | 367 | $ | 221 | $ | 632 | $ | 336 | $ | 519 | $ | 120 |
|
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|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
| 540.9 |
| 539.9 |
| 540.6 |
| 539.5 |
| 531.0 |
| 540.5 |
Effect of dilutive potential common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
| 1.9 |
| 1.6 |
| 2.0 |
| 1.0 |
| 2.2 |
| 1.3 |
Restricted stock units (non-participating) |
| 0.2 |
| -- |
| 0.1 |
| -- |
| 0.4 |
| -- |
Weighted average common and dilutive potential common shares outstanding |
| 543.0 |
| 541.5 |
| 542.7 |
| 540.5 |
| 533.6 |
| 541.8 |
|
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|
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|
|
Earnings per share - Basic | $ | 0.68 | $ | 0.41 | $ | 1.17 | $ | 0.62 | $ | 0.98 | $ | 0.22 |
Earnings per share - Diluted | $ | 0.68 | $ | 0.41 | $ | 1.16 | $ | 0.62 | $ | 0.97 | $ | 0.22 |
The effect of dilutive potential common shares does not include the effect of options with an anti-dilutive effect on earnings per share because their exercise prices exceed the average market price of Allstate common shares during the period or for which the unrecognized compensation cost would have an anti-dilutive effect. Options to purchase 27.630.4 million and 25.024.4 million Allstate common shares, with exercise prices ranging from $27.36 to $62.84 and $23.13$27.36 to $64.53, were outstanding at September 30,for the three-month periods ended March 31, 2011 and 2010, and 2009, respectively, but were not included in the computation of diluted earnings per share for the three-month periods then ended. Options to purchase 26.6 million and 26.2 million Allstate common shares, with exercise prices ranging from $27.36 to $64.53 and $23.13 to $65.38, were outstanding at September 30, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share for the nine-month periods then ended.those periods.
3. Supplemental Cash Flow Information
Non-cash investment exchanges, including modifications of certain mortgage loans (primarily refinances at maturity with no concessions granted to the borrower), fixed income securities, limited partnerships and other investments, as well as mergers completed with equity securities, totaled $544$53 million and $342$51 million for the ninethree months ended September 30,March 31, 2011 and 2010, and 2009, respectively.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Liabilities for collateral received in conjunction with the Company’s securities lending program and over-the-counter (“OTC”) derivatives are reported in other liabilities and accrued expenses or other investments in the Condensed Consolidated Statements of Financial Position.investments. The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which for the three months ended March 31 are as follows:
($ in millions) |
| Nine months ended |
| 2011 |
| 2010 | ||
|
| 2010 |
| 2009 |
|
|
|
|
Net change in proceeds managed |
|
|
|
|
|
|
|
|
Net change in short-term investments | $ | 187 | $ | (190) | $ | (351) | $ | 171 |
Operating cash flow provided (used) |
| 187 |
| (190) | ||||
Operating cash flow (used) provided |
| (351) |
| 171 | ||||
Net change in cash |
| 2 |
| -- |
| (3) |
| 6 |
Net change in proceeds managed | $ | 189 | $ | (190) | $ | (354) | $ | 177 |
|
|
|
|
|
|
|
|
|
Net change in liabilities |
|
|
|
|
|
|
|
|
Liabilities for collateral, beginning of year | $ | (658) | $ | (340) | $ | (484) | $ | (658) |
Liabilities for collateral, end of period |
| (469) |
| (530) |
| (838) |
| (481) |
Operating cash flow (used) provided | $ | (189) | $ | 190 | ||||
Operating cash flow provided (used) | $ | 354 | $ | (177) |
4. Investments
Fair values
The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:
($ in millions) |
| Amortized |
| Gross unrealized |
| Fair |
| Amortized |
| Gross unrealized |
| Fair | ||||
|
| cost |
| Gains |
| Losses |
| value |
| cost |
| Gains |
| Losses |
| value |
At September 30, 2010 |
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| ||||||||
March 31, 2011 |
|
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| ||||||||
U.S. government and agencies | $ | 10,721 | $ | 533 | $ | (1) | $ | 11,253 | $ | 6,509 | $ | 277 | $ | (20) | $ | 6,766 |
Municipal |
| 16,366 |
| 803 |
| (401) |
| 16,768 |
| 15,500 |
| 367 |
| (621) |
| 15,246 |
Corporate |
| 34,870 |
| 2,618 |
| (284) |
| 37,204 |
| 41,095 |
| 1,675 |
| (375) |
| 42,395 |
Foreign government |
| 2,946 |
| 482 |
| -- |
| 3,428 |
| 2,822 |
| 306 |
| (11) |
| 3,117 |
Residential mortgage-backed securities (“RMBS”) |
| 9,192 |
| 245 |
| (938) |
| 8,499 |
| 6,907 |
| 195 |
| (572) |
| 6,530 |
Commercial mortgage-backed securities (“CMBS”) |
| 2,375 |
| 59 |
| (441) |
| 1,993 |
| 2,156 |
| 63 |
| (166) |
| 2,053 |
Asset-backed securities (“ABS”) |
| 4,280 |
| 105 |
| (375) |
| 4,010 |
| 4,280 |
| 82 |
| (251) |
| 4,111 |
Redeemable preferred stock |
| 36 |
| 2 |
| -- |
| 38 |
| 23 |
| 1 |
| -- |
| 24 |
Total fixed income securities | $ | 80,786 | $ | 4,847 | $ | (2,440) | $ | 83,193 | $ | 79,292 | $ | 2,966 | $ | (2,016) | $ | 80,242 |
At December 31, 2009 |
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December 31, 2010 |
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| ||||||||
U.S. government and agencies | $ | 7,333 | $ | 219 | $ | (16) | $ | 7,536 | $ | 8,320 | $ | 327 | $ | (51) | $ | 8,596 |
Municipal |
| 21,683 |
| 537 |
| (940) |
| 21,280 |
| 16,201 |
| 379 |
| (646) |
| 15,934 |
Corporate |
| 32,770 |
| 1,192 |
| (847) |
| 33,115 |
| 36,260 |
| 1,816 |
| (421) |
| 37,655 |
Foreign government |
| 2,906 |
| 306 |
| (15) |
| 3,197 |
| 2,821 |
| 347 |
| (10) |
| 3,158 |
RMBS |
| 9,487 |
| 130 |
| (1,630) |
| 7,987 |
| 8,509 |
| 216 |
| (732) |
| 7,993 |
CMBS |
| 3,511 |
| 30 |
| (955) |
| 2,586 |
| 2,213 |
| 58 |
| (277) |
| 1,994 |
ABS |
| 3,514 |
| 62 |
| (550) |
| 3,026 |
| 4,425 |
| 113 |
| (294) |
| 4,244 |
Redeemable preferred stock |
| 39 |
| 1 |
| (1) |
| 39 |
| 37 |
| 1 |
| -- |
| 38 |
Total fixed income securities | $ | 81,243 | $ | 2,477 | $ | (4,954) | $ | 78,766 | $ | 78,786 | $ | 3,257 | $ | (2,431) | $ | 79,612 |
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Scheduled maturities
The scheduled maturities for fixed income securities are as follows at September 30, 2010:as of March 31, 2011:
($ in millions) |
| Amortized |
| Fair |
| Amortized |
| Fair |
|
| cost |
| value | ||||
|
| cost |
| value |
|
|
|
|
Due in one year or less | $ | 3,338 | $ | 3,389 | $ | 2,699 | $ | 2,741 |
Due after one year through five years |
| 25,627 |
| 26,746 |
| 24,998 |
| 25,760 |
Due after five years through ten years |
| 15,835 |
| 17,386 |
| 19,348 |
| 20,199 |
Due after ten years |
| 22,514 |
| 23,163 |
| 21,060 |
| 20,901 |
|
| 67,314 |
| 70,684 |
| 68,105 |
| 69,601 |
RMBS and ABS |
| 13,472 |
| 12,509 |
| 11,187 |
| 10,641 |
Total | $ | 80,786 | $ | 83,193 | $ | 79,292 | $ | 80,242 |
Actual maturities may differ from those scheduled as a result of prepayments by the issuers. Because of the potential for prepayment on RMBS and ABS, they are not categorized by contractual maturity. CMBS are categorized by contractual maturity because they generally are not subject to prepayment risk.
Net investment income
Net investment income for the three months ended March 31 is as follows:
($ in millions) |
| Three months ended |
| Nine months ended |
| 2011 |
| 2010 | ||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
|
|
|
|
Fixed income securities | $ | 926 | $ | 987 | $ | 2,840 | $ | 3,022 | $ | 900 | $ | 959 |
Equity securities |
| 17 |
| 15 |
| 63 |
| 50 |
| 19 |
| 21 |
Mortgage loans |
| 92 |
| 121 |
| 295 |
| 389 |
| 89 |
| 104 |
Limited partnership interests |
| 6 |
| 4 |
| 19 |
| 11 |
| 10 |
| 6 |
Short-term investments |
| 2 |
| 4 |
| 6 |
| 23 |
| 2 |
| 2 |
Other |
| 5 |
| (4) |
| 12 |
| (7) |
| 11 |
| 1 |
Investment income, before expense |
| 1,048 |
| 1,127 |
| 3,235 |
| 3,488 |
| 1,031 |
| 1,093 |
Investment expense |
| (43) |
| (43) |
| (131) |
| (120) |
| (49) |
| (43) |
Net investment income | $ | 1,005 | $ | 1,084 | $ | 3,104 | $ | 3,368 | $ | 982 | $ | 1,050 |
Realized capital gains and losses
Realized capital gains and losses by securityasset type for the three months ended March 31 are as follows:
($ in millions) |
| Three months ended |
| Nine months ended |
| 2011 |
| 2010 | ||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 | ||||
Fixed income securities | $ | 84 | $ | (33) | $ | (240) | $ | 89 | $ | (27) | $ | (136) |
Equity securities |
| 83 |
| (21) |
| 142 |
| (157) |
| 122 |
| 14 |
Mortgage loans |
| (1) |
| (66) |
| (54) |
| (114) |
| (6) |
| (25) |
Limited partnership interests |
| (20) |
| (20) |
| (15) |
| (443) |
| 68 |
| (21) |
Derivatives |
| (286) |
| (364) |
| (779) |
| 151 |
| (67) |
| (185) |
Other |
| (4) |
| (15) |
| 3 |
| (76) |
| 6 |
| 5 |
Realized capital gains and losses | $ | (144) | $ | (519) | $ | (943) | $ | (550) | $ | 96 | $ | (348) |
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Realized capital gains and losses by transaction type for the three months ended March 31 are as follows:
($ in millions) |
| Three months ended |
| Nine months ended |
| 2011 |
| 2010 | ||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 | ||||
Impairment write-downs | $ | (137) | $ | (381) | $ | (599) | $ | (1,292) | $ | (114) | $ | (223) |
Change in intent write-downs |
| (30) |
| (11) |
| (129) |
| (142) |
| (69) |
| (32) |
Net other-than-temporary impairment losses recognized in earnings |
| (167) |
| (392) |
| (728) |
| (1,434) |
| (183) |
| (255) |
Sales |
| 319 |
| 201 |
| 552 |
| 882 |
| 283 |
| 88 |
Valuation of derivative instruments |
| (133) |
| (269) |
| (571) |
| 201 |
| 22 |
| (155) |
Settlements of derivative instruments |
| (152) |
| (92) |
| (209) |
| (52) |
| (89) |
| (30) |
EMA limited partnership income |
| (11) |
| 33 |
| 13 |
| (147) | ||||
Equity method of accounting (“EMA”) limited partnership income |
| 63 |
| 4 | ||||||||
Realized capital gains and losses | $ | (144) | $ | (519) | $ | (943) | $ | (550) | $ | 96 | $ | (348) |
Gross gains of $387$211 million and $341$142 million and gross losses of $173$88 million and $144$74 million were realized on sales of fixed income securities during the three months ended September 30,March 31, 2011 and 2010, and 2009, respectively. Gross gains of $673 million and $1.12 billion and gross losses of $360 million and $303 million were realized on sales of fixed income securities during the nine months ended September 30, 2010 and 2009, respectively.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other-than-temporary impairment losses by asset type for the three months ended March 31 are as follows:
($ in millions) |
| Three months ended |
| Nine months ended |
| 2011 |
| 2010 | ||||||||||||||||||||||
|
| Gross |
| Included |
| Net |
| Gross |
| Included |
| Net | ||||||||||||||||||
Fixed income securities: |
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| ||||||||||||||||||
Municipal | $ | (1 | ) | $ | -- |
| $ | (1 | ) | $ | (106 | ) | $ | 4 |
| $ | (102 | ) | ||||||||||||
Corporate |
| (14 | ) |
| (1 | ) |
| (15 | ) |
| (67 | ) |
| 1 |
|
| (66 | ) | ||||||||||||
RMBS |
| (56 | ) |
| (41 | ) |
| (97 | ) |
| (268 | ) |
| (43 | ) |
| (311 | ) | ||||||||||||
CMBS |
| (1 | ) |
| (26 | ) |
| (27 | ) |
| (44 | ) |
| (37 | ) |
| (81 | ) | ||||||||||||
ABS |
| -- |
|
| -- |
|
| -- |
|
| (9 | ) |
| (16 | ) |
| (25 | ) | ||||||||||||
Total fixed income securities |
| (72 | ) |
| (68 | ) |
| (140 | ) |
| (494 | ) |
| (91 | ) |
| (585 | ) | ||||||||||||
Equity securities |
| (14 | ) |
| -- |
|
| (14 | ) |
| (51 | ) |
| -- |
|
| (51 | ) | ||||||||||||
Mortgage loans |
| (3 | ) |
| -- |
|
| (3 | ) |
| (50 | ) |
| -- |
|
| (50 | ) | ||||||||||||
Limited partnership interests |
| (10 | ) |
| -- |
|
| (10 | ) |
| (42 | ) |
| -- |
|
| (42 | ) | ||||||||||||
Other-than-temporary impairment losses | $ | (99 | ) | $ | (68 | ) | $ | (167 | ) | $ | (637 | ) | $ | (91 | ) | $ | (728 | ) | ||||||||||||
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|
| Gross |
| Included |
| Net |
| Gross |
| Included |
| Net |
| Gross |
| Included |
| Net |
| Gross |
| Included |
| Net | ||||||
Fixed income securities: |
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Municipal | $ | (6 | ) | $ | 2 |
| $ | (4 | ) | $ | (92 | ) | $ | 6 |
| $ | (86 | ) | $ | (27) | $ | (2) | $ | (29) | $ | (37) | $ | -- | $ | (37) |
Corporate |
| (112 | ) |
| (1 | ) |
| (113 | ) |
| (204 | ) |
| (10 | ) |
| (214 | ) |
| (5) |
| 1 |
| (4) |
| (47) |
| 3 |
| (44) |
Foreign government |
| -- |
|
| -- |
|
| -- |
|
| (17 | ) |
| -- |
|
| (17 | ) |
| (1) |
| -- |
| (1) |
| -- |
| -- |
| -- |
RMBS |
| (174 | ) |
| 115 |
|
| (59 | ) |
| (433 | ) |
| 266 |
|
| (167 | ) |
| (72) |
| (25) |
| (97) |
| (88) |
| (7) |
| (95) |
CMBS |
| (90 | ) |
| 62 |
|
| (28 | ) |
| (142 | ) |
| 61 |
|
| (81 | ) |
| (16) |
| (4) |
| (20) |
| (26) |
| -- |
| (26) |
ABS |
| (10 | ) |
| (31 | ) |
| (41 | ) |
| (185 | ) |
| (22 | ) |
| (207 | ) |
| (7) |
| 3 |
| (4) |
| (3) |
| (1) |
| (4) |
Total fixed income securities |
| (392 | ) |
| 147 |
|
| (245 | ) |
| (1,073 | ) |
| 301 |
|
| (772 | ) |
| (128) |
| (27) |
| (155) |
| (201) |
| (5) |
| (206) |
Equity securities |
| (61 | ) |
| -- |
|
| (61 | ) |
| (247 | ) |
| -- |
|
| (247 | ) |
| (20) |
| -- |
| (20) |
| (6) |
| -- |
| (6) |
Mortgage loans |
| (31 | ) |
| -- |
|
| (31 | ) |
| (80 | ) |
| -- |
|
| (80 | ) |
| (6) |
| -- |
| (6) |
| (19) |
| -- |
| (19) |
Limited partnership interests |
| (53 | ) |
| -- |
|
| (53 | ) |
| (296 | ) |
| -- |
|
| (296 | ) |
| (1) |
| -- |
| (1) |
| (24) |
| -- |
| (24) |
Other |
| (2 | ) |
| -- |
|
| (2 | ) |
| (39 | ) |
| -- |
|
| (39 | ) |
| (1) |
| -- |
| (1) |
| -- |
| -- |
| -- |
Other-than-temporary impairment losses | $ | (539 | ) | $ | 147 |
| $ | (392 | ) | $ | (1,735 | ) | $ | 301 |
| $ | (1,434 | ) | $ | (156) | $ | (27) | $ | (183) | $ | (250) | $ | (5) | $ | (255) |
The total amount of other-than-temporary impairment losses included in accumulated other comprehensive income at the time of impairment for fixed income securities, which were not included in earnings, are presented in the following table. The amount excludes $330$274 million and $192$322 million as of September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.
($ in millions) |
| September 30, |
| December 31, |
| March 31, |
| December 31, |
|
| 2011 |
| 2010 | ||||
Municipal | $ | (8) | $ | (10) | $ | (14) | $ | (27) |
Corporate |
| (48) |
| (51) |
| (32) |
| (31) |
RMBS |
| (484) |
| (594) |
| (417) |
| (467) |
CMBS |
| (58) |
| (127) |
| (42) |
| (49) |
ABS |
| (40) |
| (89) |
| (26) |
| (41) |
Total | $ | (638) | $ | (871) | $ | (531) | $ | (615) |
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Rollforwards of the cumulative credit losses recognized in earnings for fixed income securities held as of the end of the periodMarch 31 are as follows:
|
| Three months ended |
| |||||||||||
($ in millions) |
| Three months ended |
| Nine months ended |
| 2011 |
|
| 2010 |
| ||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 | ||||||
Beginning balance | $ | (1,309) | $ | (1,506) | $ | (1,187) | $ | -- | $ | (1,046 | ) | $ | (1,187 | ) |
Beginning balance of cumulative credit loss for securities held at April 1, 2009 |
| -- |
| -- |
| -- |
| (1,357) | ||||||
Cumulative effect of change in accounting principle |
| 81 |
| -- |
| 81 |
| -- | ||||||
Additional credit loss for securities previously other-than-temporarily impaired |
| (101) |
| (88) |
| (265) |
| (122) |
| (59 | ) |
| (101 | ) |
Additional credit loss for securities not previously other-than-temporarily impaired |
| (9) |
| (157) |
| (197) |
| (315) |
| (27 | ) |
| (79 | ) |
Reduction in credit loss for securities disposed or collected |
| 104 |
| 396 |
| 330 |
| 439 |
| 153 |
|
| 131 |
|
Reduction in credit loss for securities other-than-temporarily impaired to fair value |
| 42 |
| -- |
| 43 |
| -- | ||||||
Change in credit loss due to accretion of increase in cash flows and time value of cash flows for securities previously other-than-temporarily impaired |
| 1 |
| -- |
| 4 |
| -- | ||||||
Reduction in credit loss for securities the Company has made the decision to sell or more likely than not will be required to sell |
| 15 |
|
| -- |
| ||||||||
Change in credit loss due to accretion of increase in cash flows |
| 1 |
|
| -- |
| ||||||||
Ending balance | $ | (1,191) | $ | (1,355) | $ | (1,191) | $ | (1,355) | $ | (963 | ) | $ | (1,236 | ) |
The Company uses its best estimate of future cash flows expected to be collected from the fixed income security, discounted at the security’s original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists. The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration, available reserves or escrows, current subordination levels, third party guarantees and other credit enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate recovery value if the Company determines that the security is dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income. If the Company determines that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unrealized net capital gains and losses
Unrealized net capital gains and losses included in accumulated other comprehensive income are as follows:
($ in millions) |
| Fair |
| Gross unrealized |
| Unrealized net |
| Fair |
|
| Gross unrealized |
| Unrealized net | ||||||||
At September 30, 2010 |
| value |
| Gains |
| Losses |
| gains (losses) | |||||||||||||
March 31, 2011 |
| value |
|
| Gains |
|
| Losses |
|
| gains (losses) | ||||||||||
Fixed income securities | $ | 83,193 | $ | 4,847 | $ | (2,440) |
| $ 2,407 | $ | 80,242 |
| $ | 2,966 |
| $ | (2,016 | ) |
| $ | 950 |
|
Equity securities |
| 3,707 |
| 363 |
| (103) |
| 260 |
| 4,437 |
|
| 707 |
|
| (62 | ) |
|
| 645 |
|
Short-term investments |
| 2,776 |
| -- |
| -- |
| -- |
| 1,986 |
|
| -- |
|
| -- |
|
|
| -- |
|
Derivative instruments |
| (12) |
| 2 |
| (19) |
| (17) |
| (26 | ) |
| -- |
|
| (30 | ) |
|
| (30 | ) |
EMA limited partnership interests (2) |
|
|
|
|
|
|
|
|
|
|
| 7 |
| ||||||||
Unrealized net capital gains and losses, pre-tax |
|
|
|
|
|
|
| 2,650 |
|
|
|
|
|
|
|
|
|
|
| 1,572 |
|
Amounts recognized for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance reserves (3) |
|
|
|
|
|
|
| (608) |
|
|
|
|
|
|
|
|
|
|
| (2 | ) |
DAC and DSI (4) |
|
|
|
|
|
|
| (49) |
|
|
|
|
|
|
|
|
|
|
| 95 |
|
Amounts recognized |
|
|
|
|
|
|
| (657) |
|
|
|
|
|
|
|
|
|
|
| 93 |
|
Deferred income taxes |
|
|
|
|
|
|
| (701) |
|
|
|
|
|
|
|
|
|
|
| (586 | ) |
Unrealized net capital gains and losses, after-tax |
|
|
|
|
|
|
| $ 1,292 |
|
|
|
|
|
|
|
|
|
| $ | 1,079 |
|
(1) Unrealized net capital gains and losses for fixed income securities as of September 30, 2010 comprises $(308) million related to unrealized net capital losses on fixed income securities with OTTI and $2,715 million related to other unrealized net capital gains and losses.
(2)Included in the fair value of derivative instruments are $2$(4) million classified as assets and $14$22 million classified as liabilities.
(2)Unrealized net capital gains and losses for limited partnership interest represent the Company’s share of EMA limited partnerships’ other comprehensive income. Fair value and gross gains and losses are not applicable.
(3)The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. Although the Company evaluates premium deficiencies on the combined performance of life insurance and immediate annuities with life contingencies, the adjustment primarily relates to structured settlement annuities with life contingencies, in addition to annuity buy-outs and certain payout annuities with life contingencies.
(4)The DAC and DSI adjustment balance represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized.
|
| Fair |
| Gross unrealized |
| Unrealized net |
| Fair |
|
| Gross unrealized |
| Unrealized net | ||||||||
At December 31, 2009 |
| value |
| Gains |
| Losses |
| gains (losses) | |||||||||||||
December 31, 2010 |
| value |
|
| Gains |
|
| Losses |
|
| gains (losses) | ||||||||||
Fixed income securities | $ | 78,766 | $ | 2,477 | $ | (4,954) |
| $ (2,477) | $ | 79,612 |
| $ | 3,257 |
| $ | (2,431 | ) |
| $ | 826 |
|
Equity securities |
| 5,024 |
| 381 |
| (202) |
| 179 |
| 4,811 |
|
| 646 |
|
| (63 | ) |
|
| 583 |
|
Short-term investments |
| 3,056 |
| -- |
| -- |
| -- |
| 3,279 |
|
| -- |
|
| -- |
|
|
| -- |
|
Derivative instruments |
| (20) |
| 2 |
| (25) |
| (23) |
| (17 | ) |
| 2 |
|
| (24 | ) |
|
| (22 | ) |
Unrealized net capital gains and losses, pre-tax |
|
|
|
|
|
|
| (2,321) |
|
|
|
|
|
|
|
|
|
|
| 1,387 |
|
Amounts recognized for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance reserves |
|
|
|
|
|
|
| -- |
|
|
|
|
|
|
|
|
|
|
| (41 | ) |
DAC and DSI |
|
|
|
|
|
|
| 990 |
|
|
|
|
|
|
|
|
|
|
| 97 |
|
Amounts recognized |
|
|
|
|
|
|
| 990 |
|
|
|
|
|
|
|
|
|
|
| 56 |
|
Deferred income taxes |
|
|
|
|
|
|
| 461 |
|
|
|
|
|
|
|
|
|
|
| (508 | ) |
Unrealized net capital gains and losses, after-tax |
|
|
|
|
|
|
| $ (870) |
|
|
|
|
|
|
|
|
|
| $ | 935 |
|
(1)Unrealized net capital gains and losses for fixed income securities as of December 31, 2009 comprises $(679) million related to unrealized net capital losses on fixed income securities with OTTI and $(1,798) million related to other unrealized net capital gains and losses.
(2)Included in the fair value of derivative instruments are $(2)$2 million classified as assets and $18$19 million classified as liabilities.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Change in unrealized net capital gains and losses
The change in unrealized net capital gains and losses for the ninethree months ended September 30, 2010March 31, 2011 is as follows:
| ||
|
|
|
|
| |
|
| |
|
| |
| ||
|
| |
|
| |
|
| |
|
| |
|
|
|
($ in millions) |
|
|
|
|
|
|
|
|
|
Fixed income securities | $ | 124 |
|
|
Equity securities |
| 62 |
|
|
Derivative instruments |
| (8 | ) |
|
EMA limited partnership interests |
| 7 |
|
|
Total |
| 185 |
|
|
Amounts recognized for: |
|
|
|
|
Insurance reserves |
| 39 |
|
|
DAC and DSI |
| (2 | ) |
|
Increase in amounts recognized |
| 37 |
|
|
Deferred income taxes |
| (78 | ) |
|
Increase in unrealized net capital gains and losses | $ | 144 |
|
|
Portfolio monitoring
The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made the decision to sell or whether it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, the security’s decline in fair value is considered other than temporary and is recorded in earnings.
If the Company has not made the decision to sell the fixed income security and it is not more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company evaluates whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security. The Company calculates the estimated recovery value by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, and compares this to the amortized cost of the security. If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income.
For equity securities, the Company considers various factors, including whether it has the intent and ability to hold the equity security for a period of time sufficient to recover its cost basis. Where the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the equity security’s decline in fair value is considered other than temporary and is recorded in earnings. For equity securities managed by a third party, the Company has contractually retained its decision making authority as it pertains to selling equity securities that are in an unrealized loss position.
The Company’s portfolio monitoring process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its amortized cost (for fixed income securities) or cost (for equity securities) is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which the Company may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security. Inherent in the Company’s evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors considered in evaluating whether a decline in fair value is other than temporary are: 1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; 2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and 3) the length of time and extent to which the fair value has been less than amortized cost or cost.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the gross unrealized losses and fair value of fixed income and equity securities by the length of time that individual securities have been in a continuous unrealized loss position.
($ in millions) |
| Less than 12 months |
| 12 months or more |
| Total | ||||||||
|
| Number |
| Fair |
| Unrealized |
| Number |
| Fair |
| Unrealized |
| unrealized |
|
| of issues |
| value |
| losses |
| of issues |
| value |
| losses |
| losses |
At September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
| 6 | $ | 633 | $ | (1) |
| -- | $ | -- | $ | -- | $ | (1) |
Municipal |
| 84 |
| 338 |
| (4) |
| 431 |
| 3,003 |
| (397) |
| (401) |
Corporate |
| 82 |
| 1,026 |
| (42) |
| 189 |
| 2,512 |
| (242) |
| (284) |
Foreign government |
| 1 |
| 2 |
| -- |
| 2 |
| 11 |
| -- |
| -- |
RMBS |
| 266 |
| 358 |
| (5) |
| 370 |
| 2,050 |
| (933) |
| (938) |
CMBS |
| 4 |
| 31 |
| (1) |
| 144 |
| 1,015 |
| (440) |
| (441) |
ABS |
| 50 |
| 534 |
| (17) |
| 137 |
| 1,249 |
| (358) |
| (375) |
Redeemable preferred stock |
| -- |
| -- |
| -- |
| 1 |
| -- |
| -- |
| -- |
Total fixed income securities (1) |
| 493 |
| 2,922 |
| (70) |
| 1,274 |
| 9,840 |
| (2,370) |
| (2,440) |
Equity securities |
| 1,427 |
| 992 |
| (92) |
| 11 |
| 71 |
| (11) |
| (103) |
Total fixed income and equity securities |
| 1,920 | $ | 3,914 | $ | (162) |
| 1,285 | $ | 9,911 | $ | (2,381) | $ | (2,543) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade fixed income securities |
| 439 | $ | 2,621 | $ | (58) |
| 868 | $ | 7,111 | $ | (1,153) | $ | (1,211) |
Below investment grade fixed income securities |
| 54 |
| 301 |
| (12) |
| 406 |
| 2,729 |
| (1,217) |
| (1,229) |
Total fixed income securities |
| 493 | $ | 2,922 | $ | (70) |
| 1,274 | $ | 9,840 | $ | (2,370) | $ | (2,440) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
| 38 | $ | 3,523 | $ | (16) |
| -- | $ | -- | $ | -- | $ | (16) |
Municipal |
| 761 |
| 3,646 |
| (123) |
| 747 |
| 5,024 |
| (817) |
| (940) |
Corporate |
| 399 |
| 5,072 |
| (178) |
| 421 |
| 5,140 |
| (669) |
| (847) |
Foreign government |
| 50 |
| 505 |
| (15) |
| 1 |
| 1 |
| -- |
| (15) |
RMBS |
| 387 |
| 1,092 |
| (23) |
| 453 |
| 2,611 |
| (1,607) |
| (1,630) |
CMBS |
| 25 |
| 232 |
| (4) |
| 259 |
| 1,790 |
| (951) |
| (955) |
ABS |
| 39 |
| 352 |
| (20) |
| 173 |
| 1,519 |
| (530) |
| (550) |
Redeemable preferred stock |
| 1 |
| -- |
| -- |
| 1 |
| 21 |
| (1) |
| (1) |
Total fixed income securities (1) |
| 1,700 |
| 14,422 |
| (379) |
| 2,055 |
| 16,106 |
| (4,575) |
| (4,954) |
Equity securities |
| 1,665 |
| 1,349 |
| (113) |
| 28 |
| 450 |
| (89) |
| (202) |
Total fixed income and equity securities |
| 3,365 | $ | 15,771 | $ | (492) |
| 2,083 | $ | 16,556 | $ | (4,664) | $ | (5,156) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade fixed income securities |
| 1,587 | $ | 13,891 | $ | (293) |
| 1,561 | $ | 13,127 | $ | (2,848) | $ | (3,141) |
Below investment grade fixed income securities |
| 113 |
| 531 |
| (86) |
| 494 |
| 2,979 |
| (1,727) |
| (1,813) |
Total fixed income securities |
| 1,700 | $ | 14,422 | $ | (379) |
| 2,055 | $ | 16,106 | $ | (4,575) | $ | (4,954) |
(1)Gross unrealized losses resulting from factors other than credit on fixed income securities with other-than-temporary impairments for which the Company has recorded a credit loss in earnings total $4 million for the less than 12 month category and $428 million for the 12 months or greater category as of September 30, 2010 and $20 million for the less than 12 month category and $729 million for the 12 months or greater category as of December 31, 2009.
($ in millions) |
| Less than 12 months |
|
| 12 months or more |
|
| Total |
| ||||||||
|
| Number |
| Fair |
| Unrealized |
|
| Number |
| Fair |
| Unrealized |
|
| unrealized |
|
|
| of issues |
| value |
| losses |
|
| of issues |
| value |
| losses |
|
| losses |
|
March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
| 33 | $ | 1,565 | $ | (20 | ) |
| -- | $ | -- | $ | -- |
| $ | (20 | ) |
Municipal |
| 815 |
| 3,767 |
| (174 | ) |
| 395 |
| 2,573 |
| (447 | ) |
| (621 | ) |
Corporate |
| 597 |
| 9,339 |
| (188 | ) |
| 144 |
| 1,959 |
| (187 | ) |
| (375 | ) |
Foreign government |
| 55 |
| 357 |
| (11 | ) |
| 1 |
| 10 |
| -- |
|
| (11 | ) |
RMBS |
| 281 |
| 493 |
| (13 | ) |
| 357 |
| 1,458 |
| (559 | ) |
| (572 | ) |
CMBS |
| 13 |
| 128 |
| (3 | ) |
| 95 |
| 721 |
| (163 | ) |
| (166 | ) |
ABS |
| 58 |
| 815 |
| (6 | ) |
| 122 |
| 1,268 |
| (245 | ) |
| (251 | ) |
Total fixed income securities |
| 1,852 |
| 16,464 |
| (415 | ) |
| 1,114 |
| 7,989 |
| (1,601 | ) |
| (2,016 | ) |
Equity securities |
| 788 |
| 600 |
| (53 | ) |
| 38 |
| 74 |
| (9 | ) |
| (62 | ) |
Total fixed income and equity Securities |
| 2,640 | $ | 17,064 | $ | (468 | ) |
| 1,152 | $ | 8,063 | $ | (1,610 | ) | $ | (2,078 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade fixed income securities |
| 1,702 | $ | 15,130 | $ | (372 | ) |
| 750 | $ | 5,468 | $ | (721 | ) | $ | (1,093 | ) |
Below investment grade fixed income securities |
| 150 |
| 1,334 |
| (43 | ) |
| 364 |
| 2,521 |
| (880 | ) |
| (923 | ) |
Total fixed income securities |
| 1,852 | $ | 16,464 | $ | (415 | ) |
| 1,114 | $ | 7,989 | $ | (1,601 | ) | $ | (2,016 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
| 32 | $ | 2,081 | $ | (51 | ) |
| -- | $ | -- | $ | -- |
| $ | (51 | ) |
Municipal |
| 847 |
| 4,130 |
| (175 | ) |
| 411 |
| 2,715 |
| (471 | ) |
| (646 | ) |
Corporate |
| 438 |
| 5,994 |
| (186 | ) |
| 150 |
| 1,992 |
| (235 | ) |
| (421 | ) |
Foreign government |
| 33 |
| 277 |
| (9 | ) |
| 1 |
| 10 |
| (1 | ) |
| (10 | ) |
RMBS |
| 280 |
| 583 |
| (12 | ) |
| 422 |
| 1,939 |
| (720 | ) |
| (732 | ) |
CMBS |
| 14 |
| 158 |
| (3 | ) |
| 114 |
| 835 |
| (274 | ) |
| (277 | ) |
ABS |
| 68 |
| 762 |
| (8 | ) |
| 133 |
| 1,313 |
| (286 | ) |
| (294 | ) |
Total fixed income securities |
| 1,712 |
| 13,985 |
| (444 | ) |
| 1,231 |
| 8,804 |
| (1,987 | ) |
| (2,431 | ) |
Equity securities |
| 773 |
| 610 |
| (48 | ) |
| 44 |
| 91 |
| (15 | ) |
| (63 | ) |
Total fixed income and equity securities |
| 2,485 | $ | 14,595 | $ | (492 | ) |
| 1,275 | $ | 8,895 | $ | (2,002 | ) | $ | (2,494 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade fixed income securities |
| 1,607 | $ | 13,280 | $ | (408 | ) |
| 857 | $ | 6,217 | $ | (943 | ) | $ | (1,351 | ) |
Below investment grade fixed income securities |
| 105 |
| 705 |
| (36 | ) |
| 374 |
| 2,587 |
| (1,044 | ) |
| (1,080 | ) |
Total fixed income securities |
| 1,712 | $ | 13,985 | $ | (444 | ) |
| 1,231 | $ | 8,804 | $ | (1,987 | ) | $ | (2,431 | ) |
As of September 30, 2010, $728 millionMarch 31, 2011, $1.04 billion of unrealized losses are related to securities with an unrealized loss position less than 20% of amortized cost or cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired. Of the $728 million, $494$1.04 billion, $805 million are related to unrealized losses on investment grade fixed income securities. Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from Standard & Poor’s (“S&P”), Fitch, Dominion or Realpoint, a rating of aaa, aa, a or bbb from A.M. Best, or a comparable internal rating if an externally provided rating is not available. Unrealized losses on investment grade securities are principally related to widening credit spreads or in some instances, rising interest rates since the time of initial purchase.
As of September 30, 2010,March 31, 2011, the remaining $1.81$1.04 billion of unrealized losses are related to securities in unrealized loss positions greater than or equal to 20% of amortized cost or cost. Investment grade fixed income securities comprising $717$288 million of these unrealized losses were evaluated based on factors such as expected cash flows and the financial condition and near-term and long-term prospects of the issue or issuer and were determined to have adequate resources to fulfill contractual obligations. Of the $1.04 billion, $734 million are related to below investment grade fixed income securities and $14 million are related to equity securities. Of these amounts, $627 million of the below investment grade fixed income securities had been in an unrealized loss position for a period of twelve or more consecutive months as of March 31, 2011. Unrealized losses on below investment grade securities are principally related to RMBS, CMBS and ABS and were the result of wider credit spreads resulting from higher
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
resources to fulfill contractual obligations. Of the $1.81 billion, $1.06 billion are related to below investment grade fixed income securities and $32 million are related to equity securities. Of these amounts, $1.03 billion of the below investment grade fixed income securities had been in an unrealized loss position for a period of twelve or more consecutive months as of September 30, 2010. Unrealized losses on below investment grade securities are principally related to RMBS, CMBS and ABS and were the result of wider credit spreads resulting from larger risk premiums since the time of initial purchase, largely due to macroeconomic conditions and credit market deterioration, including the impact of declining residential and commerciallower real estate valuations.
RMBS, CMBS and ABS securities in an unrealized loss position were evaluated based on actual and projected collateral losses relative to the securities’ positions in the respective securitization trusts, security specific expectations of cash flows, and credit ratings. This evaluation also takes into consideration credit enhancement, measured in terms of (i) subordination from other classes of securities in the trust that are contractually obligated to absorb losses before the class of security the Company owns, (ii) the expected impact of other structural features embedded in the securitization trust beneficial to the class of securities the Company owns, such as overcollateralization and excess spread, and (iii) for RMBS and ABS in an unrealized loss position, credit enhancements from reliable bond insurers, where applicable. Municipal bonds in an unrealized loss position were evaluated based on the quality of the underlying securities, taking into consideration credit enhancements from reliable bond insurers, where applicable. Unrealized losses on equity securities are primarily related to equity market fluctuations.
As of September 30, 2010,March 31, 2011, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis. As of September 30, 2010,March 31, 2011, the Company had the intent and ability to hold equity securities with unrealized losses for a period of time sufficient for them to recover.
Limited partnership impairmentpartnerships
As of September 30, 2010March 31, 2011 and December 31, 2009,2010, the carrying value of equity method limited partnership interests totaled $2.19$2.70 billion and $1.64$2.47 billion, respectively. The Company recognizes an impairment loss for equity method investments when evidence demonstrates that itthe loss is other-than-temporarily impaired.other than temporary. Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment. The Company had no write-downs related to equity method limited partnership interests for the three months ended September 30, 2010March 31, 2011 and 2009. The Company had write-downs related to equity method limited partnership interests of $1 million and $10 million for the nine months ended September 30, 2010 and 2009, respectively.2010.
As of September 30, 2010March 31, 2011 and December 31, 2009,2010, the carrying value for cost method limited partnership interests was $1.26$1.38 billion and $1.10$1.35 billion, respectively. To determine if an other-than-temporary impairment has occurred, the Company evaluates whether an impairment indicator has occurred in the period that may have a significant adverse effect on the carrying value of the investment. Impairment indicators may include: significantly reduced valuations of the investments held by the limited partnerships; actual recent cash flows received being significantly less than expected cash flows; reduced valuations based on financing completed at a lower value; completed sale of a material underlying investment at a price significantly lower than expected; or any other adverse events since the last financial statements received that might affect the fair value of the investee’s capital. Additionally, the Company’s portfolio monitoring process includes a quarterly review of all cost method limited partnerships to identify instances where the net asset value is below established thresholds for certain periods of time, as well as investments that are performing below expectations, for further impairment consideration. If a cost method limited partnership is other-than-temporarily impaired, the carrying value is written down to fair value, generally estimated to be equivalent to the reported net asset value of the underlying funds. The Company had write-downs related to cost method investments of $10 million and $53 million for the three months ended September 30,March 31, 2011 and 2010 and 2009, respectively, and $41of $1 million and $286$24 million, respectively.
Mortgage loans
Mortgage loans are evaluated for impairment on a specific loan basis through a quarterly credit monitoring process and review of key credit quality indicators. Mortgage loans are considered impaired when it is probable that the Company will not collect the contractual principal and interest. Valuation allowances are established for impaired loans to reduce the carrying value to the fair value of the collateral less costs to sell or the present value of the loan’s expected future repayment cash flows discounted at the loan’s original effective interest rate. Impaired mortgage loans may not have a valuation allowance when the fair value of the collateral less costs to sell is higher than the carrying value. Mortgage loan valuation allowances are charged off when there is no reasonable expectation of recovery. The impairment evaluation is non-statistical in respect to the aggregate portfolio but considers facts and circumstances attributable to each loan. It is not considered probable that additional impairment losses, beyond those identified on a specific loan basis, have been incurred as of March 31, 2011.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accrual of income is suspended for mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable. Cash receipts on mortgage loans on nonaccrual status are generally recorded as a reduction of carrying value.
Debt service coverage ratio is considered a key credit quality indicator when mortgage loans are evaluated for impairment. Debt service coverage ratio represents the amount of estimated cash flows from the property available to the borrower to meet principal and interest payment obligations. Debt service coverage ratio estimates are updated annually or more frequently if conditions are warranted based on the Company’s credit monitoring process. The following table reflects the carrying value of non-impaired fixed rate and variable rate mortgage loans summarized by debt service coverage ratio distribution:
($ in millions) |
| March 31, 2011 |
| December 31, 2010 |
| ||||||||
Debt service coverage |
| Fixed rate |
| Variable rate |
| Total |
| Fixed rate |
| Variable rate |
| Total |
|
Below 1.0 | $ | 257 | $ | -- | $ | 257 | $ | 280 | $ | -- | $ | 280 |
|
1.0 - 1.25 |
| 1,527 |
| 15 |
| 1,542 |
| 1,583 |
| 16 |
| 1,599 |
|
1.26 - 1.50 |
| 1,513 |
| 5 |
| 1,518 |
| 1,520 |
| 5 |
| 1,525 |
|
Above 1.50 |
| 2,577 |
| 518 |
| 3,095 |
| 2,540 |
| 546 |
| 3,086 |
|
Total non-impaired mortgage loans | $ | 5,874 | $ | 538 | $ | 6,412 | $ | 5,923 | $ | 567 | $ | 6,490 |
|
Mortgage loans with a debt service coverage ratio below 1.0 that are not considered impaired primarily relate to instances where the borrower has the financial capacity to fund the revenue shortfalls from the properties for the nineforeseeable term, the decrease in cash flows from the properties is considered temporary, or there are other risk mitigating circumstances such as additional collateral, escrow balances or borrower guarantees.
The net carrying value of impaired mortgage loans is as follows:
($ in millions) |
| March 31, |
| December 31, |
|
Impaired mortgage loans with a valuation allowance | $ | 148 | $ | 168 |
|
Impaired mortgage loans without a valuation allowance |
| 22 |
| 21 |
|
Total impaired mortgage loans | $ | 170 | $ | 189 |
|
Valuation allowance on impaired mortgage loans | $ | 77 | $ | 84 |
|
The average balance of impaired loans was $180 million during the three months ended September 30, 2010 and 2009, respectively.March 31, 2011.
The rollforward of the valuation allowance on impaired mortgage loans for the three months ended March 31, 2011 is as follows:
($ in millions) |
|
|
|
Beginning balance | $ | 84 |
|
Net increase in valuation allowance |
| 6 |
|
Charge offs |
| (13 | ) |
Ending balance | $ | 77 |
|
The carrying value of past due mortgage loans is as follows:
($ in millions) |
| March 31, |
| December 31, |
|
Less than 90 days past due | $ | 1 | $ | 12 |
|
90 days or greater past due |
| 65 |
| 78 |
|
Total past due |
| 66 |
| 90 |
|
Current loans |
| 6,516 |
| 6,589 |
|
Total mortgage loans | $ | 6,582 | $ | 6,679 |
|
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Fair Value of Assets and Liabilities
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the Condensed Consolidated Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:
Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.
Level 2: Assets and liabilities whose values are based on the following:
(a) Quoted prices for similar assets or liabilities in active markets;
(b) Quoted prices for identical or similar assets or liabilities in markets that are not active; or
(c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.
The availability of observable inputs varies by instrument. In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment. The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3. In many instances, valuation inputs used to measure fair value fall into different levels of the fair value hierarchy. The category level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.
The Company has two types of situations where investments are classified as Level 3 in the fair value hierarchy. The first is where quotes continue to be received from independent third-party valuation service providers and all significant inputs are market observable; however, there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity such that the degree of market observability has declined to a point where categorization as a Level 3 measurement is considered appropriate. The indicators considered in determining whether a significant decrease in the volume and level of activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, the level of credit spreads over historical levels, applicable bid-ask spreads, and price consensus among market participants and other pricing sources.
The second situation where the Company classifies securities in Level 3 is where specific inputs significant to the fair value estimation models are not market observable. This occurs in two primary instances. The first relates to the Company’s use of broker quotes. The second relates to auction rate securities (“ARS”) backed by student loans for which a key input, the anticipated date liquidity will return to this market, is not market observable.
Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans, limited partnership interests, bank loans and policy loans. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after initial recognition and the resulting remeasurement is reflected in the condensed consolidated financial statements. In addition, derivatives embedded in fixed income securities are not disclosed in the hierarchy as free-standing derivatives since they are presented with the host contracts in fixed income securities. As of September 30, 2010, 74.4% of total assets are measured at fair value and 0.7% of total liabilities are measured at fair value.
In determining fair value, the Company principally uses the market approach which generally utilizes market transaction data for the same or similar instruments. To a lesser extent, the Company uses the income approach which involves determining fair values from discounted cash flow methodologies. For the majority of Level 2 and Level 3 valuations, a combination of the market and income approaches is used.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summary of significant valuation techniques for assets and liabilities measured at fair value on a recurring basis
Level 1 measurements
· Fixed income securities: Comprise U.S. Treasuries. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
· Equity securities: Comprise actively traded, exchange-listed U.S. and international equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
· Short-term: Comprise actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access.
· Separate account assets: Comprise actively traded mutual funds that have daily quoted net asset values for identical assets that the Company can access. Net asset values for the actively traded mutual funds in which the separate account assets are invested are obtained daily from the fund managers.
Level 2 measurements
· Fixed income securities:
U.S. government and agencies: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Municipal: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Corporate, including privately placed: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. Also included are privately placed securities valued using a discounted cash flow model that is widely accepted in the financial services industry and uses market observable inputs and inputs derived principally from, or corroborated by, observable market data. The primary inputs to the discounted cash flow model include an interest rate yield curve, as well as published credit spreads for similar assets in markets that are not active that incorporate the credit quality and industry sector of the issuer.
Foreign government: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
RMBS - U.S. government sponsored entities (“U.S. Agency”), Prime residential mortgage-backed securities (“Prime”) and Alt-A residential mortgage-backed securities (“Alt-A”); ABS - auto and student loans and other: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads.
CMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, collateral performance and credit spreads.
Redeemable preferred stock: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, underlying stock prices and credit spreads.
CMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, collateral performance and credit spreads.
· Equity securities: The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that are not active.
· Short-term: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. For certain short-term investments, amortized cost is used as the best estimate of fair value.
· Other investments: Free-standing exchange listed derivatives that are not actively traded are valued based on quoted prices for identical instruments in markets that are not active.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OTC derivatives, including interest rate swaps, foreign currency swaps, foreign exchange forward contracts, and certain credit default swaps, are valued using models that rely on inputs such as interest rate yield curves, currency rates, and counterparty credit spreads that are observable for substantially the full term of the contract. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.
·Contractholder funds: Derivatives embedded in certain annuity contracts are valued based on internal models that rely on inputs such as interest rate yield curves and equity index volatility assumptions that are market observable for substantially the full term of the contract. The valuation techniques are widely accepted in the financial services industry and do not include significant judgment.
Level 3 measurements
· Fixed income securities:
Municipal: ARS primarily backed by student loans that have become illiquid due to failures in the auction market are valued using a discounted cash flow model that is widely accepted in the financial services industry and uses significant non-market observable inputs, including estimates of future coupon rates if auction failures continue, maturity assumptionsthe anticipated date liquidity will return to the market and illiquidity premium. Also included are municipal bonds that are not rated by third party credit rating agencies but are rated by the National Association of Insurance Commissioners (“NAIC”), and other high-yield municipal bonds. The primary inputs to the valuation of these municipal bonds include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields and credit spreads.
Corporate, including privately placed: Primarily valued based on non-binding broker quotes. Also included are equity-indexed notes which are valued using a discounted cash flow model that is widely accepted in the financial services industry and uses significant non-market observable inputs, such as volatility. Other inputs include an interest rate yield curve, as well as published credit spreads for similar assets that incorporate the credit quality and industry sector of the issuer.
RMBS - Subprime residential mortgage-backed securities (“Subprime”), Prime and Alt-A: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads. Also included are Subprime, Prime and Alt-A securities that are valued based on non-binding broker quotes. Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, Subprime and certain Alt-A securities are categorized as Level 3.
Foreign government: Valued based on non-binding broker quotes.
CMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields, collateral performance and credit spreads. Also included are CMBS that are valued based on non-binding broker quotes. Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, certain CMBS are categorized as Level 3.
ABS - Collateralized debt obligations (“CDO”): Valued based on non-binding broker quotes received from brokers who are familiar with the investments. Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, all CDO are categorized as Level 3.
ABS - student loans and other: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads. Also included are ABS that are valued based on non-binding broker quotes. Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
liquidity that has been experienced in the market for these securities, certain ABS are categorized as Level 3.
· Other investments: Certain OTC derivatives, such as interest rate caps and floors, certain credit default swaps and OTC options (including swaptions), are valued using models that are widely accepted in the financial services industry. These are categorized as Level 3 as a result of the significance of non-market observable inputs such as volatility. Other primary inputs include interest rate yield curves and credit spreads.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
· Contractholder funds: Derivatives embedded in certain life and annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for the embedded derivatives within a block of contractholder liabilities. The models primarily use stochastically determined cash flows based on the contractual elements of embedded derivatives, projected option cost and other applicable market data.data, such as interest rate yield curves and equity index volatility assumptions. These are categorized as Level 3 as a result of the significance of non-market observable inputs.
Assets and liabilities measured at fair value on a non-recurring basis
Mortgage loans written-down to fair value in connection with recognizing impairments are valued based on the fair value of the underlying collateral.collateral less costs to sell. Limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments are valued using net asset values.
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2010:March 31, 2011:
($ in millions) |
| Quoted prices |
| Significant |
| Significant |
| Counterparty |
| Balance |
| Quoted prices |
| Significant |
| Significant |
| Counterparty |
| Balance | |||||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| netting |
| 2010 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| netting |
| 2011 | |||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. government and agencies | $ | 6,912 |
| $ | 4,341 |
| $ | -- |
|
|
|
| $ | 11,253 |
| $ | 4,581 | $ | 2,185 | $ | -- |
|
| $ | 6,766 |
Municipal |
| -- |
|
| 14,624 |
|
| 2,144 |
|
|
|
|
| 16,768 |
|
| -- |
| 13,382 |
| 1,864 |
|
|
| 15,246 |
Corporate |
| -- |
|
| 35,027 |
|
| 2,177 |
|
|
|
|
| 37,204 |
|
| -- |
| 40,360 |
| 2,035 |
|
|
| 42,395 |
Foreign government |
| -- |
|
| 3,428 |
|
| -- |
|
|
|
|
| 3,428 |
|
| -- |
| 3,117 |
| -- |
|
|
| 3,117 |
RMBS |
| -- |
|
| 6,615 |
|
| 1,884 |
|
|
|
|
| 8,499 |
|
| -- |
| 5,132 |
| 1,398 |
|
|
| 6,530 |
CMBS |
| -- |
|
| 1,127 |
|
| 866 |
|
|
|
|
| 1,993 |
|
| -- |
| 1,058 |
| 995 |
|
|
| 2,053 |
ABS |
| -- |
|
| 1,658 |
|
| 2,352 |
|
|
|
|
| 4,010 |
|
| -- |
| 2,020 |
| 2,091 |
|
|
| 4,111 |
Redeemable preferred stock |
| -- |
|
| 37 |
|
| 1 |
|
|
|
|
| 38 |
|
| -- |
| 23 |
| 1 |
|
|
| 24 |
Total fixed income securities |
| 6,912 |
|
| 66,857 |
|
| 9,424 |
|
|
|
|
| 83,193 |
|
| 4,581 |
| 67,277 |
| 8,384 |
|
|
| 80,242 |
Equity securities |
| 3,463 |
|
| 179 |
|
| 65 |
|
|
|
|
| 3,707 |
|
| 3,980 |
| 414 |
| 43 |
|
|
| 4,437 |
Short-term investments |
| 253 |
|
| 2,523 |
|
| -- |
|
|
|
|
| 2,776 |
|
| 232 |
| 1,754 |
| -- |
|
|
| 1,986 |
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives |
| -- |
|
| 568 |
|
| 11 |
| $ | (263 | ) |
| 316 |
|
| -- |
| 599 |
| 9 | $ | (96) |
| 512 |
Separate account assets |
| 8,459 |
|
| -- |
|
| -- |
|
| -- |
|
| 8,459 |
|
| 8,603 |
| -- |
| -- |
|
|
| 8,603 |
Other assets |
| -- |
|
| -- |
|
| 2 |
|
| -- |
|
| 2 |
|
| -- |
| -- |
| 1 |
|
|
| 1 |
Total recurring basis assets |
| 19,087 |
|
| 70,127 |
|
| 9,502 |
|
| (263 | ) |
| 98,453 |
|
| 17,396 |
| 70,044 |
| 8,437 |
| (96) |
| 95,781 |
Non-recurring basis (1) |
| -- |
|
| -- |
|
| 95 |
|
| -- |
|
| 95 |
|
| -- |
| -- |
| 42 |
|
|
| 42 |
Total assets at fair value | $ | 19,087 |
| $ | 70,127 |
| $ | 9,597 |
| $ | (263 | ) | $ | 98,548 |
| $ | 17,396 | $ | 70,044 | $ | 8,479 | $ | (96) | $ | 95,823 |
% of total assets at fair value |
| 19.4 | % |
| 71.2 | % |
| 9.7 | % |
| (0.3 | ) % |
| 100.0 | % |
| 18.2 % |
| 73.1 % |
| 8.8 % |
| (0.1) % |
| 100.0 % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives embedded in annuity contracts | $ | -- |
| $ | (145 | ) | $ | (142 | ) |
| -- |
| $ | (287 | ) | ||||||||||
Derivatives embedded in life and annuity contracts | $ | -- | $ | -- | $ | (630) |
|
| $ | (630) | |||||||||||||||
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives |
| (2 | ) |
| (652 | ) |
| (106 | ) | $ | 259 |
|
| (501 | ) |
| -- |
| (372) |
| (80) | $ | 93 |
| (359) |
Total liabilities at fair value | $ | (2 | ) | $ | (797 | ) | $ | (248 | ) | $ | 259 |
| $ | (788 | ) | $ | -- | $ | (372) | $ | (710) | $ | 93 | $ | (989) |
% of total liabilities at fair value |
| 0.3 | % |
| 101.1 | % |
| 31.5 | % |
| (32.9 | ) % |
| 100.0 | % |
| -- % |
| 37.6 % |
| 71.8 % |
| (9.4) % |
| 100.0 % |
_______________
(1)Includes $55$31 million of mortgage loans, $34$1 million of limited partnership interests and $6$10 million of other investments written-down to fair value in connection with recognizing other-than-temporary impairments.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2009:2010:
($ in millions) |
| Quoted prices |
| Significant |
| Significant |
| Counterparty |
| Balance |
| Quoted prices |
| Significant |
| Significant |
| Counterparty |
| Balance | |||||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| netting |
| 2009 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| netting |
| 2010 | |||||
Assets |
|
|
|
|
|
|
|
|
| �� |
|
|
|
|
|
|
|
|
|
| |||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. government and agencies | $ | 4,415 |
| $ | 3,121 |
| $ | -- |
|
|
|
| $ | 7,536 |
| $ | 4,976 | $ | 3,620 | $ | -- |
|
| $ | 8,596 |
Municipal |
| -- |
|
| 18,574 |
|
| 2,706 |
|
|
|
|
| 21,280 |
|
| -- |
| 13,918 |
| 2,016 |
|
|
| 15,934 |
Corporate |
| -- |
|
| 30,874 |
|
| 2,241 |
|
|
|
|
| 33,115 |
|
| -- |
| 35,747 |
| 1,908 |
|
|
| 37,655 |
Foreign government |
| -- |
|
| 3,177 |
|
| 20 |
|
|
|
|
| 3,197 |
|
| -- |
| 3,158 |
| -- |
|
|
| 3,158 |
RMBS |
| -- |
|
| 6,316 |
|
| 1,671 |
|
|
|
|
| 7,987 |
|
| -- |
| 6,199 |
| 1,794 |
|
|
| 7,993 |
CMBS |
| -- |
|
| 1,182 |
|
| 1,404 |
|
|
|
|
| 2,586 |
|
| -- |
| 1,071 |
| 923 |
|
|
| 1,994 |
ABS |
| -- |
|
| 1,025 |
|
| 2,001 |
|
|
|
|
| 3,026 |
|
| -- |
| 1,827 |
| 2,417 |
|
|
| 4,244 |
Redeemable preferred stock |
| -- |
|
| 37 |
|
| 2 |
|
|
|
|
| 39 |
|
| -- |
| 37 |
| 1 |
|
|
| 38 |
Total fixed income securities |
| 4,415 |
|
| 64,306 |
|
| 10,045 |
|
|
|
|
| 78,766 |
|
| 4,976 |
| 65,577 |
| 9,059 |
|
|
| 79,612 |
Equity securities |
| 4,821 |
|
| 134 |
|
| 69 |
|
|
|
|
| 5,024 |
|
| 4,316 |
| 432 |
| 63 |
|
|
| 4,811 |
Short-term investments |
| 278 |
|
| 2,778 |
|
| -- |
|
|
|
|
| 3,056 |
|
| 174 |
| 3,105 |
| -- |
|
|
| 3,279 |
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives |
| -- |
|
| 882 |
|
| 146 |
| $ | (482 | ) |
| 546 |
|
| -- |
| 651 |
| 74 | $ | (286) |
| 439 |
Separate account assets |
| 9,072 |
|
| -- |
|
| -- |
|
|
|
|
| 9,072 |
|
| 8,676 |
| -- |
| -- |
|
|
| 8,676 |
Other assets |
| -- |
|
| -- |
|
| 2 |
|
|
|
|
| 2 |
|
| -- |
| -- |
| 1 |
|
|
| 1 |
Total recurring basis assets |
| 18,586 |
|
| 68,100 |
|
| 10,262 |
|
| (482 | ) |
| 96,466 |
|
| 18,142 |
| 69,765 |
| 9,197 |
| (286) |
| 96,818 |
Non-recurring basis (1) |
| -- |
|
| -- |
|
| 235 |
|
|
|
|
| 235 |
|
| -- |
| -- |
| 120 |
|
|
| 120 |
Total assets at fair value | $ | 18,586 |
| $ | 68,100 |
| $ | 10,497 |
| $ | (482 | ) | $ | 96,701 |
| $ | 18,142 | $ | 69,765 | $ | 9,317 | $ | (286) | $ | 96,938 |
% of total assets at fair value |
| 19.2 % |
| 70.4 % |
| 10.9 % |
| (0.5) % |
| 100.0 % |
| 18.7 % |
| 72.0 % |
| 9.6 % |
| (0.3) % |
| 100.0 % | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives embedded in annuity contracts | $ | -- |
| $ | (217 | ) | $ | (110 | ) |
|
|
| $ | (327 | ) | ||||||||||
Derivatives embedded in life and annuity contracts | $ | -- | $ | -- | $ | (653) |
|
| $ | (653) | |||||||||||||||
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives |
| (2 | ) |
| (596 | ) |
| (91 | ) | $ | 276 |
|
| (413 | ) |
| (2) |
| (529) |
| (95) | $ | 263 |
| (363) |
Total liabilities at fair value | $ | (2 | ) | $ | (813 | ) | $ | (201 | ) | $ | 276 |
| $ | (740 | ) | $ | (2) | $ | (529) | $ | (748) | $ | 263 | $ | (1,016) |
% of total liabilities at fair value |
| 0.3 % |
| 109.9 % |
| 27.1 % |
| (37.3) % |
| 100.0 % |
| 0.2 % |
| 52.1 % |
| 73.6 % |
| (25.9) % |
| 100.0 % |
_______________
(1)Includes $211$111 million of mortgage loans and $24$9 million of limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the three months ended March 31, 2011.
($ in millions) |
|
|
| Total realized and |
|
|
|
|
| ||
|
| Balance as of |
| Net |
| OCI on |
| Transfers |
| Transfers |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
Municipal | $ | 2,016 | $ | (11) | $ | 21 | $ | -- | $ | (37) |
|
Corporate |
| 1,908 |
| 12 |
| 10 |
| 95 |
| (47) |
|
RMBS |
| 1,794 |
| (61) |
| 105 |
| -- |
| (45) |
|
CMBS |
| 923 |
| (21) |
| 114 |
| 56 |
| (59) |
|
ABS |
| 2,417 |
| 44 |
| 16 |
| -- |
| (304) |
|
Redeemable preferred stock |
| 1 |
| -- |
| -- |
| -- |
| -- |
|
Total fixed income securities |
| 9,059 |
| (37) |
| 266 |
| 151 |
| (492) |
|
Equity securities |
| 63 |
| (10) |
| -- |
| -- |
| (10) |
|
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives, net |
| (21) |
| (31) |
| -- |
| -- |
| -- |
|
Other assets |
| 1 |
| -- |
| -- |
| -- |
| -- |
|
Total recurring Level 3 assets | $ | 9,102 | $ | (78) | $ | 266 | $ | 151 | $ | (502) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Contractholder funds: |
|
|
|
|
|
|
|
|
|
|
|
Derivatives embedded in life and annuity contracts | $ | (653) | $ | 8 | $ | -- | $ | -- | $ | -- |
|
Total recurring Level 3 liabilities | $ | (653) | $ | 8 | $ | -- | $ | -- | $ | -- |
|
|
| Purchases |
| Sales |
| Issuances |
| Settlements |
| Balance as |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
Municipal | $ | 10 | $ | (134) | $ | -- | $ | (1) | $ | 1,864 |
|
Corporate |
| 96 |
| (31) |
| -- |
| (8) |
| 2,035 |
|
RMBS |
| -- |
| (318) |
| -- |
| (77) |
| 1,398 |
|
CMBS |
| 8 |
| (25) |
| -- |
| (1) |
| 995 |
|
ABS |
| 90 |
| (114) |
| -- |
| (58) |
| 2,091 |
|
Redeemable preferred stock |
| -- |
| -- |
| -- |
| -- |
| 1 |
|
Total fixed income securities |
| 204 |
| (622) |
| -- |
| (145) |
| 8,384 |
|
Equity securities |
| -- |
| -- |
| -- |
| -- |
| 43 |
|
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives, net |
| 48 |
| -- |
| -- |
| (67) |
| (71) | (2) |
Other assets |
| -- |
| -- |
| -- |
| -- |
| 1 |
|
Total recurring Level 3 assets | $ | 252 | $ | (622) | $ | -- | $ | (212) | $ | 8,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
Contractholder funds: |
|
|
|
|
|
|
|
|
|
|
|
Derivatives embedded in life and annuity contracts | $ | -- | $ | -- | $ | (14) | $ | 29 | $ | (630) |
|
Total recurring Level 3 liabilities | $ | -- | $ | -- | $ | (14) | $ | 29 | $ | (630) |
|
_______________
(1) The effect to net income totals $(70) million and is reported in the Condensed Consolidated Statements of Operations as follows: $(85) million in realized capital gains and losses, $7 million in net investment income, $37 million in interest credited to contractholder funds and $(45) million in life and annuity contract benefits.
(2) Comprises $9 million of assets and $80 million of liabilities.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the three months ended September 30,March 31, 2010.
($ in millions) |
|
|
| Total realized and |
|
|
|
|
|
|
|
|
|
|
| Total realized and |
|
|
|
|
|
|
|
|
| |||||||||||
|
| Balance as of |
| Net |
| OCI on |
| Purchases, sales, |
| Transfers |
| Transfers |
| Balance as |
| Balance as of |
| Net |
| OCI on |
| Purchases, |
| Transfers |
| Transfers |
| Balance as |
| |||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Municipal | $ | 2,197 |
| $ | 13 |
| $ | 18 |
| $ | (87 | ) | $ | 5 |
| $ | (2 | ) | $ | 2,144 |
| $ | 2,706 | $ | (16) | $ | 37 | $ | (216) | $ | -- | $ | (29) | $ | 2,482 |
|
Corporate |
| 2,225 |
|
| 8 |
|
| 77 |
|
| (96 | ) |
| 192 |
|
| (229 | ) |
| 2,177 |
|
| 2,241 |
| (27) |
| 75 |
| (11) |
| 12 |
| (113) |
| 2,177 |
|
Foreign government |
| 20 |
| -- |
| -- |
| (20) |
| -- |
| -- |
| -- |
| |||||||||||||||||||||
RMBS |
| 2,010 |
|
| (102 | ) |
| 206 |
|
| (230 | ) |
| -- |
|
| -- |
|
| 1,884 |
|
| 1,671 |
| (58) |
| 163 |
| 303 |
| -- |
| -- |
| 2,079 |
|
CMBS |
| 880 |
|
| (66 | ) |
| 134 |
|
| (120 | ) |
| 38 |
|
| -- |
|
| 866 |
|
| 1,404 |
| (34) |
| 108 |
| (163) |
| 24 |
| (209) |
| 1,130 |
|
ABS |
| 2,430 |
|
| 18 |
|
| 73 |
|
| 64 |
|
| -- |
|
| (233 | ) |
| 2,352 |
|
| 2,001 |
| 15 |
| 93 |
| 331 |
| -- |
| (37) |
| 2,403 |
|
Redeemable preferred stock |
| 1 |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| 1 |
|
| 2 |
| -- |
| -- |
| -- |
| -- |
| -- |
| 2 |
|
Total fixed income securities |
| 9,743 |
|
| (129 | ) |
| 508 |
|
| (469 | ) |
| 235 |
|
| (464 | ) |
| 9,424 |
|
| 10,045 |
| (120) |
| 476 |
| 224 |
| 36 |
| (388) |
| 10,273 |
|
Equity securities |
| 66 |
|
| 14 |
|
| -- |
|
| (15 | ) |
| -- |
|
| -- |
|
| 65 |
|
| 69 |
| -- |
| 3 |
| 4 |
| -- |
| (4) |
| 72 |
|
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives, net |
| (99 | ) |
| (10 | ) |
| -- |
|
| 14 |
|
| -- |
|
| -- |
|
| (95 | ) (2) |
| 55 |
| (133) |
| -- |
| 40 |
| -- |
| -- |
| (38) | (2) |
Other assets |
| 2 |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| 2 |
|
| 2 |
| -- |
| -- |
| -- |
| -- |
| -- |
| 2 |
|
Total recurring Level 3 assets | $ | 9,712 |
| $ | (125 | ) | $ | 508 |
| $ | (470 | ) | $ | 235 |
| $ | (464 | ) | $ | 9,396 |
| $ | 10,171 | $ | (253) | $ | 479 | $ | 268 | $ | 36 | $ | (392) | $ | 10,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives embedded in annuity contracts | $ | (119 | ) | $ | (23 | ) | $ | -- |
| $ | -- |
| $ | -- |
| $ | -- |
| $ | (142 | ) | |||||||||||||||
Derivatives embedded in life and annuity contracts | $ | (110) | $ | 18 | $ | -- | $ | 2 | $ | -- | $ | -- | $ | (90) |
| |||||||||||||||||||||
Total recurring Level 3 liabilities | $ | (119 | ) | $ | (23 | ) | $ | -- |
| $ | -- |
| $ | -- |
| $ | -- |
| $ | (142 | ) | $ | (110) | $ | 18 | $ | -- | $ | 2 | $ | -- | $ | -- | $ | (90) |
|
_______________
(1)The effect to net income totals $(148)$(235) million and is reported in the Condensed Consolidated Statements of Operations as follows: $(136)$(286) million in realized capital gains and losses, $11$32 million in net investment income, $(1) million in interest credited to contractholder funds and $23$(18) million in life and annuity contract benefits.
(2)Comprises $11$58 million of assets and $106 million of liabilities.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the nine months ended September 30, 2010.
($ in millions) |
|
|
| Total realized and |
|
|
|
|
|
|
|
| |||||||||
|
| Balance as of |
| Net |
| OCI on |
| Purchases, sales, |
| Transfers |
| Transfers |
| Balance as | |||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Municipal | $ | 2,706 |
| $ | (34 | ) | $ | 76 |
| $ | (539 | ) | $ | 21 |
| $ | (86 | ) | $ | 2,144 |
|
Corporate |
| 2,241 |
|
| (29 | ) |
| 178 |
|
| (62 | ) |
| 355 |
|
| (506 | ) |
| 2,177 |
|
Foreign government |
| 20 |
|
| -- |
|
| -- |
|
| (20 | ) |
| -- |
|
| -- |
|
| -- |
|
RMBS |
| 1,671 |
|
| (271 | ) |
| 549 |
|
| (51 | ) |
| -- |
|
| (14 | ) |
| 1,884 |
|
CMBS |
| 1,404 |
|
| (173 | ) |
| 434 |
|
| (448 | ) |
| 62 |
|
| (413 | ) |
| 866 |
|
ABS |
| 2,001 |
|
| 36 |
|
| 172 |
|
| 536 |
|
| -- |
|
| (393 | ) |
| 2,352 |
|
Redeemable preferred stock |
| 2 |
|
| -- |
|
| -- |
|
| (1 | ) |
| -- |
|
| -- |
|
| 1 |
|
Total fixed income securities |
| 10,045 |
|
| (471 | ) |
| 1,409 |
|
| (585 | ) |
| 438 |
|
| (1,412 | ) |
| 9,424 |
|
Equity securities |
| 69 |
|
| 8 |
|
| 4 |
|
| (12 | ) |
| -- |
|
| (4 | ) |
| 65 |
|
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives, net |
| 55 |
|
| (242 | ) |
| -- |
|
| 92 |
|
| -- |
|
| -- |
|
| (95 | ) (2) |
Other assets |
| 2 |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| 2 |
|
Total recurring Level 3 assets | $ | 10,171 |
| $ | (705 | ) | $ | 1,413 |
| $ | (505 | ) | $ | 438 |
| $ | (1,416 | ) | $ | 9,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives embedded in annuity contracts | $ | (110 | ) | $ | (35 | ) | $ | -- |
| $ | 3 |
| $ | -- |
| $ | -- |
| $ | (142 | ) |
Total recurring Level 3 liabilities | $ | (110 | ) | $ | (35 | ) | $ | -- |
| $ | 3 |
| $ | -- |
| $ | -- |
| $ | (142 | ) |
(1)The effect to net income totals $(740) million and is reported in the Condensed Consolidated Statements of Operations as follows: $(767) million in realized capital gains and losses, $65 million in net investment income, $3 million in interest credited to contractholder funds and $35 million in life and annuity contract benefits.
(2)Comprises $11 million of assets and $106$96 million of liabilities.
Transfers between level categorizations may occur due to changes in the availability of market observable inputs, which generally are caused by changes in market conditions such as liquidity, trading volume or bid-ask spreads. Transfers between level categorizations may also occur due to changes in the valuation source. For example, in situations where a fair value quote is not provided by the Company’s independent third-party valuation service provider and as a result the price is stale or has been replaced with a broker quote, the security is transferred into Level 3. Transfers in and out of level categorizations are reported as having occurred at the beginning of the quarter in which the transfer occurred. Therefore, for all transfers into Level 3, all realized and changes in unrealized gains and losses in the quarter of transfer are reflected in the Level 3 rollforward table.
There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30,March 31, 2011 or 2010.
During the three and nine months ended September 30,March 31, 2011 and 2010, certain CMBS and ABS, and certain CMBS, respectively, were transferred into Level 2 from Level 3 as a result of increased liquidity in the market and the availability of market observable quoted prices for similar assets. When transferring these securities into Level 2, the Company did not change the source of fair value estimates or modify the estimates received from independent third-party valuation service providers or the internal valuation approach. Accordingly, for securities included within this group, there was no change in fair value in conjunction with the transfer resulting in a realized or unrealized gain or loss.
Transfers into Level 3 during the three and nine months ended September 30,March 31, 2011 and 2010 including those related to Corporate fixed income securities, included situations where a fair value quote was not provided by the Company’s independent third-party valuation service provider and as a result the price was stale or had been replaced with a broker quote resulting in the security being classified as Level 3.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
broker quote resulting in the security being classified as Level 3. Transfers out of Level 3 during the three and nine months ended September 30,March 31, 2011 and 2010 including those related to Corporate fixed income securities, included situations where a broker quote was used in the prior period and a fair value quote became available from the Company’s independent third-party valuation service provider in the current period. A quote utilizing the new pricing source was not available as of the prior period, and any gains or losses related to the change in valuation source for individual securities were not significant.
The following table provides the total gains and (losses) included in net income during the periodthree months ended March 31 for Level 3 assets and liabilities still held at September 30, 2010.as of March 31.
($ in millions) |
| Three |
| Nine |
| 2011 |
| 2010 | ||
|
| months ended |
| months ended | ||||||
Assets |
| September 30, 2010 |
| September 30, 2010 |
|
|
|
| ||
Fixed income securities: |
|
|
|
|
|
|
|
| ||
Municipal | $ | 1 |
| $ | (24 | ) | $ | (11) | $ | (13) |
Corporate |
| (1 | ) |
| (42 | ) |
| 9 |
| (28) |
RMBS |
| (83 | ) |
| (214 | ) |
| (40) |
| (58) |
CMBS |
| (22 | ) |
| (42 | ) |
| (16) |
| (23) |
ABS |
| 28 |
|
| 53 |
|
| 2 |
| 1 |
Total fixed income securities |
| (77 | ) |
| (269 | ) |
| (56) |
| (121) |
Equity securities |
| (1 | ) |
| (8 | ) |
| (10) |
| -- |
Other investments: |
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives, net |
| 28 |
|
| (113 | ) |
| 3 |
| (85) |
Total recurring Level 3 assets | $ | (50 | ) | $ | (390 | ) | $ | (63) | $ | (206) |
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
Contractholder funds: |
|
|
|
|
|
|
|
|
|
|
Derivatives embedded in annuity contracts | $ | (23 | ) | $ | (35 | ) | ||||
Derivatives embedded in life and annuity contracts | $ | 8 | $ | 18 | ||||||
Total recurring Level 3 liabilities | $ | (23 | ) | $ | (35 | ) | $ | 8 | $ | 18 |
The amounts in the table above represent gains and losses included in net income during the period presented for the period of time that the asset or liability was determined to be in Level 3. These gains and losses total $(73) million for the three months ended September 30, 2010 and are reported in the Condensed Consolidated Statements of Operations as follows: $(57) million in realized capital gains and losses, $6 million in net investment income, $(1) million in interest credited to contractholder funds and $23 million in life and annuity contract benefits. These gains and losses total $(425) million for the nine months ended September 30, 2010 and are reported in the Condensed Consolidated Statements of Operations as follows: $(426) million in realized capital gains and losses, $41 million in net investment income, $5 million in interest credited to contractholder funds and $35 million in life and annuity contract benefits.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the three months ended September 30, 2009.
($ in millions) |
|
|
| Total realized and unrealized |
|
|
|
|
|
|
| Total | |||||||||
|
| Balance as of |
| Net income (1) |
| OCI on |
| Purchases, |
| Net |
| Balance as of |
| net income for | |||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Municipal | $ | 2,513 |
| $ | (1 | ) | $ | 131 |
| $ | (72 | ) | $ | 136 |
| $ | 2,707 |
| $ | -- |
|
Corporate |
| 9,837 |
|
| 2 |
|
| 559 |
|
| (370 | ) |
| (50 | ) |
| 9,978 |
|
| (10 | ) |
Foreign government |
| -- |
|
| -- |
|
| -- |
|
| 80 |
|
| -- |
|
| 80 |
|
| -- |
|
RMBS |
| 2,377 |
|
| (46 | ) |
| 267 |
|
| (150 | ) |
| (738 | ) |
| 1,710 |
|
| (51 | ) |
CMBS |
| 944 |
|
| (57 | ) |
| 420 |
|
| (56 | ) |
| 136 |
|
| 1,387 |
|
| (17 | ) |
ABS |
| 1,728 |
|
| (6 | ) |
| 388 |
|
| (2 | ) |
| (333 | ) |
| 1,775 |
|
| (38 | ) |
Redeemable preferred stock |
| 2 |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| 2 |
|
| -- |
|
Total fixed income securities |
| 17,401 |
|
| (108 | ) |
| 1,765 |
|
| (570 | ) |
| (849 | ) |
| 17,639 |
|
| (116 | ) |
Equity securities |
| 70 |
|
| -- |
|
| (2 | ) |
| -- |
|
| -- |
|
| 68 |
|
| -- |
|
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives, net |
| 159 |
|
| (151 | ) |
| -- |
|
| (16 | ) |
| -- |
|
| (8 | ) (2) |
| (128) |
|
Other assets |
| 2 |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| 2 |
|
| -- |
|
Total recurring Level 3 assets | $ | 17,632 |
| $ | (259 | ) | $ | 1,763 |
| $ | (586 | ) | $ | (849 | ) | $ | 17,701 |
| $ | (244 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives embedded in annuity contracts | $ | (155 | ) | $ | 36 |
| $ | -- |
| $ | (1 | ) | $ | -- |
| $ | (120 | ) | $ | 36 |
|
Total recurring Level 3 liabilities | $ | (155 | ) | $ | 36 |
| $ | -- |
| $ | (1 | ) | $ | -- |
| $ | (120 | ) | $ | 36 |
|
(1)The effect to net income totals $(223) million and is reported in the Condensed Consolidated Statements of Operations as follows: $(273) million in realized capital gains and losses, $13 million in net investment income, $(1) million in interest credited to contractholder funds and $(36) million in life and annuity contract benefits.
(2)Comprises $96 million of assets and $104 million of liabilities.
(3)The amounts represent gains and losses included in net income for the period of time that the asset or liability was determined to be in Level 3. These gains and losses total $(208)$(55) million for the three months ended March 31, 2011 and are reported in the Condensed Consolidated Statements of Operations as follows: $(257)$(69) million in realized capital gains and losses, $11$6 million in net investment income, $(2)$37 million in interest credited to contractholder funds and $(36)$(45) million in life and annuity contract benefits.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the nine months ended September 30, 2009.
($ in millions) |
|
|
| Total realized and |
|
|
|
|
|
|
| Total |
| |||||||||
|
| Balance as of |
| Net |
| OCI on |
| Purchases, |
| Net |
| Balance as |
| net income |
| |||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Municipal | $ | 2,463 |
| $ | (4 | ) | $ | 192 |
| $ | (107 | ) | $ | 163 |
| $ | 2,707 |
| $ | (5 | ) |
|
Corporate |
| 10,195 |
|
| (50 | ) |
| 1,197 |
|
| (1,250 | ) |
| (114 | ) |
| 9,978 |
|
| (53 | ) |
|
Foreign government |
| -- |
|
| -- |
|
| -- |
|
| 80 |
|
| -- |
|
| 80 |
|
| -- |
|
|
RMBS |
| 2,988 |
|
| (105 | ) |
| 58 |
|
| (293 | ) |
| (938 | ) |
| 1,710 |
|
| (84 | ) |
|
CMBS |
| 457 |
|
| (163 | ) |
| 592 |
|
| (60 | ) |
| 561 |
|
| 1,387 |
|
| (131 | ) |
|
ABS |
| 1,714 |
|
| (172 | ) |
| 676 |
|
| 7 |
|
| (450 | ) |
| 1,775 |
|
| (171 | ) |
|
Redeemable preferred stock |
| 2 |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| 2 |
|
| -- |
|
|
Total fixed income securities |
| 17,819 |
|
| (494 | ) |
| 2,715 |
|
| (1,623 | ) |
| (778 | ) |
| 17,639 |
|
| (444 | ) |
|
Equity securities |
| 74 |
|
| -- |
|
| (6 | ) |
| 3 |
|
| (3 | ) |
| 68 |
|
| -- |
|
|
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives, net |
| (101 | ) |
| 68 |
|
| -- |
|
| 25 |
|
| -- |
|
| (8 | ) (2) |
| 126 |
|
|
Other assets |
| 1 |
|
| 1 |
|
| -- |
|
| -- |
|
| -- |
|
| 2 |
|
| 1 |
|
|
Total recurring Level 3 assets | $ | 17,793 |
| $ | (425 | ) | $ | 2,709 |
| $ | (1,595 | ) | $ | (781 | ) | $ | 17,701 |
| $ | (317 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives embedded in annuity contracts | $ | (265 | ) | $ | 141 |
| $ | -- |
| $ | 4 |
| $ | -- |
| $ | (120 | ) | $ | 141 |
|
|
Total recurring Level 3 liabilities | $ | (265 | ) | $ | 141 |
| $ | -- |
| $ | 4 |
| $ | -- |
| $ | (120 | ) | $ | 141 |
|
|
(1)The effect to net income totals $(284) million and is reported in the Condensed Consolidated Statements of Operations as follows: $(503) million in realized capital gains and losses, $78 million in net investment income, and $(141) million in life and annuity contract benefits.
(2)Comprises $96 million of assets and $104 million of liabilities.
(3)The amounts represent gains and losses included in net income for the period of time that the asset or liability was determined to be in Level 3. These gains and losses total $(176)$(188) million for the three months ended March 31, 2010 and are reported in the Condensed Consolidated Statements of Operations as follows: $(385)$(237) million in realized capital gains and losses, $65$31 million in net investment income $(3) million in interest credited to contractholder funds, and $(141)$(18) million in life and annuity contract benefits.
Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value on a recurring basis.value.
Financial assets
($ in millions) |
| September 30, 2010 |
| December 31, 2009 |
| March 31, 2011 |
| December 31, 2010 |
| ||||||||
|
| Carrying |
| Fair value |
| Carrying |
| Fair |
| Carrying |
| Fair |
| Carrying |
| Fair |
|
Mortgage loans | $ | 6,961 | $ | 6,372 | $ | 7,935 | $ | 6,336 | $ | 6,582 | $ | 6,492 | $ | 6,679 | $ | 6,439 |
|
Limited partnership interests - cost basis |
| 1,261 |
| 1,334 |
| 1,103 |
| 1,098 |
| 1,383 |
| 1,625 |
| 1,348 |
| 1,481 |
|
Bank loans |
| 341 |
| 325 |
| 420 |
| 391 |
| 312 |
| 310 |
| 363 |
| 355 |
|
The fair value of mortgage loans is based on discounted contractual cash flows or, if the loans are impaired due to credit reasons, the fair value of collateral less costs to sell. Risk adjusted discount rates are selected using current rates at which similar loans would be made to borrowers with similar characteristics, using similar types of properties as collateral. The fair value of limited partnership interests accounted for on the cost basis is determined using reported net asset values of the underlying funds. The fair value of bank loans, which are reported in other investments, on the Condensed Consolidated Statements of Financial Position, are valuedis based on broker quotes from brokers familiar with the loans and current market conditions.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial liabilities
($ in millions) |
| September 30, 2010 |
| December 31, 2009 |
|
| March 31, 2011 |
| December 31, 2010 |
| ||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| |||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
|
|
|
|
|
|
|
|
|
|
Contractholder funds on investment contracts | $ | 36,927 | $ | 36,859 | $ | 40,943 | $ | 39,328 |
| $ | 34,834 | $ | 33,985 | $ | 36,163 | $ | 35,194 |
|
Long-term debt |
| 5,909 |
| 6,417 |
| 5,910 |
| 6,016 |
|
| 5,908 |
| 6,261 |
| 5,908 |
| 6,325 |
|
Liability for collateral |
| 469 |
| 469 |
| 658 |
| 658 |
|
| 838 |
| 838 |
| 484 |
| 484 |
|
The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts utilizing prevailing market rates for similar contracts adjusted for the Company’s own credit risk. Deferred annuities included in contractholder funds are valued using discounted cash flow models which incorporate market value margins, which are based on the cost of holding economic capital, and the Company’s own credit risk. Immediate annuities without life contingencies and fixed rate funding agreements are valued at the present value of future benefits using market implied interest rates which include the Company’s own credit risk.
The fair value of long-term debt is based on market observable data (such as the fair value of the debt when traded as an asset) or, in certain cases, is determined using discounted cash flow calculations based on current interest rates for instruments with comparable terms and considers the Company’s own credit risk. The liability for collateral is valued at carrying value due to its short-term nature.
6. Derivative Financial Instruments
The Company primarily uses derivatives for risk management, to partially mitigate potential adverse impacts from changes in risk-free interest rates, negative equity market valuations and increases in credit spreads, and asset replication. In addition, the Company has derivatives embedded in non-derivative host contracts that are required to be separated from the host contracts and accounted for at fair value. With the exception of non-hedge derivatives used for asset replication and non-hedge embedded derivatives, all of the Company’s derivatives are evaluated for their ongoing effectiveness as either accounting hedge or non-hedge derivative financial instruments on at least a quarterly basis. The Company does not use derivatives for trading purposes. Non-hedge accounting is generally used for “portfolio” level hedging strategies where the terms of the individual hedged items do not meet the strict homogeneity requirements to permit the application of hedge accounting.
Property-Liability uses interest rate swaption contracts and exchange traded options on interest rate futures to offset potential declining fixed income market values resulting from potential rising interest rates. Property-Liability also uses interest rate swaps to mitigate municipal bond interest rate risk within the municipal bond portfolio. Exchange traded equity put options are utilized by Property-Liability for overall equity portfolio protection from significant declines in equity market values below a targeted level. Equity index futures are used by Property-Liability to offset valuation losses in the equity portfolio during periods of declining equity market values. Credit default swaps are typically used to mitigate the credit risk within the Property-Liability fixed income portfolio. Prior to March 31, 2011, Property-Liability used interest rate swaption contracts and exchange traded options on interest rate futures to offset potential declining fixed income market values resulting from potential rising interest rates. Prior to March 31, 2011, exchange traded equity put options were utilized by Property-Liability for overall equity portfolio protection from significant declines in equity market values below a targeted level.
Portfolio duration management is a risk management strategy that is principally employed by Property-Liability wherein depending on the current portfolio duration relative to a designated target and the expectations of future interest rate movements, financial futures and interest rate swaps are utilized to change the duration of the portfolio in order to offset the economic effect that interest rates would otherwise have on the fair value of its fixed income securities.
Property-Liability uses futures to hedge the market risk related to deferred compensation liability contracts and forward contracts to hedge foreign currency risk associated with holding foreign currency denominated investments and foreign operations.
Allstate Financial uses foreign currency swaps primarily to reduce the foreign currency risk associated with issuing foreign currency denominated funding agreements and holding foreign currency denominated investments. Credit default swaps are also typically used to mitigate the credit risk within the Allstate Financial fixed income portfolio.
Asset-liability management is a risk management strategy that is principally employed by Allstate Financial to balance the respective interest-rate sensitivities of its assets and liabilities. Depending upon the attributes of the
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
assets acquired and liabilities issued, derivative instruments such as interest rate swaps, caps, floors, swaptions and futures are utilized to change the interest rate characteristics of existing assets and liabilities to ensure the relationship is maintained within specified ranges and to reduce exposure to rising or falling interest rates. Allstate Financial uses financial futures and interest rate swaps to hedge anticipated asset purchases and liability issuances and futures and options for hedging the equity exposure contained in its equity indexed life and annuity product contracts that offer equity returns to contractholders. In addition, Allstate Financial uses interest rate swaps to hedge interest rate risk inherent in funding agreements.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Allstate Financial uses foreign currency swaps primarily to reduce the foreign currency risk associated with issuing foreign currency denominated funding agreements and holding foreign currency denominated investments. Credit default swaps are also typically used to mitigate the credit risk within the Allstate Financial fixed income portfolio.
When derivatives meet specific criteria, they may be designated as accounting hedges and accounted for as fair value, cash flow, foreign currency fair value or foreign currency cash flow hedges. Allstate Financial designates certain of its interest rate and foreign currency swap contracts and certain investment risk transfer reinsurance agreements as fair value hedges when the hedging instrument is highly effective in offsetting the risk of changes in the fair value of the hedged item. Allstate Financial designates certain of its foreign currency swap contracts as cash flow hedges when the hedging instrument is highly effective in offsetting the exposure of variations in cash flows for the hedged risk that could affect net income. Amounts are reclassified to net investment income or realized capital gains and losses as the hedged item affects net income.
Asset replication refers to the “synthetic” creation of assets through the use of derivatives and primarily investment grade host bonds to replicate securities that are either unavailable in the cash markets or more economical to acquire in synthetic form. The Company replicates fixed income securities using a combination of a credit default swap and one or more highly rated fixed income securities to synthetically replicate the economic characteristics of one or more cash market securities. The Company also creates “synthetic” exposure to equity markets through the use of exchange traded equity index future contracts and an investment grade host bond.
The Company’s primary embedded derivatives are conversion options in fixed income securities, which provide the Company with the right to convert the instrument into a predetermined number of shares of common stock; equity options in Allstate Financial life and annuity product contracts, which provide equity returns to contractholders; equity-indexed notes containing equity call options, which provide a coupon payout that is determined using one or more equity-based indices; and credit default swaps in synthetic collateralized debt obligations, which provide enhanced coupon rates as a result of selling credit protection.protection; and conversion options in fixed income securities, which provide the Company with the right to convert the instrument into a predetermined number of shares of common stock. Substantially all of the fixed income securities with conversion options were sold in March 2011.
The notional amounts specified in the contracts are used to calculate the exchange of contractual payments under the agreements and are generally not representative of the potential for gain or loss on these agreements. However, the notional amounts specified in credit default swaps where the Company has sold credit protection represent the maximum amount of potential loss, assuming no recoveries.
Fair value, which is equal to the carrying value, is the estimated amount that the Company would receive or pay to terminate the derivative contracts at the reporting date. The carrying value amounts for OTC derivatives are further adjusted for the effects, if any, of legally enforceable master netting agreements and are presented on a net basis, by counterparty agreement, in the Condensed Consolidated Statements of Financial Position. For certain exchange traded derivatives, the exchange requires margin deposits as well as daily cash settlements of margin accounts. As of September 30, 2010,March 31, 2011, the Company pledged $71$16 million of securitiescash and cashsecurities in the form of margin deposits.
For those derivatives which qualify for fair value hedge accounting, net income includes the changes in the fair value of both the derivative instrument and the hedged risk, and therefore reflects any hedging ineffectiveness. For cash flow hedges, gains and losses are amortized from accumulated other comprehensive income and are reported in net income in the same period the forecasted transactions being hedged impact net income. For embedded derivatives in fixed income securities, net income includes the change in fair value of the embedded derivative and accretion income related to the host instrument. For non-hedge derivatives, net income includes changes in fair value and accrued periodic settlements, when applicable.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides a summary of the volume and fair value positions of derivative instruments as well as their reporting location in the Condensed Consolidated StatementsStatement of Financial Position at September 30, 2010.as of March 31, 2011.
($ in millions, except number of contracts) |
| Asset derivatives |
| Asset derivatives | ||||||||||||||||||||||||
|
|
|
| Volume (1) |
|
|
|
|
|
|
|
|
| Volume (1) |
|
|
|
|
|
|
|
| ||||||
|
| Balance sheet location |
| Notional |
| Number |
| Fair |
| Gross |
| Gross |
| Balance sheet location |
| Notional |
| Number |
| Fair |
|
| Gross |
| Gross |
| ||
Derivatives designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Interest rate swap agreements |
| Other investments | $ | 35 |
| n/a | $ | (2 | ) | $ | -- | $ | (2 | ) |
| Other investments | $ | 252 |
| n/a | $ | (16 | ) | $ | -- | $ | (16 | ) |
Foreign currency swap agreements |
| Other investments |
| 41 |
| n/a |
| 2 |
|
| 3 |
| (1 | ) |
| Other investments |
| 50 |
| n/a |
| (4 | ) |
| 3 |
| (7 | ) |
Total |
|
| $ | 76 |
| n/a | $ | -- |
| $ | 3 | $ | (3 | ) |
|
| $ | 302 |
| n/a | $ | (20 | ) | $ | 3 | $ | (23 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
| Other investments | $ | 574 |
| n/a | $ | 58 |
| $ | 60 | $ | (2 | ) |
| Other investments | $ | 5,386 |
| n/a | $ | 152 |
| $ | 178 | $ | (26 | ) |
Interest rate swaption agreements |
| Other investments |
| 750 |
| n/a |
| 3 |
|
| 3 |
| -- |
| ||||||||||||||
Interest rate cap and floor agreements |
| Other investments |
| 61 |
| n/a |
| -- |
|
| -- |
| -- |
|
| Other investments |
| 1,352 |
| n/a |
| (3 | ) |
| -- |
| (3 | ) |
Financial futures contracts and options |
| Other investments |
| n/a |
| 2,600 |
| -- |
|
| -- |
| -- |
| ||||||||||||||
Financial futures contracts and options |
| Other assets |
| n/a |
| 16,040 |
| -- |
|
| -- |
| -- |
|
| Other assets |
| n/a |
| 702 |
| -- |
|
| -- |
| -- |
|
Equity and index contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options, futures and warrants (2) |
| Other investments |
| 66 |
| 43,050 |
| 258 |
|
| 258 |
| -- |
|
| Other investments |
| 142 |
| 18,916 |
| 381 |
|
| 381 |
| -- |
|
Options, futures and warrants |
| Other assets |
| n/a |
| 1,456 |
| -- |
|
| -- |
| -- |
|
| Other assets |
| n/a |
| 1,205 |
| -- |
|
| -- |
| -- |
|
Foreign currency contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency swap agreements |
| Other investments |
| 40 |
| n/a |
| -- |
|
| -- |
| -- |
|
| Other investments |
| 40 |
| n/a |
| 1 |
|
| 1 |
| -- |
|
Foreign currency forwards and options |
| Other investments |
| 77 |
| n/a |
| -- |
|
| 1 |
| (1 | ) |
| Other investments |
| 219 |
| n/a |
| 1 |
|
| 4 |
| (3 | ) |
Embedded derivative financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion options |
| Fixed income securities |
| 852 |
| n/a |
| 204 |
|
| 206 |
| (2 | ) |
| Fixed income securities |
| 5 |
| n/a |
| -- |
|
| -- |
| -- |
|
Equity-indexed call options |
| Fixed income securities |
| 325 |
| n/a |
| 47 |
|
| 47 |
| -- |
|
| Fixed income securities |
| 300 |
| n/a |
| 50 |
|
| 50 |
| -- |
|
Credit default swaps |
| Fixed income securities |
| 181 |
| n/a |
| (102 | ) |
| -- |
| (102 | ) |
| Fixed income securities |
| 181 |
| n/a |
| (87 | ) |
| -- |
| (87 | ) |
Other embedded derivative financial instruments |
| Other investments |
| 1,000 |
| n/a |
| 2 |
|
| 2 |
| -- |
|
| Other investments |
| 1,000 |
| n/a |
| -- |
|
| -- |
| -- |
|
Credit default contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps - buying protection |
| Other investments |
| 146 |
| n/a |
| -- |
|
| 1 |
| (1 | ) |
| Other investments |
| 48 |
| n/a |
| (2 | ) |
| -- |
| (2 | ) |
Credit default swaps - selling protection |
| Other investments |
| 30 |
| n/a |
| (1 | ) |
| 1 |
| (2 | ) | ||||||||||||||
Other contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other contracts |
| Other investments |
| 13 |
| n/a |
| -- |
|
| -- |
| -- |
|
| Other investments |
| 6 |
| n/a |
| -- |
|
| -- |
| -- |
|
Other contracts |
| Other assets |
| 5 |
| n/a |
| 2 |
|
| 2 |
| -- |
|
| Other assets |
| 5 |
| n/a |
| 1 |
|
| 1 |
| -- |
|
Total |
|
| $ | 3,340 |
| 63,146 | $ | 469 |
| $ | 577 | $ | (108 | ) |
|
| $ | 9,464 |
| 20,823 | $ | 496 |
| $ | 619 | $ | (123 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets |
|
| $ | 3,416 |
| 63,146 | $ | 469 |
| $ | 580 | $ | (111 | ) | ||||||||||||||
Total asset derivatives |
|
| $ | 9,766 |
| 20,823 | $ | 476 |
| $ | 622 | $ | (146 | ) |
(1) Volume for OTC derivative contracts is represented by their notional amounts. Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded. (n/a = not applicable)
(2) In addition to the number of contracts presented in the table, the Company held 1,432,06527,554 stock rights and 1,363,107 stock warrants. Stock warrants can be converted to cash upon sale of those instruments or exercised for shares of common stock.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| Liability derivatives |
| Liability derivatives | ||||||||||||||||||||||||
|
|
|
| Volume (1) |
|
|
|
|
|
|
|
|
| Volume (1) |
|
|
|
|
|
|
|
| ||||||
|
| Balance sheet location |
| Notional |
| Number |
| Fair |
| Gross |
| Gross |
| Balance sheet location |
| Notional |
| Number |
| Fair |
|
| Gross |
| Gross |
| ||
Derivatives designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Interest rate swap agreements |
| Other liabilities & accrued expenses | $ | 3,621 |
| n/a | $ | (255 | ) | $ | 26 | $ | (281 | ) |
| Other liabilities & accrued expenses | $ | 59 |
| n/a | $ | (4 | ) | $ | -- | $ | (4 | ) |
Interest rate swap agreements |
| Contractholder funds |
| -- |
| n/a |
| 7 |
|
| 7 |
| -- |
| ||||||||||||||
Foreign currency swap agreements |
| Other liabilities & accrued expenses |
| 161 |
| n/a |
| (14 | ) |
| 1 |
| (15 | ) |
| Other liabilities & accrued expenses |
| 152 |
| n/a |
| (22 | ) |
| -- |
| (22 | ) |
Foreign currency and interest rate swap agreements |
| Other liabilities & accrued expenses |
| 435 |
| n/a |
| 44 |
|
| 44 |
| -- |
| ||||||||||||||
Foreign currency and interest rate swap agreements |
| Contractholder funds |
| -- |
| n/a |
| 20 |
|
| 20 |
| -- |
| ||||||||||||||
Total |
|
| $ | 4,217 |
| n/a | $ | (198 | ) | $ | 98 | $ | (296 | ) |
|
| $ | 211 |
| n/a | $ | (26 | ) | $ | -- | $ | (26 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
| Other liabilities & accrued expenses | $ | 5,769 |
| n/a | $ | (70 | ) | $ | 132 | $ | (202 | ) |
| Other liabilities & accrued expenses | $ | 3,252 |
| n/a | $ | (40 | ) | $ | 26 | $ | (66 | ) |
Interest rate swaption agreements |
| Other liabilities & accrued expenses |
| 8,750 |
| n/a |
| 8 |
|
| 8 |
| -- |
|
| Other liabilities & accrued expenses |
| 1,675 |
| n/a |
| -- |
|
| -- |
| -- |
|
Interest rate cap and floor agreements |
| Other liabilities & accrued expenses |
| 3,514 |
| n/a |
| (32 | ) |
| 1 |
| (33 | ) |
| Other liabilities & accrued expenses |
| 2,020 |
| n/a |
| (18 | ) |
| 2 |
| (20 | ) |
Financial futures contracts and options |
| Other liabilities & accrued expenses |
| n/a |
| 7,130 |
| -- |
|
| -- |
| -- |
|
| Other liabilities & accrued expenses |
| n/a |
| 440 |
| -- |
|
| -- |
| -- |
|
Equity and index contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and futures |
| Other liabilities & accrued expenses |
| 57 |
| 25,184 |
| (110 | ) |
| 1 |
| (111 | ) |
| Other liabilities & accrued expenses |
| 4 |
| 19,917 |
| (207 | ) |
| -- |
| (207 | ) |
Foreign currency contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency swap agreements |
| Other liabilities & accrued expenses |
| 50 |
| n/a |
| 3 |
|
| 3 |
| -- |
|
| Other liabilities & accrued expenses |
| 50 |
| n/a |
| 1 |
|
| 1 |
| -- |
|
Foreign currency forwards and options |
| Other liabilities & accrued expenses |
| 682 |
| n/a |
| (13 | ) |
| 2 |
| (15 | ) |
| Other liabilities & accrued expenses |
| 62 |
| n/a |
| 2 |
|
| 2 |
| -- |
|
Embedded derivative financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed accumulation benefits |
| Contractholder funds |
| 1,019 |
| n/a |
| (87 | ) |
| -- |
| (87 | ) |
| Contractholder funds |
| 1,115 |
| n/a |
| (58 | ) |
| -- |
| (58 | ) |
Guaranteed withdrawal benefits |
| Contractholder funds |
| 720 |
| n/a |
| (51 | ) |
| -- |
| (51 | ) |
| Contractholder funds |
| 761 |
| n/a |
| (29 | ) |
| -- |
| (29 | ) |
Equity-indexed options in life and annuity product contracts |
| Contractholder funds |
| 4,165 |
| n/a |
| (145 | ) |
| -- |
| (145 | ) | ||||||||||||||
Equity-indexed and forward starting options in life and annuity product contracts |
| Contractholder funds |
| 4,624 |
| n/a |
| (537 | ) |
| -- |
| (537 | ) | ||||||||||||||
Other embedded derivative financial instruments |
| Contractholder funds |
| 85 |
| n/a |
| (4 | ) |
| -- |
| (4 | ) |
| Contractholder funds |
| 85 |
| n/a |
| (6 | ) |
| -- |
| (6 | ) |
Credit default contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps — buying protection |
| Other liabilities & accrued expenses |
| 1,661 |
| n/a |
| (3 | ) |
| 9 |
| (12 | ) | ||||||||||||||
Credit default swaps — selling protection |
| Other liabilities & accrued expenses |
| 707 |
| n/a |
| (82 | ) |
| 2 |
| (84 | ) | ||||||||||||||
Credit default swaps – buying protection |
| Other liabilities & accrued expenses |
| 1,399 |
| n/a |
| (11 | ) |
| 4 |
| (15 | ) | ||||||||||||||
Credit default swaps – selling protection |
| Other liabilities & accrued expenses |
| 583 |
| n/a |
| (57 | ) |
| 2 |
| (59 | ) | ||||||||||||||
Total |
|
| $ | 27,179 |
| 32,314 | $ | (586 | ) | $ | 158 | $ | (744 | ) |
|
| $ | 15,630 |
| 20,357 | $ | (960 | ) | $ | 37 | $ | (997 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities |
|
| $ | 31,396 |
| 32,314 | $ | (784 | ) | $ | 256 | $ | (1,040 | ) | ||||||||||||||
Total liability derivatives |
|
| $ | 15,841 |
| 20,357 | $ | (986 | ) | $ | 37 | $ | (1,023 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
| $ | 34,812 |
| 95,460 | $ | (315 | ) |
|
|
|
|
|
|
| $ | 25,607 |
| 41,180 | $ | (510 | ) |
|
|
|
|
|
(1) Volume for OTC derivative contracts is represented by their notional amounts. Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded. (n/a = not applicable)
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides a summary of the volume and fair value positions of derivative instruments as well as their reporting location in the Condensed Consolidated StatementsStatement of Financial Position atas of December 31, 2009.2010.
($ in millions, except number of contracts) |
| Asset derivatives |
| Asset derivatives | ||||||||||||||||||||||||
|
|
|
| Volume (1) |
|
|
|
|
|
|
|
|
| Volume (1) |
|
|
|
|
|
|
|
| ||||||
|
| Balance sheet location |
| Notional |
| Number |
| Fair |
| Gross |
| Gross |
| Balance sheet location |
| Notional |
| Number |
| Fair |
|
| Gross |
| Gross |
| ||
Derivatives designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Interest rate swap agreements |
| Other investments | $ | 45 |
| n/a | $ | (3 | ) | $ | — | $ | (3 | ) |
| Other investments | $ | 156 |
| n/a | $ | (18 | ) | $ | -- | $ | (18 | ) |
Foreign currency swap agreements |
| Other investments |
| 23 |
| n/a |
| (2 | ) |
| — |
| (2 | ) |
| Other investments |
| 64 |
| n/a |
| 2 |
|
| 3 |
| (1 | ) |
Total |
|
| $ | 68 |
| n/a | $ | (5 | ) | $ | — | $ | (5 | ) |
|
| $ | 220 |
| n/a | $ | (16 | ) | $ | 3 | $ | (19 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
| Other investments | $ | 1,206 |
| n/a | $ | 49 |
| $ | 62 | $ | (13 | ) |
| Other investments | $ | 1,469 |
| n/a | $ | 65 |
| $ | 81 | $ | (16 | ) |
Interest rate swaption agreements |
| Other investments |
| 8,500 |
| n/a |
| 95 |
|
| 95 |
| — |
|
| Other investments |
| 4,161 |
| n/a |
| 50 |
|
| 50 |
| -- |
|
Interest rate cap and floor agreements |
| Other investments |
| 52 |
| n/a |
| 2 |
|
| 2 |
| — |
|
| Other investments |
| 226 |
| n/a |
| (2 | ) |
| 1 |
| (3 | ) |
Financial futures contracts and options |
| Other investments |
| n/a |
| 30,000 |
| 12 |
|
| 12 |
| — |
|
| Other investments |
| n/a |
| 8,000 |
| 3 |
|
| 3 |
| -- |
|
Financial futures contracts and options |
| Other assets |
| n/a |
| 404 |
| — |
|
| — |
| — |
|
| Other assets |
| n/a |
| 1,420 |
| -- |
|
| -- |
| -- |
|
Equity and index contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options, futures and warrants (2) |
| Other investments |
| 62 |
| 43,850 |
| 435 |
|
| 435 |
| — |
|
| Other investments |
| 64 |
| 38,451 |
| 359 |
|
| 359 |
| -- |
|
Options, futures and warrants |
| Other assets |
| n/a |
| 102 |
| — |
|
| — |
| — |
|
| Other assets |
| n/a |
| 292 |
| -- |
|
| -- |
| -- |
|
Foreign currency contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency swap agreements |
| Other investments |
| 53 |
| n/a |
| 1 |
|
| 1 |
| — |
|
| Other investments |
| 90 |
| n/a |
| 6 |
|
| 6 |
| -- |
|
Foreign currency forwards and options |
| Other investments |
| 476 |
| n/a |
| 5 |
|
| 8 |
| (3 | ) |
| Other investments |
| 257 |
| n/a |
| 6 |
|
| 7 |
| (1 | ) |
Embedded derivative financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion options |
| Fixed income securities |
| 936 |
| n/a |
| 312 |
|
| 316 |
| (4 | ) |
| Fixed income securities |
| 820 |
| n/a |
| 236 |
|
| 238 |
| (2 | ) |
Equity-indexed call options |
| Fixed income securities |
| 475 |
| n/a |
| 89 |
|
| 89 |
| — |
|
| Fixed income securities |
| 300 |
| n/a |
| 47 |
|
| 47 |
| -- |
|
Credit default swaps |
| Fixed income securities |
| 181 |
| n/a |
| (88 | ) |
| -- |
| (88 | ) | ||||||||||||||
Other embedded derivative financial instruments |
| Other investments |
| 1,000 |
| n/a |
| 2 |
|
| 2 |
| — |
|
| Other investments |
| 1,000 |
| n/a |
| -- |
|
| -- |
| -- |
|
Credit default contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps – buying protection |
| Other investments |
| 329 |
| n/a |
| (6 | ) |
| 2 |
| (8 | ) | ||||||||||||||
Credit default swaps – selling protection |
| Other investments |
| 93 |
| n/a |
| (8 | ) |
| 2 |
| (10 | ) | ||||||||||||||
Credit default swaps - buying protection |
| Other investments |
| 299 |
| n/a |
| (5 | ) |
| 2 |
| (7 | ) | ||||||||||||||
Credit default swaps - selling protection |
| Other investments |
| 150 |
| n/a |
| (8 | ) |
| 2 |
| (10 | ) | ||||||||||||||
Other contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other contracts |
| Other investments |
| 75 |
| n/a |
| — |
|
| — |
| — |
|
| Other investments |
| 13 |
| n/a |
| -- |
|
| -- |
| -- |
|
Other contracts |
| Other assets |
| 6 |
| n/a |
| 2 |
|
| 2 |
| — |
|
| Other assets |
| 5 |
| n/a |
| 1 |
|
| 1 |
| -- |
|
Total |
|
| $ | 13,263 |
| 74,356 | $ | 990 |
| $ | 1,028 | $ | (38 | ) |
|
| $ | 9,035 |
| 48,163 | $ | 670 |
| $ | 797 | $ | (127 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets |
|
| $ | 13,331 |
| 74,356 | $ | 985 |
| $ | 1,028 | $ | (43 | ) | ||||||||||||||
Total asset derivatives |
|
| $ | 9,255 |
| 48,163 | $ | 654 |
| $ | 800 | $ | (146 | ) |
(1) Volume for OTC derivative contracts is represented by their notional amounts. Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded. (n/a = not applicable)
(2) In addition to the number of contracts presented in the table, the Company held 101,2552,768 stock rights and 1,352,4321,379,932 stock warrants. Stock rights and stock warrants can be converted to cash upon sale of those instruments or exercised for shares of common stock.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| Liability derivatives |
|
| Liability derivatives | ||||||||||||||||||||||
|
|
|
| Volume (1) |
|
|
|
|
|
|
|
|
|
| Volume (1) |
|
|
|
|
|
|
|
| ||||
|
| Balance sheet location |
| Notional |
| Number |
| Fair |
| Gross |
| Gross |
|
| Balance sheet location |
| Notional |
| Number |
| Fair |
|
| Gross |
| Gross |
|
Derivatives designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
| Other liabilities & accrued expenses | $ | 3,345 |
| n/a | $ | (181 | ) | $ | 20 | $ | (201 | ) | |||||||||||||
Interest rate swap agreements |
| Other liabilities & accrued expenses | $ | 2,443 |
| n/a | $ | (230) | $ | -- | $ | (230) |
|
| Contractholder funds |
| -- |
| n/a |
| 2 |
|
| 2 |
| -- |
|
Foreign currency swap agreements |
| Other liabilities & accrued expenses |
| 179 |
| n/a |
| (18) |
| 3 |
| (21) |
|
| Other liabilities & accrued expenses |
| 138 |
| n/a |
| (20 | ) |
| -- |
| (20 | ) |
Foreign currency and interest rate swap agreements |
| Other liabilities & accrued expenses |
| 870 |
| n/a |
| 231 |
| 231 |
| -- |
|
| Other liabilities & accrued expenses |
| 435 |
| n/a |
| 34 |
|
| 34 |
| -- |
|
Foreign currency and interest rate swap agreements |
| Contractholder funds |
| -- |
| n/a |
| 44 |
| 44 |
| -- |
|
| Contractholder funds |
| -- |
| n/a |
| 28 |
|
| 28 |
| -- |
|
Total |
|
| $ | 3,492 |
| n/a | $ | 27 | $ | 278 | $ | (251) |
|
|
| $ | 3,918 |
| n/a | $ | (137 | ) | $ | 84 | $ | (221 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
| Other liabilities & accrued expenses | $ | 6,187 |
| n/a | $ | 28 | $ | 68 | $ | (40) |
|
| Other liabilities & accrued expenses | $ | 4,543 |
| n/a | $ | 29 |
| $ | 97 | $ | (68 | ) |
Interest rate swaption agreements |
| Other liabilities & accrued expenses |
| 2,000 |
| n/a |
| 34 |
| 34 |
| -- |
|
| Other liabilities & accrued expenses |
| 4,400 |
| n/a |
| 18 |
|
| 18 |
| -- |
|
Interest rate cap and floor agreements |
| Other liabilities & accrued expenses |
| 3,896 |
| n/a |
| (16) |
| 9 |
| (25) |
|
| Other liabilities & accrued expenses |
| 3,216 |
| n/a |
| (22 | ) |
| 1 |
| (23 | ) |
Financial futures contracts and options |
| Other liabilities & accrued expenses |
| n/a |
| 15,150 |
| (1 | ) |
| -- |
| (1 | ) | |||||||||||||
Equity and index contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options, futures and warrants |
| Other liabilities & accrued expenses |
| 45 |
| 21,098 |
| (214) |
| 3 |
| (217) |
| ||||||||||||||
Options and futures |
| Other liabilities & accrued expenses |
| 64 |
| 21,585 |
| (168 | ) |
| 2 |
| (170 | ) | |||||||||||||
Foreign currency contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency swap agreements |
| Other liabilities & accrued expenses |
| 54 |
| n/a |
| 3 |
| 3 |
| -- |
| ||||||||||||||
Foreign currency forwards and options |
| Other liabilities & accrued expenses |
| 185 |
| n/a |
| 2 |
| 2 |
| -- |
|
| Other liabilities & accrued expenses |
| 316 |
| n/a |
| 1 |
|
| 2 |
| (1 | ) |
Embedded derivative financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed accumulation benefits |
| Contractholder funds |
| 1,113 |
| n/a |
| (66) |
| -- |
| (66) |
|
| Contractholder funds |
| 1,067 |
| n/a |
| (88 | ) |
| -- |
| (88 | ) |
Guaranteed withdrawal benefits |
| Contractholder funds |
| 810 |
| n/a |
| (41) |
| -- |
| (41) |
|
| Contractholder funds |
| 739 |
| n/a |
| (47 | ) |
| -- |
| (47 | ) |
Equity-indexed options in life and annuity product contracts |
| Contractholder funds |
| 4,321 |
| n/a |
| (217) |
| -- |
| (217) |
| ||||||||||||||
Equity-indexed and forward starting options in life and annuity product contracts |
| Contractholder funds |
| 4,694 |
| n/a |
| (515 | ) |
| -- |
| (515 | ) | |||||||||||||
Other embedded derivative financial instruments |
| Contractholder funds |
| 85 |
| n/a |
| (3) |
| -- |
| (3) |
|
| Contractholder funds |
| 85 |
| n/a |
| (3 | ) |
| -- |
| (3 | ) |
Credit default contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps – buying protection |
| Other liabilities & accrued expenses |
| 839 |
| n/a |
| (40) |
| 5 |
| (45) |
|
| Other liabilities & accrued expenses |
| 1,127 |
| n/a |
| (13 | ) |
| 6 |
| (19 | ) |
Credit default swaps – selling protection |
| Other liabilities & accrued expenses |
| 1,195 |
| n/a |
| (65) |
| 7 |
| (72) |
|
| Other liabilities & accrued expenses |
| 482 |
| n/a |
| (66 | ) |
| 1 |
| (67 | ) |
Total |
|
| $ | 20,730 |
| 21,098 | $ | (595) | $ | 131 | $ | (726) |
|
|
| $ | 20,733 |
| 36,735 | $ | (875 | ) | $ | 127 | $ | (1,002 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liabilities |
|
| $ | 24,222 |
| 21,098 | $ | (568) | $ | 409 | $ | (977) |
| ||||||||||||||
Total liability derivatives |
|
| $ | 24,651 |
| 36,735 | $ | (1,012 | ) | $ | 211 | $ | (1,223 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
| $ | 37,553 |
| 95,454 | $ | 417 |
|
|
|
|
|
|
| $ | 33,906 |
| 84,898 | $ | (358 | ) |
|
|
|
|
|
(1) Volume for OTC derivative contracts is represented by their notional amounts. Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded. (n/a = not applicable)
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides a summary of the impacts of the Company’s foreign currency contracts in cash flow hedging relationships in the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Financial Position.Position for the three months ended March 31. Amortization of net gainslosses from accumulated other comprehensive income related to cash flow hedges is expected to be $2$6 million during the next twelve months.
($ in millions) |
| Three months |
| Nine months |
| ||||
Effective portion |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
|
(Loss) gain recognized in OCI on derivatives during the period | $ | (19) | $ | (12) | $ | 9 | $ | (36) |
|
Loss recognized in OCI on derivatives during the term of the hedging relationship |
| (17) |
| (24) |
| (17) |
| (24) |
|
Gain reclassified from AOCI into income (net investment income) |
| -- |
| 1 |
| 1 |
| 2 |
|
(Loss) gain reclassified from AOCI into income (realized capital gains and losses) |
| -- |
| (2) |
| 2 |
| (1) |
|
Ineffective portion and amount excluded from effectiveness testing |
|
|
|
|
|
|
|
|
|
Gain recognized in income on derivatives (realized capital gains and losses) |
| -- |
| -- |
| -- |
| -- |
|
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
($ in millions) |
| 2011 |
| 2010 | ||
(Loss) gain recognized in OCI on derivatives during the period | $ | (8 | ) | $ | 6 |
|
Loss recognized in OCI on derivatives during the term of the hedging relationship |
| (30 | ) |
| (18 | ) |
Gain reclassified from AOCI into income (net investment income) |
| -- |
|
| 1 |
|
Gain reclassified from AOCI into income (realized capital gains and losses) |
| -- |
|
| -- |
|
Ineffective portion and amount excluded from effectiveness testing |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain recognized in income on derivatives (realized capital gains and losses) |
| -- |
|
| -- |
|
The following tables present gains and losses from valuation, settlements and hedge ineffectiveness reported on derivatives used in fair value hedging relationships and derivatives not designated as accounting hedging instruments in the Condensed Consolidated Statements of Operations.Operations for the three months ended March 31.
($ in millions) |
| Three months ended September 30, 2010 | ||||||||||
|
| Net |
| Realized |
| Life and |
| Interest |
| Operating |
| Total gain |
Derivatives in fair value accounting hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts | $ | (57) | $ | 2 | $ | -- | $ | 9 | $ | -- | $ | (46) |
Foreign currency and interest rate contracts |
| -- |
| -- |
| -- |
| 25 |
| -- |
| 25 |
Subtotal |
| (57) |
| 2 |
| -- |
| 34 |
| -- |
| (21) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| -- |
| (183) |
| -- |
| -- |
| -- |
| (183) |
Equity and index contracts |
| -- |
| (115) |
| -- |
| 70 |
| 13 |
| (32) |
Embedded derivative financial instruments |
| -- |
| 48 |
| (22) |
| (39) |
| -- |
| (13) |
Foreign currency contracts |
| -- |
| (41) |
| -- |
| -- |
| 4 |
| (37) |
Credit default contracts |
| -- |
| 5 |
| -- |
| -- |
| -- |
| 5 |
Other contracts |
| -- |
| (1) |
| -- |
| 1 |
| -- |
| -- |
Subtotal |
| -- |
| (287) |
| (22) |
| 32 |
| 17 |
| (260) |
Total | $ | (57) | $ | (285) | $ | (22) | $ | 66 | $ | 17 | $ | (281) |
|
| Nine months ended September 30, 2010 | ||||||||||||||||||||||||||||
($ in millions) |
| 2011 | ||||||||||||||||||||||||||||
|
| Net |
| Realized |
| Life and |
| Interest |
| Operating |
| Total gain |
| Net |
| Realized |
| Life and |
| Interest |
| Operating |
| Total gain | ||||||
Derivatives in fair value accounting hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts | $ | (170) | $ | 4 | $ | -- | $ | 21 | $ | -- | $ | (145) | $ | 1 |
| $ | (8 | ) | $ | -- |
| $ | (5 | ) | $ | -- |
| $ | (12 | ) |
Foreign currency and interest rate contracts |
| -- |
| (1) |
| -- |
| (15) |
| -- |
| (16) |
| -- |
|
| -- |
|
| -- |
|
| (32 | ) |
| -- |
|
| (32 | ) |
Subtotal |
| (170) |
| 3 |
| -- |
| 6 |
| -- |
| (161) |
| 1 |
|
| (8 | ) |
| -- |
|
| (37 | ) |
| -- |
|
| (44 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interest rate contracts |
| -- |
| (621) |
| -- |
| -- |
| -- |
| (621) |
| -- |
| (51 | ) |
| -- |
| -- |
| -- |
| (51 | ) | ||||
Equity and index contracts |
| -- |
| (72) |
| -- |
| 34 |
| 5 |
| (33) |
| -- |
| (19 | ) |
| -- |
| 38 |
| 7 |
| 26 |
| ||||
Embedded derivative financial instruments |
| -- |
| (71) |
| (30) |
| 71 |
| -- |
| (30) |
| -- |
| 8 |
| 45 |
| (22 | ) |
| -- |
| 31 |
| ||||
Foreign currency contracts |
| -- |
| (21) |
| -- |
| -- |
| (2) |
| (23) |
| -- |
| (5 | ) |
| -- |
| -- |
| 2 |
| (3 | ) | ||||
Credit default contracts |
| -- |
| 2 |
| -- |
| -- |
| -- |
| 2 |
| -- |
| 8 |
| -- |
| -- |
| -- |
| 8 |
| |||||
Other contracts |
| -- |
| -- |
| -- |
| 3 |
| -- |
| 3 |
| -- |
|
| -- |
|
| -- |
|
| 2 |
|
| -- |
|
| 2 |
|
Subtotal |
| -- |
| (783) |
| (30) |
| 108 |
| 3 |
| (702) |
| -- |
|
| (59 | ) |
| 45 |
|
| 18 |
|
| 9 |
|
| 13 |
|
Total | $ | (170) | $ | (780) | $ | (30) | $ | 114 | $ | 3 | $ | (863) | $ | 1 |
| $ | (67 | ) | $ | 45 |
| $ | (19 | ) | $ | 9 |
| $ | (31 | ) |
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| Three months ended September 30, 2009 | ||||||||||
|
| Net |
| Realized |
| Life and |
| Interest |
| Operating |
| Total gain |
Derivatives in fair value accounting hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts | $ | (55) | $ | -- | $ | -- | $ | -- | $ | -- | $ | (55) |
Foreign currency and interest rate contracts |
| -- |
| (3) |
| -- |
| 12 |
| -- |
| 9 |
Subtotal |
| (55) |
| (3) |
| -- |
| 12 |
| -- |
| (46) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| -- |
| (398) |
| -- |
| -- |
| -- |
| (398) |
Equity and index contracts |
| -- |
| (47) |
| -- |
| 68 |
| 16 |
| 37 |
Embedded derivative financial instruments |
| -- |
| 88 |
| 36 |
| (100) |
| -- |
| 24 |
Foreign currency contracts |
| -- |
| 4 |
| -- |
| -- |
| 3 |
| 7 |
Credit default contracts |
| -- |
| (6) |
| -- |
| -- |
| -- |
| (6) |
Other contracts |
| -- |
| -- |
| -- |
| 2 |
| -- |
| 2 |
Subtotal |
| -- |
| (359) |
| 36 |
| (30) |
| 19 |
| (334) |
Total | $ | (55) | $ | (362) | $ | 36 | $ | (18) | $ | 19 | $ | (380) |
|
| Nine months ended September 30, 2009 | ||||||||||
|
| Net |
| Realized |
| Life and |
| Interest |
| Operating |
| Total gain |
Derivatives in fair value accounting hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts | $ | 23 | $ | 10 | $ | -- | $ | (13) | $ | -- | $ | 20 |
Foreign currency and interest rate contracts |
| -- |
| (6) |
| -- |
| 72 |
| -- |
| 66 |
Subtotal |
| 23 |
| 4 |
| -- |
| 59 |
| -- |
| 86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| -- |
| 181 |
| -- |
| -- |
| -- |
| 181 |
Equity and index contracts |
| -- |
| (132) |
| -- |
| 77 |
| 19 |
| (36) |
Embedded derivative financial instruments |
| -- |
| 117 |
| 146 |
| (185) |
| -- |
| 78 |
Foreign currency contracts |
| -- |
| (2) |
| -- |
| -- |
| (9) |
| (11) |
Credit default contracts |
| -- |
| (16) |
| -- |
| -- |
| -- |
| (16) |
Other contracts |
| (1) |
| -- |
| -- |
| 1 |
| -- |
| -- |
Subtotal |
| (1) |
| 148 |
| 146 |
| (107) |
| 10 |
| 196 |
Total | $ | 22 | $ | 152 | $ | 146 | $ | (48) | $ | 10 | $ | 282 |
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| 2010 | ||||||||||||||||
|
| Net |
| Realized |
| Life and |
| Interest |
| Operating |
| Total gain | ||||||
Derivatives in fair value accounting hedging relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts | $ | (41 | ) | $ | -- |
| $ | -- |
| $ | (1 | ) | $ | -- |
| $ | (42 | ) |
Foreign currency and interest rate contracts |
| -- |
|
| -- |
|
| -- |
|
| (24 | ) |
| -- |
|
| (24 | ) |
Subtotal |
| (41 | ) |
| -- |
|
| -- |
|
| (25 | ) |
| -- |
|
| (66 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| -- |
|
| (156 | ) |
| -- |
|
| -- |
|
| -- |
|
| (156 | ) |
Equity and index contracts |
| -- |
|
| (39 | ) |
| -- |
|
| 34 |
|
| 6 |
|
| 1 |
|
Embedded derivative financial instruments |
| -- |
|
| (13 | ) |
| 20 |
|
| (2 | ) |
| -- |
|
| 5 |
|
Foreign currency contracts |
| -- |
|
| 17 |
|
| -- |
|
| -- |
|
| (5 | ) |
| 12 |
|
Credit default contracts |
| -- |
|
| 6 |
|
| -- |
|
| -- |
|
| -- |
|
| 6 |
|
Subtotal |
| -- |
|
| (185 | ) |
| 20 |
|
| 32 |
|
| 1 |
|
| (132 | ) |
Total | $ | (41 | ) | $ | (185 | ) | $ | 20 |
| $ | 7 |
| $ | 1 |
| $ | (198 | ) |
The following tables provide a summary of the changes in fair value of the Company’s fair value hedging relationships in the Condensed Consolidated Statements of Operations.Operations for the three months ended March 31.
($ in millions) |
| Three months ended September 30, 2010 | ||||||
|
| Gain (loss) on derivatives |
| Gain (loss) on hedged risk | ||||
Location of gain or (loss) recognized |
| Interest |
| Foreign |
| Contractholder |
| Investments |
Interest credited to contractholder funds | $ | 6 | $ | 18 | $ | (24) | $ | -- |
Net investment income |
| (32) |
| -- |
| -- |
| 32 |
Realized capital gains and losses |
| 2 |
| -- |
| -- |
| -- |
Total | $ | (24) | $ | 18 | $ | (24) | $ | 32 |
| ($ in millions) |
| 2011 | ||||||||||
|
|
| Gain (loss) on derivatives |
|
| Gain (loss) on hedged risk |
| ||||||
| Location of gain or (loss) recognized |
| Interest |
|
| Foreign |
|
| Contractholder |
|
| Investments |
|
| Interest credited to contractholder funds | $ | (7 | ) | $ | (34 | ) | $ | 41 |
| $ | -- |
|
| Net investment income |
| 21 |
|
| -- |
|
| -- |
|
| (21 | ) |
| Realized capital gains and losses |
| (8 | ) |
| -- |
|
| -- |
|
| -- |
|
| Total | $ | 6 |
| $ | (34 | ) | $ | 41 |
| $ | (21 | ) |
|
| Nine months ended September 30, 2010 | ||||||
|
| Gain (loss) on derivatives |
| Gain (loss) on hedged risk | ||||
Location of gain or (loss) recognized |
| Interest |
| Foreign |
| Contractholder |
| Investments |
Interest credited to contractholder funds | $ | 14 | $ | (39) | $ | 25 | $ | -- |
Net investment income |
| (88) |
| -- |
| -- |
| 88 |
Realized capital gains and losses |
| 4 |
| (1) |
| -- |
| -- |
Total | $ | (70) | $ | (40) | $ | 25 | $ | 88 |
|
| Three months ended September 30, 2009 | ||||||
|
| Gain (loss) on derivatives |
| Gain (loss) on hedged risk | ||||
Location of gain or (loss) recognized |
| Interest |
| Foreign |
| Contractholder |
| Investments |
Interest credited to contractholder funds | $ | -- | $ | 1 | $ | (1) | $ | -- |
Net investment income |
| (21) |
| -- |
| -- |
| 21 |
Realized capital gains and losses |
| -- |
| (3) |
| -- |
| -- |
Total | $ | (21) | $ | (2) | $ | (1) | $ | 21 |
|
| Nine months ended September 30, 2009 | ||||||
|
| Gain (loss) on derivatives |
| Gain (loss) on hedged risk | ||||
Location of gain or (loss) recognized |
| Interest |
| Foreign |
| Contractholder |
| Investments |
Interest credited to contractholder funds | $ | (26) | $ | 45 | $ | (19) | $ | -- |
Net investment income |
| 124 |
| -- |
| -- |
| (124) |
Realized capital gains and losses |
| 10 |
| (6) |
| -- |
| -- |
Total | $ | 108 | $ | 39 | $ | (19) | $ | (124) |
|
|
| 2010 | ||||||||||
|
|
| Gain (loss) on derivatives |
| Gain (loss) on hedged risk | ||||||||
| Location of gain or (loss) recognized |
| Interest |
|
| Foreign |
|
| Contractholder |
|
| Investments |
|
| Interest credited to contractholder funds | $ | (1 | ) | $ | (33 | ) | $ | 34 |
| $ | -- |
|
| Net investment income |
| (13 | ) |
| -- |
|
| -- |
|
| 13 |
|
| Realized capital gains and losses |
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| Total | $ | (14 | ) | $ | (33 | ) | $ | 34 |
| $ | 13 |
|
The Company manages its exposure to credit risk by utilizing highly rated counterparties, establishing risk control limits, executing legally enforceable master netting agreements (“MNAs”) and obtaining collateral where appropriate. The Company uses MNAs for OTC derivative transactions, including interest rate swap, foreign currency swap, interest rate cap, interest rate floor, credit default swap, forward and certain option agreements (including swaptions). These agreements permit either party to net payments due for transactions covered by the agreements. Under the provisions of the agreements, collateral is either pledged or obtained when certain predetermined exposure limits are exceeded. As of September 30, 2010,March 31, 2011, counterparties pledged $4$105 million in cash and $13 million in securities to the Company, and the Company pledged $364$166 million in securities to counterparties which includes $275$100 million of collateral posted under MNAs for contracts containing credit-risk-contingent provisions that are in a liability position and $89$66 million of collateral posted under MNAs for contracts without credit-risk-contingent liabilities. The Company has not incurred any losses on derivative financial instruments due to counterparty nonperformance. Other derivatives, including futures and certain option contracts, are traded on organized
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
organized exchanges which require margin deposits and guarantee the execution of trades, thereby mitigating any potential credit risk.
Counterparty credit exposure represents the Company’s potential loss if all of the counterparties concurrently fail to perform under the contractual terms of the contracts and all collateral, if any, becomes worthless. This exposure is measured by the fair value of OTC derivative contracts with a positive fair value at the reporting date reduced by the effect, if any, of legally enforceable master netting agreements.
The following table summarizes the counterparty credit exposure by counterparty credit rating as it relates to interest rate swap, foreign currency swap, interest rate cap, interest rate floor, free-standing credit default swap, forward and certain option agreements (including swaptions).
($ in millions) |
| September 30, 2010 |
| December 31, 2009 | ||||||||||||
Rating (1) |
| Number |
| Notional |
| Credit |
| Exposure, |
| Number |
| Notional |
| Credit |
| Exposure, |
AA- |
| 1 | $ | 672 | $ | 23 | $ | 11 |
| 2 | $ | 3,269 | $ | 26 | $ | 1 |
A+ |
| 2 |
| 190 |
| 3 |
| -- |
| 5 |
| 12,359 |
| 204 |
| 57 |
A |
| 3 |
| 932 |
| 5 |
| 5 |
| 3 |
| 2,551 |
| 62 |
| 30 |
A- |
| 1 |
| 89 |
| 34 |
| 34 |
| 1 |
| 145 |
| 23 |
| 23 |
Total |
| 7 | $ | 1,883 | $ | 65 | $ | 50 |
| 11 | $ | 18,324 | $ | 315 | $ | 111 |
| ($ in millions) |
| March 31, 2011 |
| December 31, 2010 | ||||||||||||||||||||
| Rating (1) |
| Number |
| Notional |
| Credit |
| Exposure, |
| Number |
| Notional |
| Credit |
| Exposure, | ||||||||
| AA- |
| 2 |
| $ | 841 |
| $ | 19 |
| $ | 1 |
|
| 2 |
| $ | 2,322 |
| $ | 43 |
| $ | 16 |
|
| A+ |
| 3 |
|
| 3,451 |
|
| 39 |
|
| -- |
|
| 5 |
|
| 3,189 |
|
| 16 |
|
| 10 |
|
| A |
| 4 |
|
| 4,034 |
|
| 46 |
|
| 3 |
|
| 3 |
|
| 3,479 |
|
| 17 |
|
| 17 |
|
| A- |
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| 1 |
|
| 89 |
|
| 31 |
|
| 31 |
|
| BBB+ |
| 1 |
|
| 5 |
|
| 33 |
|
| 33 |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| Total |
| 10 |
| $ | 8,331 |
| $ | 137 |
| $ | 37 |
|
| 11 |
| $ | 9,079 |
| $ | 107 |
| $ | 74 |
|
(1)Rating is the lower of S&P or Moody’s ratings.
(2)Only OTC derivatives with a net positive fair value are included for each counterparty.
Market risk is the risk that the Company will incur losses due to adverse changes in market rates and prices. Market risk exists for all of the derivative financial instruments the Company currently holds, as these instruments may become less valuable due to adverse changes in market conditions. To limit this risk, the Company’s senior management has established risk control limits. In addition, changes in fair value of the derivative financial instruments that the Company uses for risk management purposes are generally offset by the change in the fair value or cash flows of the hedged risk component of the related assets, liabilities or forecasted transactions.
Certain of the Company’s derivative instruments contain credit-risk-contingent termination events, cross-default provisions and credit support annex agreements. Credit-risk-contingent termination events allow the counterparties to terminate the derivative on certain dates if AIC’s, ALIC’s or Allstate Life Insurance Company of New York’s (“ALNY”) financial strength credit ratings by Moody’s or S&P fall below a certain level or in the event AIC, ALIC or ALNY are no longer rated by both Moody’s and S&P. Credit-risk-contingent cross-default provisions allow the counterparties to terminate the derivative instruments if the Company defaults by pre-determined threshold amounts on certain debt instruments. Credit-risk-contingent credit support annex agreements specify the amount of collateral the Company must post to counterparties based on AIC’s, ALIC’s or ALNY’s financial strength credit ratings by Moody’s or S&P, or in the event AIC, ALIC or ALNY are no longer rated by both Moody’s and S&P.
The following summarizes the fair value of derivative instruments with termination, cross-default or collateral credit-risk-contingent features that are in a liability position, as well as the fair value of assets and collateral that are netted against the liability in accordance with provisions within legally enforceable MNAs.
($ in millions) |
| September |
| December |
| March 31, |
| December 31, | ||
Gross liability fair value of contracts containing credit-risk-contingent features | $ | 566 | $ | 429 | $ | 199 |
| $ | 448 |
|
Gross asset fair value of contracts containing credit-risk-contingent features and subject to MNAs |
| (248) |
| (265) |
| (89 | ) |
| (255 | ) |
Collateral posted under MNAs for contracts containing credit-risk-contingent features |
| (275) |
| (122) |
| (100 | ) |
| (171 | ) |
Maximum amount of additional exposure for contracts with credit-risk-contingent features if all features were triggered concurrently | $ | 43 | $ | 42 | $ | 10 |
| $ | 22 |
|
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Credit derivatives - selling protection
Free-standing credit default swaps (“CDS”) are utilized for selling credit protection against a specified credit event. A credit default swap is a derivative instrument, representing an agreement between two parties to exchange the credit risk of a specified entity (or a group of entities), or an index based on the credit risk of a group of entities
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(all (all commonly referred to as the “reference entity” or a portfolio of “reference entities”), in return for a periodic premium. In selling protection, CDS are used to replicate fixed income securities and to complement the cash market when credit exposure to certain issuers is not available or when the derivative alternative is less expensive than the cash market alternative. CDS typically have a five-year term.
The following table shows the CDS notional amounts by credit rating and fair value of protection sold as of September 30, 2010:March 31, 2011:
($ in millions) |
| Notional amount |
|
|
|
| Notional amount |
|
|
| |||||||||||||||||||||
|
| AA |
| A |
| BBB |
| BB and |
| Total |
| Fair |
|
| AA |
| A |
| BBB |
| BB and |
| Total |
| Fair | ||||||
Single name |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Investment grade corporate debt | $ | 50 | $ | 146 | $ | 150 | $ | 20 | $ | 366 | $ | (9) |
| $ | 50 |
| $ | 133 |
| $ | 103 |
| $ | 25 |
| $ | 311 |
| $ | (2 | ) |
High yield debt |
| -- |
| -- |
| -- |
| 6 |
| 6 |
| -- |
|
| -- |
|
| -- |
| -- |
| 2 |
| 2 |
| -- |
| ||||
Municipal |
| 170 |
| -- |
| -- |
| -- |
| 170 |
| (15) |
|
| 135 |
|
| -- |
|
| -- |
|
| -- |
|
| 135 |
|
| (10 | ) |
Subtotal |
| 220 |
| 146 |
| 150 |
| 26 |
| 542 |
| (24) |
|
| 185 |
|
| 133 |
|
| 103 |
|
| 27 |
|
| 448 |
|
| (12 | ) |
Baskets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Tranche |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Investment grade corporate debt |
| -- |
| -- |
| -- |
| 65 |
| 65 |
| (22) |
|
| -- |
|
| -- |
| -- |
| 65 |
| 65 |
| (16 | ) | ||||
First-to-default |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Municipal |
| -- |
| 100 |
| -- |
| -- |
| 100 |
| (36) |
|
| -- |
|
| 100 |
|
| -- |
|
| -- |
|
| 100 |
|
| (30 | ) |
Subtotal |
| -- |
| 100 |
| -- |
| 65 |
| 165 |
| (58) |
|
| -- |
|
| 100 |
|
| -- |
|
| 65 |
|
| 165 |
|
| (46 | ) |
Total | $ | 220 | $ | 246 | $ | 150 | $ | 91 | $ | 707 | $ | (82) |
| $ | 185 |
| $ | 233 |
| $ | 103 |
| $ | 92 |
| $ | 613 |
| $ | (58 | ) |
The following table shows the CDS notional amounts by credit rating and fair value of protection sold as of December 31, 2009:2010:
($ in millions) |
| Notional amount |
|
|
|
| Notional amount |
|
|
| |||||||||||||||||||||
|
| AA |
| A |
| BBB |
| BB and |
| Total |
| Fair |
|
| AA |
| A |
| BBB |
| BB and |
| Total |
| Fair | ||||||
Single name |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade corporate debt | $ | 63 | $ | 86 | $ | 84 | $ | 30 | $ | 263 | $ | (12) |
| $ | 50 |
| $ | 148 |
| $ | 103 |
| $ | 25 |
| $ | 326 |
| $ | (4 | ) |
High yield debt |
| -- |
| -- |
| -- |
| 10 |
| 10 |
| -- |
|
| -- |
|
| -- |
| -- |
| 6 |
| 6 |
| -- |
| ||||
Municipal |
| 135 |
| -- |
| -- |
| -- |
| 135 |
| (10) |
|
| 135 |
|
| -- |
|
| -- |
|
| -- |
|
| 135 |
|
| (14 | ) |
Subtotal |
| 198 |
| 86 |
| 84 |
| 40 |
| 408 |
| (22) |
|
| 185 |
|
| 148 |
|
| 103 |
|
| 31 |
|
| 467 |
|
| (18 | ) |
Baskets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Tranche |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Investment grade corporate debt |
| -- |
| -- |
| -- |
| 65 |
| 65 |
| (27) |
|
| -- |
|
| -- |
| -- |
| 65 |
| 65 |
| (19 | ) | ||||
First-to-default |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Investment grade corporate debt |
| -- |
| 45 |
| 15 |
| -- |
| 60 |
| -- |
| ||||||||||||||||||
Municipal |
| 20 |
| 135 |
| -- |
| -- |
| 155 |
| (28) |
|
| -- |
|
| 100 |
|
| -- |
|
| -- |
|
| 100 |
|
| (37 | ) |
Subtotal |
| 20 |
| 180 |
| 15 |
| 65 |
| 280 |
| (55) |
|
| -- |
|
| 100 |
|
| -- |
|
| 65 |
|
| 165 |
|
| (56 | ) |
Index |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Investment grade corporate debt |
| 14 |
| 159 |
| 408 |
| 19 |
| 600 |
| 4 |
| ||||||||||||||||||
Total | $ | 232 | $ | 425 | $ | 507 | $ | 124 | $ | 1,288 | $ | (73) |
| $ | 185 |
| $ | 248 |
| $ | 103 |
| $ | 96 |
| $ | 632 |
| $ | (74 | ) |
In selling protection with CDS, the Company sells credit protection on an identified single name, a basket of names in a first-to-default (“FTD”) structure or a specific tranche of a basket, or credit derivative index (“CDX”) that is generally investment grade, and in return receives periodic premiums through expiration or termination of the agreement. With single name CDS, this premium or credit spread generally corresponds to the difference between
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the yield on the reference entity’s public fixed maturity cash instruments and swap rates at the time the agreement is executed. With a FTD basket or a tranche of a basket, because of the additional credit risk inherent in a basket of named reference entities, the premium generally corresponds to a high proportion of the sum of the credit spreads of the names in the basket and the correlation between the names. CDX index is utilized to take a position on multiple (generally
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(generally 125) reference entities. Credit events are typically defined as bankruptcy, failure to pay, or restructuring, depending on the nature of the reference entities. If a credit event occurs, the Company settles with the counterparty, either through physical settlement or cash settlement. In a physical settlement, a reference asset is delivered by the buyer of protection to the Company, in exchange for cash payment at par, whereas in a cash settlement, the Company pays the difference between par and the prescribed value of the reference asset. When a credit event occurs in a single name or FTD basket (for FTD, the first credit event occurring for any one name in the basket), the contract terminates at the time of settlement. When a credit event occurs in a tranche of a basket, there is no immediate impact to the Company until cumulative losses in the basket exceed the contractual subordination. To date, realized losses have not exceeded the subordination. For CDX index, the reference entity’s name incurring the credit event is removed from the index while the contract continues until expiration. The maximum payout on a CDS is the contract notional amount. A physical settlement may afford the Company with recovery rights as the new owner of the asset.
The Company monitors risk associated with credit derivatives through individual name credit limits at both a credit derivative and a combined cash instrument/credit derivative level. The ratings of individual names for which protection has been sold are also monitored.
In addition to the CDS described above, the Company’s synthetic collateralized debt obligations contain embedded credit default swaps which sell protection on a basket of reference entities. The synthetic collateralized debt obligations are fully funded; therefore, the Company is not obligated to contribute additional funds when credit events occur related to the reference entities named in the embedded credit default swaps. The Company’s maximum amount at risk equals the amount of its aggregate initial investment in the synthetic collateralized debt obligations.
7. Reserve for Property-Liability Insurance Claims and Claims Expense
The Company establishes reserves for claims and claims expense (“loss”) on reported and unreported claims of insured losses. The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. In the normal course of business, the Company may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process.
Because reserves are estimates of unpaid portions of losses that have occurred, including incurred but not reported losses, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reported in property-liability insurance claims and claims expense in the Condensed Consolidated Statements of Operations in the period such changes are determined.
Management believes that the reserve for property-liability insurance claims and claims expense, net of reinsurance recoverables, is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by the date of the Condensed Consolidated Statements of Financial Position based on available facts, technology, laws and regulations.
8. Reinsurance
Property-liability insurance premiums earned and life and annuity premiums and contract charges for the three months ended March 31 have been reduced by the reinsurance ceded amounts shown in the following table:
($ in millions) |
| 2011 |
|
| 2010 |
|
Property-liability insurance premiums earned | $ | 270 |
| $ | 268 |
|
Life and annuity premiums and contract charges |
| 193 |
|
| 191 |
|
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Reinsurance
Property-liability insurance premiums and life and annuity premiums and contract charges have been reduced by the reinsurance ceded amounts shown in the following table:
($ in millions) |
| Three months ended September 30, |
| Nine months ended September 30, | ||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
Property-liability insurance premiums earned | $ | 270 | $ | 269 | $ | 811 | $ | 798 |
Life and annuity premiums and contract charges |
| 192 |
| 206 |
| 585 |
| 612 |
Property-liability insurance claims and claims expense and life and annuity contract benefits and interest credited to contractholder funds for the three months ended March 31 have been reduced by the reinsurance ceded amounts shown in the following table:table.
($ in millions) |
| Three months ended |
| Nine months ended | ||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
Property-liability insurance claims and claims expense | $ | 11 | $ | 64 | $ | 202 | $ | 242 |
Life and annuity contract benefits (1) |
| 267 |
| (1) |
| 616 |
| 617 |
Interest credited to contractholder funds |
| 8 |
| 9 |
| 24 |
| 24 |
(1)The three months ended September 30, 2009 include a $166 million decrease in the reinsurance recoverables related to the ceded variable annuity contract guarantees as a result of improved equity market conditions during 2009.
($ in millions) |
| 2011 |
|
| 2010 |
|
Property-liability insurance claims and claims expense | $ | 137 |
| $ | 80 |
|
Life and annuity contract benefits |
| 84 |
|
| 130 |
|
Interest credited to contractholder funds |
| 8 |
|
| 7 |
|
9. Company Restructuring
The Company undertakes various programs to reduce expenses. These programs generally involve a reduction in staffing levels, and in certain cases, office closures. Restructuring and related charges include employee termination and relocation benefits, and post-exit rent expenses in connection with these programs, and non-cash charges resulting from pension benefit payments made to agents in connection with the 1999 reorganization of Allstate’s multiple agency programs to a single exclusive agency program. In the ninethree months ended September 30, 2010,March 31, 2011, restructuring programs primarily relate to Allstate Protection’s field claim and field sales office consolidations and realignment of litigation services.consolidations. The expenses related to these activities are included in the Condensed Consolidated Statements of Operations as restructuring and related charges, and totaled $9 million and $35$11 million during the three months ended September 30,March 31, 2011 and 2010, and 2009, respectively, and $33 million and $112 million for the nine months ended September 30, 2010 and 2009, respectively.
The following table presents changes in the restructuring liability during the ninethree months ended September 30, 2010.March 31, 2011.
($ in millions) |
| Employee |
| Exit |
| Total |
| Employee |
|
| Exit |
|
| Total |
|
Balance at December 31, 2009 | $ | 45 | $ | 6 | $ | 51 | |||||||||
Balance as of December 31, 2010 | $ | 13 |
| $ | 3 |
| $ | 16 |
| ||||||
Expense incurred |
| 19 |
| 1 |
| 20 |
| 4 |
|
| 4 |
|
| 8 |
|
Adjustments to liability |
| (6) |
| -- |
| (6) |
| (4 | ) |
| -- |
|
| (4 | ) |
Payments applied against liability |
| (24) |
| (2) |
| (26) |
| (5 | ) |
| (1 | ) |
| (6 | ) |
Balance at September 30, 2010 | $ | 34 | $ | 5 | $ | 39 | |||||||||
Balance as of March 31, 2011 | $ | 8 |
| $ | 6 |
| $ | 14 |
|
The payments applied against the liability for employee costs primarily reflect severance costs, and the payments for exit costs generally consist of post-exit rent expenses and contract termination penalties. As of September 30, 2010,March 31, 2011, the cumulative amount incurred to date for active programs totaled $170$99 million for employee costs and $46$44 million for exit costs.
10. Guarantees and Contingent Liabilities
State facility assessments
The Company is required to participate in assigned risk plans, reinsurance facilities and joint underwriting associations in various states that provide insurance coverage to individuals or entities that otherwise are unable to
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
purchase such coverage from private insurers. Underwriting results related to these arrangements, which tend to be adverse, have been immaterial to the Company’s results of operations. Because of the Company’s participation, it may be exposed to losses that surpass the capitalization of these facilities and/or to assessments from these facilities.
Shared markets
As a condition of maintaining its licenses to write personal property and casualty insurance in various states, the Company is required to participate in assigned risk plans, reinsurance facilities and joint underwriting associations that provide various types of insurance coverage to individuals or entities that otherwise are unable to purchase such coverage from private insurers. Underwriting results related to these arrangements, which tend to be adverse, have been immaterial to the Company’s results of operations.
Guarantees
The Company owns certain fixed income securities that obligate the Company to exchange credit risk or to forfeit principal due, depending on the nature or occurrence of specified credit events for the reference entities. In the event all such specified credit events were to occur, the Company’s maximum amount at risk on these fixed income securities, as measured by the amount of the aggregate initial investment, was $111$67 million at September 30, 2010.as of March 31,
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2011. The obligations associated with these fixed income securities expire at various dates on or before July 26, 2016.March 11, 2018.
Related to the disposal through reinsurance of substantially all of Allstate Financial’s variable annuity business to The Prudential Insurance Company of America, a subsidiary of Prudential Financial, Inc. (collectively “Prudential”) in 2006, the Company and its consolidated subsidiaries, ALIC and ALNY, have agreed to indemnify Prudential for certain pre-closing contingent liabilities (including extra-contractual liabilities of ALIC and ALNY and liabilities specifically excluded from the transaction) that ALIC and ALNY have agreed to retain. In addition, the Company, ALIC and ALNY will each indemnify Prudential for certain post-closing liabilities that may arise from the acts of ALIC, ALNY and their agents, including in connection with ALIC’s and ALNY’s provision of transition services. The reinsurance agreements contain no limitations or indemnifications with regard to insurance risk transfer, and transferred all of the future risks and responsibilities for performance on the underlying variable annuity contracts to Prudential, including those related to benefit guarantees. Management does not believe this agreement will have a material adverse effect on results of operations, cash flows or financial position of the Company.
The Company provides residual value guarantees on Company leased automobiles. If all outstanding leases were terminated effective September 30, 2010,March 31, 2011, the Company’s maximum obligation pursuant to these guarantees, assuming the automobiles have no residual value, would be $11$9 million at September 30, 2010.as of March 31, 2011. The remaining term of each residual value guarantee is equal to the term of the underlying lease that ranges from less than one year to three years. Historically, the Company has not made any material payments pursuant to these guarantees.
In the normal course of business, the Company provides standard indemnifications to contractual counterparties in connection with numerous transactions, including acquisitions and divestitures. The types of indemnifications typically provided include indemnifications for breaches of representations and warranties, taxes and certain other liabilities, such as third party lawsuits. The indemnification clauses are often standard contractual terms and are entered into in the normal course of business based on an assessment that the risk of loss would be remote. The terms of the indemnifications vary in duration and nature. In many cases, the maximum obligation is not explicitly stated and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur. Consequently, the maximum amount of the obligation under such indemnifications is not determinable. Historically, the Company has not made any material payments pursuant to these obligations.
The aggregate liability balance related to all guarantees was not material as of September 30, 2010.March 31, 2011.
Regulation and Compliance
The Company is subject to changing social, economic and regulatory conditions. From time to time, regulatory authorities or legislative bodies seek to influence and restrict premium rates, require premium refunds to policyholders, require reinstatement of terminated policies, restrict the ability of insurers to cancel or non-renew policies, require insurers to continue to write new policies or limit their ability to write new policies, limit insurers’ ability to change coverage terms or to impose underwriting standards, impose additional regulations regarding agent and broker compensation, regulate the nature of and amount of investments, and otherwise expand overall regulation
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
of insurance products and the insurance industry. The Company has established procedures and policies to facilitate compliance with laws and regulations, to foster prudent business operations, and to support financial reporting. The Company routinely reviews its practices to validate compliance with laws and regulations and with internal procedures and policies. As a result of these reviews, from time to time the Company may decide to modify some of its procedures and policies. Such modifications, and the reviews that led to them, may be accompanied by payments being made and costs being incurred. The ultimate changes and eventual effects of these actions on the Company’s business, if any, are uncertain.
A multi-state market conduct examination of Allstate’s claims handling practices has been underway with Florida, Illinois, Iowa, and New York serving as lead states. The Illinois Department of Insurance issued the official notice of the examination on March 30, 2009. The exam concluded with the state regulatory authorities finding no institutional issues involving underpayment of claims. Moreover, no violations were cited regarding Allstate’s claims adjusting practices, and no fines or penalties were assessed. Allstate has agreed to adopt certain enhancements to its business practices such as undertaking certain work in connection with its claim processes including, for example, consolidating materials detailing the primary functions of its bodily injury practices into a single manual and centralizing the oversight of some practices. Allstate has also agreed to contribute a non-material amount towards the development and training of insurance department examination personnel to support the review and evaluation of the insurance industry’s use of software technology in adjusting claims. Forty-five states have agreed with the conclusions and resolution of this exam.
Legal and regulatory proceedings and inquiries
Background
The Company and certain subsidiaries are involved in a number of lawsuits, regulatory inquiries, and other legal proceedings arising out of various aspects of its business. As background to both the “Claims related proceedings” and “Other proceedings” subsections below, please note the following:
· These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including the underlying facts of each matter; novel legal issues; variations between jurisdictions in which matters are being litigated, heard, or investigated; differences in applicable laws and
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
judicial interpretations; the length of time before many of these matters might be resolved by settlement, through litigation, or otherwise; the fact that some of the lawsuits are putative class actions in which a class has not been certified and in which the purported class may not be clearly defined; the fact that some of the lawsuits involve multi-state class actions in which the applicable law(s) for the claims at issue is in dispute and therefore unclear; and the current challenging legal environment faced by large corporations and insurance companies.
· The outcome of these matters may be affected by decisions, verdicts, and settlements, and the timing of such decisions, verdicts, and settlements, in other individual and class action lawsuits that involve the Company, other insurers, or other entities and by other legal, governmental, and regulatory actions that involve the Company, other insurers, or other entities. The outcome may also be affected by future state or federal legislation, the timing or substance of which cannot be predicted.
· In the lawsuits, plaintiffs seek a variety of remedies which may include equitable relief in the form of injunctive and other remedies and monetary relief in the form of contractual and extra-contractual damages. In some cases, the monetary damages sought may include punitive or treble damages. Often specific information about the relief sought, such as the amount of damages, is not available because plaintiffs have not requested specific relief in their pleadings. When specific monetary demands are made, they are often set just below a state court jurisdictional limit in order to seek the maximum amount available in state court, regardless of the specifics of the case, while still avoiding the risk of removal to federal court. In Allstate’s experience, monetary demands in pleadings bear little relation to the ultimate loss, if any, to the Company.
· In connection with regulatory examinations and proceedings, government authorities may seek various forms of relief, including penalties, restitution, and changes in business practices. The Company may not be advised of the nature and extent of relief sought until the final stages of the examination or proceeding.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
· For the reasons specified above, it is often not possible to make meaningful estimates of the amount or range of loss that could result from the matters described below in the “Claims related proceedings” and “Other proceedings” subsections. The Company reviews these matters on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. When assessing reasonably possible and probable outcomes, the Company bases its decisions on its assessment of the ultimate outcome following all appeals.
· Due to the complexity and scope of the matters disclosed in the “Claims related proceedings” and “Other proceedings” subsections below and the many uncertainties that exist, the ultimate outcome of these matters cannot be reasonably predicted. In the event of an unfavorable outcome in one or more of these matters, the ultimate liability may be in excess of amounts currently reserved, if any, and may be material to the Company’s operating results or cash flows for a particular quarterly or annual period. However, based on information currently known to it, management believes that the ultimate outcome of all matters described below, as they are resolved over time, is not likely to have a material adverse effect on the financial position of the Company.
Claims related proceedings
The Company is vigorously defending a number of matters in various stages of development filed in the aftermath of Hurricane Katrina, including individual lawsuits and a statewide putative class action in Louisiana. The Louisiana Attorney General filed a putative class action lawsuit in state court against Allstate and other insurers on behalf of Road Home fund recipients alleging that the insurers have failed to pay all damages owed under their policies. The insurers removed the matter to federal court. The district court denied plaintiffs’ motion to remand the matter to state court and the U.S. Court of Appeals for the Fifth Circuit (“Fifth Circuit”) affirmed that ruling. The defendants filed a motion to dismiss and the plaintiffs filed a motion to remand the claims involving a Road Home subrogation agreement. In March 2009, the district court denied the State’s request that its claims be remanded to state court. As for the defendant insurers’ motion, the judge granted it in part and denied it in part. Dismissal of all of the extra-contractual claims, including the bad faith and breach of fiduciary duty claims, was granted. Dismissal also was granted of all claims based on the Valued Policy Law and all flood loss claims based on the levee breaches finding that the insurers flood exclusions precluded coverage. The remaining claims are for breach of contract and for declaratory relief on the alleged underpayment of claims by the insurers. The judge did not dismiss the class action allegations.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The defendants also had moved to dismiss the complaint on grounds that the State had no standing to bring the lawsuit as an assignee of insureds because of anti-assignment language in the insurers’ policies. The judge denied the defendants’ motion for reconsideration on the assignment issue but found the matter was ripe for consideration by the federal appellate court. The defendants have filed a petition for permission to appeal to the Fifth Circuit. The Fifth Circuit has accepted review. After the Fifth Circuit accepted review, plaintiffs filed a motion to remand the case to state court, asserting that the class claims on which federal jurisdiction was premised have now effectively been dismissed as a result of a ruling in a related case. The Fifth Circuit has denied the motion for remand, without prejudice to plaintiffs’ right to refile the motion for remand after the Fifth Circuit disposes of the pending appeal. On July 28, 2010, the Fifth Circuit issued an order stating that since there is no controlling Louisiana Supreme Court precedent on the issue of whether an insurance policy’s anti-assignment clause prohibits post-loss assignments, the Fifth Circuit is certifying that issue to the Louisiana Supreme Court. The issue has been briefed to the Louisiana Supreme Court may rule basedCourt. That court heard oral argument on the pleadings that have been filed withappeal on March 14, 2011 and a decision is pending. If the Fifth Circuit, orinsurers are not successful on the appeal, we anticipate the State to vigorously pursue the case once it may request additional briefing as well as oral argument.returns to the trial court.
There are one nationwide and several statewide class action lawsuits pending against Allstate alleging that it failed to properly pay general contractors overhead and profit on many homeowner structural loss claims. Most of these lawsuits contain counts for breach of contract, as well as one or more counts asserting other theories of liability such as bad faith, fraud, unjust enrichment, or unfair claims practices. General contractors overhead and profit is an amount that is added to payments on claims where the services of a general contractor are reasonably likely to be required. To a large degree, these lawsuits mirror similar lawsuits filed against other carriers in the industry, some of which have settled. These lawsuits are pending in various state and federal courts, and they are in different stages of development. No classes have been certified against Allstate. The Company has extendedreached an offer of settlementagreement to settle on a 48-state basis in the nationwide class action that appears acceptable toaction. This settlement received preliminary approval from the plaintiffs. Many termscourt on December 6, 2010, and conditions of suchthe case was certified as a class for settlement are still to be worked out, and any final agreement to settle will be subject to the approval of the court.purposes only. The settlement was accrued as a prior year reserve reestimate in property-liability insurance claims and claims expense in 2010. No other classes have been certified against Allstate on this issue. The hearing for final approval of the third quarter of 2010.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)settlement is scheduled for May 6, 2011.
Allstate has been vigorously defending a lawsuit in regards to certain claims employees involving worker classification issues. This lawsuit is a certified class action challenging a state wage and hour law. In this case, plaintiffs sought monetary relief, such as penalties and liquidated damages, and non-monetary relief, such as injunctive relief. In December 2009, the liability phase of the case was tried, and, on July 6, 2010, the court issued its decision finding in favor of Allstate on all claims. The plaintiffs are appealing the decision.
Other proceedings
The Company is defending certain matters relating to the Company’s agency program reorganization announced in 1999. These matters are in various stages of development.
· These matters include a lawsuit filed in 2001 by the U.S. Equal Employment Opportunity Commission (“EEOC”) alleging retaliation under federal civil rights laws (the “EEOC I” suit) and a class action filed in 2001 by former employee agents alleging retaliation and age discrimination under the Age Discrimination in Employment Act (“ADEA”), breach of contract and ERISA violations (the “Romero I” suit). In 2004, in the consolidated EEOC I and Romero I litigation, the trial court issued a memorandum and order that, among other things, certified classes of agents, including a mandatory class of agents who had signed a release, for purposes of effecting the court’s declaratory judgment that the release is voidable at the option of the release signer. The court also ordered that an agent who voids the release must return to Allstate “any and all benefits received by the [agent] in exchange for signing the release.” The court also stated that, “on the undisputed facts of record, there is no basis for claims of age discrimination.” The EEOC and plaintiffs asked the court to clarify and/or reconsider its memorandum and order and in January 2007, the judge denied their request. In June 2007, the court granted the Company’s motions for summary judgment. Following plaintiffs’ filing of a notice of appeal, the U.S. Court of Appeals for the Third Circuit (“Third Circuit”) issued an order in December 2007 stating that the notice of appeal was not taken from a final order within the meaning of the federal law and thus not appealable at this time. In March 2008, the Third Circuit decided that the appeal should not summarily be dismissed and that the question of whether the matter is appealable at this time will be addressed by the Third Circuit along with the merits of the appeal. In July 2009, the Third Circuit vacated the decision which granted the Company’s summary judgment
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
motions, remanded the cases to the trial court for additional discovery, and directed that the cases be reassigned to another trial court judge. In January 2010, the cases were assigned to a new judge for further proceedings in the trial court.
· A putative nationwide class action has also been filed by former employee agents alleging various violations of ERISA, including a worker classification issue. These plaintiffs are challenging certain amendments to the Agents Pension Plan and are seeking to have exclusive agent independent contractors treated as employees for benefit purposes. This matter was dismissed with prejudice by the trial court, was the subject of further proceedings on appeal, and was reversed and remanded to the trial court in 2005. In June 2007, the court granted the Company’s motion to dismiss the case. Following plaintiffs’ filing of a notice of appeal, the Third Circuit issued an order in December 2007 stating that the notice of appeal was not taken from a final order within the meaning of the federal law and thus not appealable at this time. In March 2008, the Third Circuit decided that the appeal should not summarily be dismissed and that the question of whether the matter is appealable at this time will be addressed by the Third Circuit along with the merits of the appeal. In July 2009, the Third Circuit vacated the decision which granted the Company’s motion to dismiss the case, remanded the case to the trial court for additional discovery, and directed that the case be reassigned to another trial court judge. In January 2010, the case was assigned to a new judge for further proceedings in the trial court.
In these agency program reorganization matters, plaintiffs seek compensatory and punitive damages, and equitable relief. Allstate has been vigorously defending these lawsuits and other matters related to its agency program reorganization.
Other Matters
Various other legal, governmental, and regulatory actions, including state market conduct exams, and other governmental and regulatory inquiries are currently pending that involve the Company and specific aspects of its conduct of business. Like other members of the insurance industry, the Company is the target of a number of class action lawsuits and other types of proceedings, some of which involve claims for substantial or indeterminate
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
amounts. These actions are based on a variety of issues and target a range of the Company’s practices. The outcome of these disputes is currently unpredictable.
One or more of these matters could have an adverse effect on the Company’s operating results or cash flows for a particular quarterly or annual period. However, based on information currently known to it, management believes that the ultimate outcome of all matters described in this “Other Matters” subsection, in excess of amounts currently reserved, if any, as they are resolved over time, is not likely to have a material effect on the operating results, cash flows or financial position of the Company.
Asbestos and environmental
Allstate’s reserves for asbestos claims were $1.13$1.09 billion and $1.18$1.10 billion, net of reinsurance recoverables of $565$544 million and $600$555 million, at September 30, 2010as of March 31, 2011 and December 31, 2009,2010, respectively. Reserves for environmental claims were $205$193 million and $198$201 million, net of reinsurance recoverables of $44 million and $47 million, and $49 million, at September 30, 2010as of March 31, 2011 and December 31, 2009,2010, respectively. Approximately 59%61% and 62%60% of the total net asbestos and environmental reserves at September 30, 2010as of March 31, 2011 and December 31, 2009,2010, respectively, were for incurred but not reported estimated losses.
Management believes its net loss reserves for asbestos, environmental and other discontinued lines exposures are appropriately established based on available facts, technology, laws and regulations. However, establishing net loss reserves for asbestos, environmental and other discontinued lines claims is subject to uncertainties that are much greater than those presented by other types of claims. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimate. Among the complications are lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure and unresolved legal issues regarding policy coverage; unresolved legal issues regarding the determination, availability and timing of exhaustion of policy limits; plaintiffs’ evolving and expanding theories of liability; availability and collectability of recoveries from reinsurance; retrospectively determined premiums and other contractual agreements; estimates of the extent and timing of any contractual liability; the impact of bankruptcy protection sought by various asbestos producers and other asbestos defendants; and other uncertainties. There are also complex legal issues concerning the interpretation of various insurance policy provisions and whether those losses are covered, or were ever intended
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
to be covered, and could be recoverable through retrospectively determined premium, reinsurance or other contractual agreements. 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 insurer obligation to defend; how policy limits are determined; how policy exclusions and conditions are applied and interpreted; and whether clean-up costs represent insured property damage. Management believes these issues are not likely to be resolved in the near future, and the ultimate costs may vary materially from the amounts currently recorded resulting in material changes in loss reserves. In addition, while the Company believes that improved actuarial techniques and databases have assisted in its ability to estimate asbestos, environmental, and other discontinued lines net loss reserves, these refinements may subsequently prove to be inadequate indicators of the extent of probable losses. 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.
4311. Components of Net Periodic Pension and Postretirement Benefit Costs
The components of net periodic cost for the Company’s pension and postretirement benefit plans for the three months ended March 31 are as follows:
($ in millions) |
| 2011 |
| 2010 | ||
Pension benefits |
|
|
|
| ||
Service cost | $ | 38 |
| $ | 38 |
|
Interest cost |
| 81 |
|
| 80 |
|
Expected return on plan assets |
| (92 | ) |
| (83 | ) |
Amortization of: |
|
|
|
|
|
|
Prior service credit |
| -- |
|
| (1 | ) |
Net actuarial loss |
| 38 |
|
| 40 |
|
Settlement loss |
| 9 |
|
| 13 |
|
Net periodic pension cost | $ | 74 |
| $ | 87 |
|
|
|
|
|
|
|
|
Postretirement benefits |
|
|
|
|
|
|
Service cost | $ | 3 |
| $ | 3 |
|
Interest cost |
| 9 |
|
| 10 |
|
Amortization of: |
|
|
|
|
|
|
Prior service credit |
| (6 | ) |
| (6 | ) |
Net actuarial gain |
| (7 | ) |
| (5 | ) |
Net periodic postretirement cost | $ | (1 | ) | $ | 2 |
|
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Income Taxes
A reconciliation of the statutory federal income tax rate to the effective income tax rate on income from operations for the nine months ended September 30 is as follows:
($ in millions) |
| 2010 |
| 2009 | ||||
|
|
|
|
|
|
|
|
|
Statutory federal income tax rate - expense | $ | 267 |
| 35.0 % | $ | 194 |
| 35.0 % |
Tax-exempt income |
| (139) |
| (18.2) |
| (197) |
| (35.6) |
Dividends received deduction |
| (13) |
| (1.7) |
| (11) |
| (2.1) |
Deferred foreign tax credit |
| 4 |
| 0.5 |
| 12 |
| 2.1 |
Adjustment to prior year tax liabilities |
| (4) |
| (0.5) |
| (21) |
| (3.7) |
Other |
| 16 |
| 2.1 |
| (6) |
| (1.1) |
Valuation allowance |
| -- |
| -- |
| 248 |
| 44.7 |
Effective income tax rate - expense | $ | 131 |
| 17.2 % | $ | 219 |
| 39.3 % |
Income tax expense for the nine months ended September 30, 2009 included expense of $254 million attributable to an increase in the valuation allowance relating to the deferred tax asset on capital losses.
12. Components of Net Periodic Pension and Postretirement Benefit Costs
The components of net periodic cost for the Company’s pension and postretirement benefit plans are as follows:
($ in millions) |
| Three months ended September 30, |
| Nine months ended September 30, | ||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
|
|
|
|
|
|
|
|
|
Pension benefits |
|
|
|
|
|
|
|
|
Service cost | $ | 38 | $ | 32 | $ | 113 | $ | 95 |
Interest cost |
| 80 |
| 83 |
| 240 |
| 248 |
Expected return on plan assets |
| (83) |
| (100) |
| (248) |
| (298) |
Amortization of: |
|
|
|
|
|
|
|
|
Prior service credit |
| (1) |
| (1) |
| (2) |
| (2) |
Net actuarial loss |
| 40 |
| 5 |
| 119 |
| 13 |
Settlement loss |
| 13 |
| 15 |
| 39 |
| 47 |
Net periodic pension cost | $ | 87 | $ | 34 | $ | 261 | $ | 103 |
|
|
|
|
|
|
|
|
|
Postretirement benefits |
|
|
|
|
|
|
|
|
Service cost | $ | 3 | $ | 3 | $ | 9 | $ | 10 |
Interest cost |
| 10 |
| 13 |
| 30 |
| 42 |
Amortization of: |
|
|
|
|
|
|
|
|
Prior service credit |
| (6) |
| (2) |
| (17) |
| (1) |
Net actuarial gain |
| (5) |
| (7) |
| (16) |
| (23) |
Net periodic postretirement benefit cost | $ | 2 | $ | 7 | $ | 6 | $ | 28 |
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13.12. Business Segments
Summarized revenue data for each of the Company’s business segments for the three months ended March 31 are as follows:
($ in millions) |
| Three months ended |
| Nine months ended |
| 2011 |
| 2010 | ||||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 | ||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Property-Liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Property-liability insurance premiums |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Standard auto | $ | 4,134 |
| $ | 4,167 |
| $ | 12,425 |
| $ | 12,493 |
| $ | 4,088 |
| $ | 4,137 |
|
Non-standard auto |
| 224 |
|
| 237 |
|
| 688 |
|
| 730 |
|
| 211 |
|
| 234 |
|
Total auto |
| 4,358 |
|
| 4,404 |
|
| 13,113 |
|
| 13,223 |
|
| 4,299 |
|
| 4,371 |
|
Homeowners |
| 1,526 |
| 1,504 |
| 4,554 |
| 4,562 |
|
| 1,539 |
|
| 1,516 |
| |||
Other personal lines |
| 614 |
|
| 627 |
|
| 1,847 |
|
| 1,893 |
|
| 611 |
|
| 616 |
|
Allstate Protection |
| 6,498 |
|
| 6,535 |
|
| 19,514 |
|
| 19,678 |
|
| 6,449 |
|
| 6,503 |
|
Discontinued Lines and Coverages |
| 1 |
|
| -- |
|
| 1 |
|
| (1 | ) |
| (1 | ) |
| -- |
|
Total property-liability insurance premiums |
| 6,499 |
|
| 6,535 |
|
| 19,515 |
|
| 19,677 |
|
| 6,448 |
|
| 6,503 |
|
Net investment income |
| 284 |
| 326 |
| 898 |
| 1,004 |
|
| 284 |
|
| 304 |
| |||
Realized capital gains and losses |
| (107 | ) |
| (290 | ) |
| (403 | ) |
| (403 | ) |
| 57 |
|
| (190) |
|
Total Property-Liability |
| 6,676 |
|
| 6,571 |
|
| 20,010 |
|
| 20,278 |
|
| 6,789 |
|
| 6,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Allstate Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Life and annuity premiums and contract charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Traditional life insurance |
| 107 |
| 103 |
| 317 |
| 303 |
|
| 108 |
|
| 106 |
| |||
Immediate annuities with life contingencies |
| 26 |
| 15 |
| 84 |
| 83 |
|
| 43 |
|
| 27 |
| |||
Accident and health |
| 157 |
|
| 114 |
|
| 464 |
|
| 340 |
| ||||||
Accident and health insurance |
| 161 |
|
| 156 |
| ||||||||||||
Total life and annuity premiums |
| 290 |
|
| 232 |
|
| 865 |
|
| 726 |
|
| 312 |
|
| 289 |
|
Interest-sensitive life insurance |
| 249 |
| 238 |
| 740 |
| 699 |
|
| 248 |
|
| 242 |
| |||
Fixed annuities |
| 9 |
|
| 12 |
|
| 32 |
|
| 35 |
|
| 9 |
|
| 13 |
|
Total contract charges |
| 258 |
|
| 250 |
|
| 772 |
|
| 734 |
|
| 257 |
|
| 255 |
|
Total life and annuity premiums and contract charges |
| 548 |
|
| 482 |
|
| 1,637 |
|
| 1,460 |
|
| 569 |
|
| 544 |
|
Net investment income |
| 707 |
| 744 |
| 2,161 |
| 2,327 |
|
| 684 |
|
| 731 |
| |||
Realized capital gains and losses |
| (38 | ) |
| (234 | ) |
| (553 | ) |
| (156 | ) |
| 39 |
|
| (162 | ) |
Total Allstate Financial |
| 1,217 |
|
| 992 |
|
| 3,245 |
|
| 3,631 |
|
| 1,292 |
|
| 1,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Service fees |
| 2 |
| 3 |
| 8 |
| 7 |
|
| 2 |
|
| 3 |
| |||
Net investment income |
| 14 |
| 14 |
| 45 |
| 37 |
|
| 14 |
|
| 15 |
| |||
Realized capital gains and losses |
| 1 |
|
| 5 |
|
| 13 |
|
| 9 |
|
| -- |
|
| 4 |
|
Total Corporate and Other before reclassification of service fees |
| 17 |
|
| 22 |
|
| 66 |
|
| 53 |
|
| 16 |
|
| 22 |
|
Reclassification of service fees (1) |
| (2 | ) |
| (3 | ) |
| (8 | ) |
| (7 | ) |
| (2 | ) |
| (3 | ) |
Total Corporate and Other |
| 15 |
|
| 19 |
|
| 58 |
|
| 46 |
|
| 14 |
|
| 19 |
|
Consolidated revenues | $ | 7,908 |
| $ | 7,582 |
| $ | 23,313 |
| $ | 23,955 |
| $ | 8,095 |
| $ | 7,749 |
|
(1) For presentation in the Condensed Consolidated Statements of Operations, service fees of the Corporate and Other segment are reclassified to
operating costs and expenses.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summarized financial performance data for each of the Company’s reportable segments for the three months ended March 31 are as follows:
($ in millions) |
| Three months ended |
| Nine months ended |
| 2011 |
| 2010 | ||||||||||
|
| 2010 | 2009 |
| 2010 |
| 2009 | |||||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property-Liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss) |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Underwriting income |
|
|
|
|
|
| ||||||||||||
Allstate Protection | $ | 287 |
| $ | 363 |
| $ | 571 |
| $ | 578 |
| $ | 333 |
| $ | 75 |
|
Discontinued Lines and Coverages |
| (21 | ) |
| (17 | ) |
| (27 | ) |
| (27 | ) |
| (6 | ) |
| (4 | ) |
Total underwriting income |
| 266 |
|
| 346 |
|
| 544 |
|
| 551 |
|
| 327 |
|
| 71 |
|
Net investment income |
| 284 |
|
| 326 |
|
| 898 |
|
| 1,004 |
|
| 284 |
|
| 304 |
|
Income tax expense on operations |
| (154 | ) |
| (170 | ) |
| (391 | ) |
| (346 | ) |
| (181 | ) |
| (88 | ) |
Realized capital gains and losses, after-tax |
| (69 | ) |
| (188 | ) |
| (261 | ) |
| (373 | ) |
| 38 |
|
| (123 | ) |
Gain on disposition of operations, after-tax |
| 4 |
|
| -- |
|
| 4 |
|
| -- |
| ||||||
Property-Liability net income |
| 331 |
|
| 314 |
|
| 794 |
|
| 836 |
|
| 468 |
|
| 164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allstate Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life and annuity premiums and contract charges |
| 548 |
|
| 482 |
|
| 1,637 |
|
| 1,460 |
|
| 569 |
|
| 544 |
|
Net investment income |
| 707 |
|
| 744 |
|
| 2,161 |
|
| 2,327 |
|
| 684 |
|
| 731 |
|
Periodic settlements and accruals on non-hedge derivative financial instruments |
| 10 |
|
| 2 |
|
| 38 |
|
| -- |
|
| 17 |
|
| 17 |
|
Contract benefits and interest credited to contractholder funds |
| (891 | ) |
| (879 | ) |
| (2,731 | ) |
| (2,735 | ) |
| (879 | ) |
| (905 | ) |
Operating costs and expenses and amortization of deferred policy acquisition costs |
| (219 | ) |
| (207 | ) |
| (554 | ) |
| (672 | ) |
| (222 | ) |
| (178 | ) |
Restructuring and related charges |
| -- |
|
| (4 | ) |
| 1 |
|
| (24 | ) |
| 2 |
|
| -- |
|
Income tax expense on operations |
| (47 | ) |
| (43 | ) |
| (180 | ) |
| (111 | ) |
| (55 | ) |
| (70 | ) |
Operating income |
| 108 |
|
| 95 |
|
| 372 |
|
| 245 |
|
| 116 |
|
| 139 |
|
Realized capital gains and losses, after-tax |
| (25 | ) |
| (151 | ) |
| (360 | ) |
| (239 | ) |
| 25 |
|
| (105 | ) |
DAC and DSI accretion (amortization) related to realized capital gains and losses, after-tax |
| 7 |
|
| 18 |
|
| 9 |
|
| (132 | ) | ||||||
DAC and DSI unlocking related to realized capital gains and losses, after-tax |
| -- |
|
| -- |
|
| (18 | ) |
| (224 | ) | ||||||
Valuation changes on embedded derivatives that are not hedged, after-tax |
| 8 |
|
| -- |
| ||||||||||||
DAC and DSI amortization relating to realized capital gains and losses and valuation changes on embedded derivatives that are not hedged, after-tax |
| (26 | ) |
| (2 | ) | ||||||||||||
DAC and DSI unlocking relating to realized capital gains and losses, after-tax |
| 1 |
|
| (18 | ) | ||||||||||||
Reclassification of periodic settlements and accruals on non-hedge financial instruments, after-tax |
| (7 | ) |
| (1 | ) |
| (25 | ) |
| -- |
|
| (12 | ) |
| (11 | ) |
Gain on disposition of operations, after-tax |
| 2 |
|
| 1 |
|
| 4 |
|
| 4 |
| ||||||
Allstate Financial net income (loss) |
| 85 |
|
| (38 | ) |
| (18 | ) |
| (346 | ) | ||||||
(Loss) gain on disposition of operations, after-tax |
| (15 | ) |
| 1 |
| ||||||||||||
Allstate Financial net income |
| 97 |
|
| 4 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees (1) |
| 2 |
|
| 3 |
|
| 8 |
|
| 7 |
|
| 2 |
|
| 3 |
|
Net investment income |
| 14 |
|
| 14 |
|
| 45 |
|
| 37 |
|
| 14 |
|
| 15 |
|
Operating costs and expenses (1) |
| (97 | ) |
| (112 | ) |
| (301 | ) |
| (309 | ) |
| (93 | ) |
| (100 | ) |
Income tax benefit on operations |
| 31 |
|
| 37 |
|
| 96 |
|
| 105 |
|
| 31 |
|
| 32 |
|
Operating loss |
| (50 | ) |
| (58 | ) |
| (152 | ) |
| (160 | ) |
| (46 | ) |
| (50 | ) |
Realized capital gains and losses, after-tax |
| 1 |
|
| 3 |
|
| 8 |
|
| 6 |
|
| -- |
|
| 2 |
|
Corporate and Other net loss |
| (49 | ) |
| (55 | ) |
| (144 | ) |
| (154 | ) |
| (46 | ) |
| (48 | ) |
Consolidated net income | $ | 367 |
| $ | 221 |
| $ | 632 |
| $ | 336 |
| $ | 519 |
| $ | 120 |
|
(1) For presentation in the Condensed Consolidated Statements of Operations, service fees of the Corporate and Other segment are reclassified to
operating costs and expenses.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14.13. Other Comprehensive Income
The components of other comprehensive income on a pre-tax and afterpre-tax and after-tax basis for the three months ended March 31 are as follows:
($ in millions) |
| Three months ended September 30, | ||||||||||||||||
|
| 2010 |
| 2009 | ||||||||||||||
|
| Pre-tax |
|
| Tax |
|
| After- |
|
| Pre-tax |
|
| Tax |
|
| After- |
|
Unrealized net holding gains and losses arising during the period, net of related offsets | $ | 1,593 |
| $ | (557 | ) | $ | 1,036 |
| $ | 3,354 |
| $ | (1,185 | ) | $ | 2,169 |
|
Less: reclassification adjustment of realized capital gains and losses |
| 140 |
|
| (49 | ) |
| 91 |
|
| (85 | ) |
| 30 |
|
| (55 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net capital gains and losses |
| 1,453 |
|
| (508 | ) |
| 945 |
|
| 3,439 |
|
| (1,215 | ) |
| 2,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign currency translation adjustments |
| 17 |
|
| (6 | ) |
| 11 |
|
| 39 |
|
| (14 | ) |
| 25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized pension and other postretirement benefit cost |
| 26 |
|
| (9 | ) |
| 17 |
|
| 122 |
|
| (67 | ) |
| 55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income | $ | 1,496 |
| $ | (523 | ) |
| 973 |
| $ | 3,600 |
| $ | (1,296 | ) |
| 2,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
| 367 |
|
|
|
|
|
|
|
| 221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
| $ | 1,340 |
|
|
|
|
|
|
| $ | 2,525 |
|
|
| Nine months ended September 30, | ||||||||||||||||||||||||||||||||
($ in millions) |
| 2011 |
| 2010 | ||||||||||||||||||||||||||||||
|
| 2010 |
| 2009 |
| Pre-tax |
| Tax |
| After- |
| Pre-tax |
| Tax |
| After- | ||||||||||||||||||
|
| Pre-tax |
|
| Tax |
|
| After- |
|
| Pre-tax |
|
| Tax |
|
| After- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net holding gains and losses arising during the period, net of related offsets | $ | 3,134 |
| $ | (1,096 | ) | $ | 2,038 |
| $ | 6,168 |
| $ | (2,156 | ) | $ | 4,012 |
| $ | 375 | $ | (132 | ) | $ | 243 | $ | 1,086 |
| $ | (379 | ) | $ | 707 |
|
Less: reclassification adjustment of realized capital gains and losses |
| (161 | ) |
| 56 |
|
| (105 | ) |
| (640 | ) |
| 224 |
|
| (416 | ) |
| 153 |
| (54 | ) |
| 99 |
| (122 | ) |
| 43 |
|
| (79 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Unrealized net capital gains and losses |
| 3,295 |
|
| (1,152 | ) |
| 2,143 |
| 6,808 |
|
| (2,380 | ) |
| 4,428 |
|
| 222 |
| (78 | ) |
| 144 |
| 1,208 |
|
| (422 | ) |
| 786 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Unrealized foreign currency translation adjustments |
| 12 |
|
| (4 | ) |
| 8 |
| 57 |
|
| (20 | ) |
| 37 |
|
| 15 |
| (5 | ) |
| 10 |
| 22 |
|
| (8 | ) |
| 14 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Unrecognized pension and other postretirement benefit cost |
| 83 |
|
| (28 | ) |
| 55 |
|
| 109 |
|
| (63 | ) |
| 46 |
|
| 23 |
| (8 | ) |
| 15 |
| 26 |
|
| (9 | ) |
| 17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Other comprehensive income | $ | 3,390 |
| $ | (1,184 | ) |
| 2,206 |
| $ | 6,974 |
| $ | (2,463 | ) |
| 4,511 |
| $ | 260 | $ | (91 | ) |
| 169 | $ | 1,256 |
| $ | (439 | ) |
| 817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Net income |
|
|
|
|
|
|
| 632 |
|
|
|
|
|
|
|
| 336 |
|
|
|
|
|
|
| 519 |
|
|
|
|
|
|
| 120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Comprehensive income |
|
|
|
|
|
| $ | 2,838 |
|
|
|
|
|
|
| $ | 4,847 |
|
|
|
|
|
| $ | 688 |
|
|
|
|
|
| $ | 937 |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
The Allstate Corporation
Northbrook, IL 60062
We have reviewed the accompanying condensed consolidated statement of financial position of The Allstate Corporation and subsidiaries (the “Company”) as of September 30, 2010,March 31, 2011, and the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2010 and 2009, and the condensed consolidated statements of cash flows for the nine-monththree-month periods ended September 30, 2010March 31, 2011 and 2009.2010. These interim financialsfinancial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), 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 reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim 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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of The Allstate Corporation and subsidiaries as of December 31, 2009,2010, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 25, 2010,24, 2011, which report includes an explanatory paragraph relating to a change in the Company’s recognition and presentation for other-than-temporary impairments of debt securities in 2009, 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, 20092010 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.
/s/ Deloitte & Touche LLP
Chicago, Illinois
OctoberApril 27, 20102011
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
OVERVIEW
The following discussion highlights significant factors influencing the consolidated financial position and results of operations of The Allstate Corporation (referred to in this document as “we”, “our”, “us”, 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 2009.2010. Further analysis of our insurance segments is provided in the Property-Liability Operations (which includes the Allstate Protection and the Discontinued Lines and Coverages segments) and in the Allstate Financial Segment sections of Management’s Discussion and Analysis (“MD&A”). The segments are consistent with the way in which we use financial information to evaluate business performance and to determine the allocation of resources.
Allstate is focused on three priorities:
·improve customer loyalty, reinvent protection and retirement for the consumer and our operating results;
·grow our businesses.businesses profitably; and
·differentiate ourselves from the competition by reinventing our business.
· Consolidated net income was $367 million in the third quarter of 2010 compared to $221 million in the third quarter of 2009, and $632$519 million in the first nine monthsquarter of 20102011 compared to $336$120 million in the first nine monthsquarter of 2009.2010. Net income per diluted share was $0.68 in the third quarter of 2010 compared to $0.41 in the third quarter of 2009, and $1.16$0.97 in the first nine monthsquarter of 20102011 compared to $0.62$0.22 in the first nine monthsquarter of 2009.2010.
· Property-Liability net income was $331 million in the third quarter of 2010 compared to $314 million in the third quarter of 2009, and $794$468 million in the first nine monthsquarter of 20102011 compared to $836$164 million in the first nine monthsquarter of 2009.2010.
· The Property-Liability combined ratio was 95.9 in the third quarter of 2010 compared to 94.7 in the third quarter of 2009, and 97.294.9 in the first nine monthsquarter of both 2010 and 2009.2011 compared to 98.9 in the first quarter of 2010.
· Allstate Financial had a net income of $85 million in the third quarter of 2010 compared to a net loss of $38 million in the third quarter of 2009, and a net loss of $18$97 million in the first nine monthsquarter of 20102011 compared to a net loss of $346$4 million in the first nine monthsquarter of 2009.2010.
· Total revenues were $7.91 billion in the third quarter of 2010 compared to $7.58 billion in the third quarter of 2009, and $23.31$8.10 billion in the first nine monthsquarter of 20102011 compared to $23.96$7.75 billion in the first nine monthsquarter of 2009.2010.
· Property-Liability premiums earned in the thirdfirst quarter of 20102011 totaled $6.50$6.45 billion, a decrease of 0.6% from $6.54 billion in the third quarter of 2009, and $19.52 billion in the first nine months of 2010, a decrease of 0.8% from $19.68$6.50 billion in the first nine monthsquarter of 2009.2010.
· Net realized capital lossesgains were $144$96 million in the thirdfirst quarter of 20102011 compared to $519 million in the third quarter of 2009, and net realized capital losses were $943of $348 million in the first nine monthsquarter of 2010 compared to $550 million in the first nine months of 2009.2010.
· Investments as of September 30, 2010March 31, 2011 totaled $102.21$99.61 billion, an increasea decrease of 2.4%0.9% from $99.83$100.48 billion as of December 31, 2009.2010. Net investment income in the thirdfirst quarter of 20102011 was $1.01 billion,$982 million, a decrease of 7.3%6.5% from $1.08 billion in the third quarter of 2009, and $3.10$1.05 billion in the first nine monthsquarter of 2010, a decrease of 7.8% from $3.37 billion in the first nine months of 2009.2010.
· Book value per diluted share (ratio of shareholders’ equity to total shares outstanding and dilutive potential shares outstanding) was $35.48$36.51 as of September 30, 2010,March 31, 2011, an increase of 9.9%13.2% from $32.29$32.26 as of September 30, 2009March 31, 2010 and an increase of 15.0%3.4% from $30.84$35.32 as of December 31, 2009.2010.
· For the twelve months ended September 30, 2010,March 31, 2011, return on the average of beginning and ending period shareholders’ equity was 6.3%7.2%, an increasea decrease of 10.91.2 points from (4.6)%8.4% for the twelve months ended September 30, 2009.March 31, 2010.
· At September 30, 2010,As of March 31, 2011, we had $19.27$19.31 billion in capital.shareholders’ equity. This total included $3.53$3.65 billion in deployable invested assets at the parent holding company level.
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
($ in millions) |
| Three months ended |
| Nine months ended |
| Three months ended | ||||||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2011 |
| 2010 | ||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Property-liability insurance premiums | $ | 6,499 |
| $ | 6,535 |
| $ | 19,515 |
| $ | 19,677 |
| $ | 6,448 |
| $ | 6,503 |
|
Life and annuity premiums and contract charges |
| 548 |
| 482 |
| 1,637 |
| 1,460 |
|
| 569 |
|
| 544 |
| |||
Net investment income |
| 1,005 |
| 1,084 |
| 3,104 |
| 3,368 |
|
| 982 |
|
| 1,050 |
| |||
Realized capital gains and losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total other-than-temporary impairment losses |
| (99 | ) |
| (539 | ) |
| (637 | ) |
| (1,735 | ) |
| (156 | ) |
| (250 | ) |
Portion of loss recognized in other comprehensive income |
| (68 | ) |
| 147 |
|
| (91 | ) |
| 301 |
|
| (27 | ) |
| (5 | ) |
Net other-than-temporary impairment losses recognized in earnings |
| (167 | ) |
| (392 | ) |
| (728 | ) |
| (1,434 | ) |
| (183 | ) |
| (255 | ) |
Sales and other realized capital gains and losses |
| 23 |
|
| (127 | ) |
| (215 | ) |
| 884 |
|
| 279 |
|
| (93 | ) |
Total realized capital gains and losses |
| (144 | ) |
| (519 | ) |
| (943 | ) |
| (550 | ) |
| 96 |
|
| (348 | ) |
Total revenues |
| 7,908 |
|
| 7,582 |
|
| 23,313 |
|
| 23,955 |
|
| 8,095 |
|
| 7,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Property-liability insurance claims and claims expense |
| (4,603 | ) |
| (4,573 | ) |
| (14,109 | ) |
| (14,295 | ) |
| (4,476 | ) |
| (4,792 | ) |
Life and annuity contract benefits |
| (445 | ) |
| (382 | ) |
| (1,372 | ) |
| (1,176 | ) |
| (454 | ) |
| (442 | ) |
Interest credited to contractholder funds |
| (445 | ) |
| (496 | ) |
| (1,358 | ) |
| (1,636 | ) |
| (418 | ) |
| (463 | ) |
Amortization of deferred policy acquisition costs |
| (1,006 | ) |
| (1,023 | ) |
| (2,969 | ) |
| (3,649 | ) |
| (1,051 | ) |
| (1,014 | ) |
Operating costs and expenses |
| (828 | ) |
| (744 | ) |
| (2,446 | ) |
| (2,247 | ) |
| (838 | ) |
| (829 | ) |
Restructuring and related charges |
| (9 | ) |
| (35 | ) |
| (33 | ) |
| (112 | ) |
| (9 | ) |
| (11 | ) |
Interest expense |
| (91 | ) |
| (106 | ) |
| (275 | ) |
| (291 | ) |
| (92 | ) |
| (92 | ) |
Total costs and expenses |
| (7,427 | ) |
| (7,359 | ) |
| (22,562 | ) |
| (23,406 | ) |
| (7,338 | ) |
| (7,643 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposition of operations |
| 9 |
| 2 |
| 12 |
| 6 |
| |||||||||
Income tax expense |
| (123 | ) |
| (4 | ) |
| (131 | ) |
| (219 | ) | ||||||
(Loss) gain on disposition of operations |
| (23 | ) |
| 1 |
| ||||||||||||
Income tax (expense) benefit |
| (215 | ) |
| 13 |
| ||||||||||||
Net income | $ | 367 |
| $ | 221 |
| $ | 632 |
| $ | 336 |
| $ | 519 |
| $ | 120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Property-Liability | $ | 331 |
| $ | 314 |
| $ | 794 |
| $ | 836 |
| $ | 468 |
| $ | 164 |
|
Allstate Financial |
| 85 |
| (38 | ) |
| (18 | ) |
| (346 | ) |
| 97 |
|
| 4 |
| |
Corporate and Other |
| (49 | ) |
| (55 | ) |
| (144 | ) |
| (154 | ) |
| (46 | ) |
| (48 | ) |
Net income | $ | 367 |
| $ | 221 |
| $ | 632 |
| $ | 336 |
| $ | 519 |
| $ | 120 |
|
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
· Premiums written, an operating measure that is defined and reconciled to premiums earned in the Property-Liability Operations section of the MD&A, decreased 0.6%0.7% to $6.77 billion in the third quarter of 2010 from $6.81 billion in the third quarter of 2009, and 0.1% to $19.67$6.22 billion in the first nine monthsquarter of 20102011 from $19.69$6.26 billion in the first nine monthsquarter of 2009.2010 and decreased 0.4% from $6.24 billion in the fourth quarter of 2010.
– Allstate brand standard auto premiums written decreased 0.5%1.0% to $4.03 billion in the third quarter of 2010 from $4.05 billion in the third quarter of 2009, and increased 0.8% to $12.00$3.98 billion in the first nine monthsquarter of 20102011 from $11.90$4.02 billion in the first nine monthsquarter of 2009.2010.
– Allstate brand homeowners premiums written increased 2.4%3.0% to $1.61 billion in the third quarter of 2010 from $1.57 billion in the third quarter of 2009, and increased 2.1% to $4.36$1.23 billion in the first nine monthsquarter of 20102011 from $4.28$1.19 billion in the first nine monthsquarter of 2009.2010.
– Encompass brand premiums written decreased 16.7%6.8% to $290 million in the third quarter of 2010 from $348 million in the third quarter of 2009, and 19.4% to $841$245 million in the first nine monthsquarter of 20102011 from $1.04 billion$263 million in the first nine monthsquarter of 2009.2010.
· Premium operating measures and statistics contributing to overall Allstate brand standard auto premiums written decrease were the following:
– 1.7%0.7% decrease in policies in force (“PIF”) as of September 30, 2010March 31, 2011 compared to September 30, 2009March 31, 2010
– 1.4% increase0.9% decrease in the six month policy term average gross premium before reinsurance to $441$439 in the thirdfirst quarter of 20102011 from $435 in the third quarter of 2009, and 2.5% increase in the six month policy term average gross premium before reinsurance to $443 in the first nine monthsquarter of 2010 from $432 in the first nine months of 2009
– 0.40.1 point decreaseincrease in the six month renewal ratio to 88.7%88.9% in the thirdfirst quarter of 20102011 compared to 89.1% in the third quarter of 2009, and the six month renewal ratio of 88.8% in the first nine monthsquarter of 2010 was comparable to the first nine months of 2009
– 2.5%11.9% increase in new issued applications in the thirdfirst quarter of 20102011 compared to the same periodfirst quarter of 2009, and 2.7% decrease in new issued applications in the first nine months of 2010 compared to the same period of 2009
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010
· Premium operating measures and statistics contributing to overall Allstate brand homeowners premiums written increase were the following:
– 4.1%3.7% decrease in PIF as of September 30, 2010March 31, 2011 compared to September 30, 2009March 31, 2010
– 7.2%5.9% increase in the twelve month policy term average gross premium before reinsurance to $953 in the third quarter of 2010 from $889 in the third quarter of 2009, and 6.7% increase in the twelve month policy term average gross premium before reinsurance to $937$975 in the first nine monthsquarter of 20102011 from $878$921 in the first nine monthsquarter of 20092010
– 0.1 point increase in the twelve month renewal ratio to 88.6% in the third quarter of 2010 compared to 88.5% in the third quarter of 2009, and 0.3 point increase in the twelve month renewal ratio to 88.3% in the first nine monthsquarter of 20102011 compared to 88.0% in the first nine monthsquarter of 20092010
– 5.4% and 2.4%4.2% decrease in new issued applications in the thirdfirst quarter and first nine months of 2010, respectively,2011 compared to the same periodfirst quarter of 20092010
– $1511 million decrease in catastrophe reinsurance costs to $127 million in the third quarter of 2010 from $142 million in the third quarter of 2009, and $24 million decrease in catastrophe reinsurance costs to $398$124 million in the first nine monthsquarter of 20102011 from $422$135 million in the first nine monthsquarter of 20092010
· Factors comprising the Allstate brand standard auto loss ratio increase of 0.10.9 points to 68.7 in the third quarter of 2010 from 68.6 in the third quarter of 2009, and an increase of 0.1 points to 69.570.3 in the first nine monthsquarter of 20102011 from 69.4 in the first nine monthsquarter of 20092010 were the following:
– 3.7% and 1.8%1.2% increase in standard auto claim frequency (rate of claim occurrence per policy in force) for property damage in the thirdfirst quarter and first nine months of 2010, respectively,2011 compared to the same periodsfirst quarter of 20092010
– 7.5% and 5.7%3.1% increase in standard auto claim frequency for bodily injury in the thirdfirst quarter and first nine months of 2010, respectively,2011 compared to the same periodsfirst quarter of 20092010
– 1.0%0.8% increase and 0.1% decrease in auto paid claim severities (average cost per claim) for property damage in the thirdfirst quarter and first nine months of 2010, respectively,2011 compared to the same periodsfirst quarter of 20092010
– 1.1%3.6% increase and 0.4% decrease in auto paid claim severities for bodily injury in the thirdfirst quarter and first nine months of 2010, respectively,2011 compared to the same periodsfirst quarter of 20092010
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
· Factors comprising the Allstate brand homeowners loss ratio, which includes catastrophes, an increasedecrease of 5.119.6 points to 80.5 in the third quarter of 2010 from 75.4 in the third quarter of 2009, and a decrease of 1.0 points to 83.567.9 in the first nine monthsquarter of 20102011 from 84.587.5 in the first nine monthsquarter of 20092010 were the following:
– 0.8 point increase in the effect of catastrophe losses to 23.1 points in the third quarter of 2010 compared to 22.3 points in the third quarter of 2009, and 0.319.4 point decrease in the effect of catastrophe losses to 31.617.7 points in the first nine monthsquarter of 20102011 compared to 31.937.1 points in the first nine monthsquarter of 20092010
– 2.3% decrease and 1.2%1.7% increase in homeowner claim frequency, excluding catastrophes, in the thirdfirst quarter and first nine months of 2010, respectively,2011 compared to the same periodsfirst quarter of 20092010
– 2.1% and 0.6%3.5% increase in paid claim severity, excluding catastrophes, in the thirdfirst quarter and first nine months of 2010, respectively,2011 compared to the same periodsfirst quarter of 20092010
· Factors comprising the $21$315 million decrease in catastrophe losses to $386$333 million in the thirdfirst quarter of 20102011 compared to $407$648 million in the thirdfirst quarter of 2009, and $71 million decrease to $1.67 billion in the first nine months of 2010 compared to $1.74 billion in the first nine months of 2009 were the following:
– $4216 events with losses of $367 million of favorable prior year reserve reestimates in the thirdfirst quarter of 20102011 compared to $8011 events with losses of $663 million favorable prior year reserve reestimates in the thirdfirst quarter of 2009, primarily related to recovered subrogation, and $1402010
–$34 million favorable prior year reserve reestimates in the first nine monthsquarter of 2010 which is comparable2011 compared to 2009
–$57$15 million of unfavorable prior quarterfavorable reserve reestimates in the thirdfirst quarter of 2010 compared to $86 million unfavorable prior quarter reserve reestimates in the third quarter of 2009
–29 events with $371 million of losses in the third quarter of 2010 compared to 24 events with losses of $401 million in the third quarter of 2009, and 70 events with losses of $1.81 billion in the first nine months of 2010 compared to 69 events with losses of $1.88 billion in the first nine months of 2009
· Factors comprising prior year reserve reestimates of $11 million unfavorable in the third quarter of 2010 compared to $52 million favorable in the third quarter of 2009, and prior year reserve reestimates of $162$41 million favorable in the first nine monthsquarter of 20102011 compared to $87$23 million favorable in the first nine monthsquarter of 20092010 included:
– prior year reserve reestimates related to auto, homeowners and other personal lines in the thirdfirst quarter of 20102011 contributed $40$19 million favorable, $67 million unfavorable and $38 million favorable respectively, compared to prior year reserve reestimates in the third quarter of 2009 of $11and $13 million unfavorable, $75 million favorable and $3 million favorable, respectively. Prior year reserve reestimates related to auto, homeowners and other personal lines in the first nine months of 2010 contributed $120 million favorable, $2 million favorable and $65 million favorable, respectively, compared to prior year reserve reestimates in the first nine monthsquarter of 20092010 of $28$5 million favorable, $118unfavorable, $8 million favorable and $38$22 million unfavorable, respectively.favorable, respectively
– prior year reserve reestimates in the third quarter of 2010 are attributable to a $70 million litigation settlement largely offset by favorable prior year catastrophe reestimates and severity development that was better than expected. Prior year reestimates in the first nine monthsquarter of 2011 and 2010 are largely attributable to favorable prior year catastrophe reestimates and severity development that was better than expected, partially offset by the litigation settlement.
·Our 2010 annual review resulted in asbestos reserve reestimates of $5 million unfavorable in the third quarter of 2010 compared to $8 million favorable in the third quarter of 2009, and environmental reserve reestimates of $18 million unfavorable in the third quarter of 2010 compared to $13 million unfavorable in the third quarter of 2009.catastrophes
· Property-Liability underwriting income was $266 million in the third quarter of 2010 compared to $346 million in the third quarter of 2009, and $544$327 million in the first nine monthsquarter of 20102011 compared to $551$71 million in the first nine monthsquarter of 2009.2010. Underwriting income, a measure not based on accounting principles generally accepted in the United States of America (“GAAP”), is defined below.
· Net realized capital gains were $57 million in the first quarter of 2011 compared to net realized capital losses of $190 million in the first quarter of 2010.
·Property-Liability investments as of September 30, 2010March 31, 2011 were $35.75$35.46 billion, an increase of 3.5%1.2% from $34.53$35.05 billion as of December 31, 2009.2010. Net investment income was $284 million in the thirdfirst quarter of 2010,2011, a decrease of 12.9%6.6% from $326 million in the third quarter of 2009, and $898$304 million in the first nine months of 2010, a decrease of 10.6% from $1.00 billion in the first nine months of 2009.
·Net realized capital losses were $107 million in the third quarter of 2010 compared to $290 million in the third quarter of 2009, and net realized capital losses were $403 million in the first nine months of both 2010 and 2009.2010.
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
PROPERTY-LIABILITY OPERATIONS
Overview Our Property-Liability operations consist of two business segments: Allstate Protection and Discontinued Lines and Coverages. Allstate Protection comprises two brands, the Allstate brand and Encompass® brand. Allstate Protection is principally engaged in the sale of personal property and casualty insurance, primarily private passenger auto and homeowners insurance, to individuals in the United States and Canada. Discontinued Lines and Coverages includes results from insurance coverage that we no longer write and results for certain commercial and other businesses in run-off. These segments are consistent with the groupings of financial information that management uses to evaluate performance and to determine the allocation of resources.
Underwriting income, a measure that is not based on GAAP and is reconciled to net income below, is calculated as premiums earned, less claims and claims expense (“losses”), amortization of deferred policy acquisition costs (“DAC”), operating costs and expenses and restructuring and related charges, as determined using GAAP. We use this measure in our evaluation of results of operations to analyze the profitability of the Property-Liability insurance operations separately from investment results. It is also an integral component of incentive compensation. It is useful for investors to evaluate the components of income separately and in the aggregate when reviewing performance. Net income is the GAAP measure most directly comparable to underwriting income. Underwriting income should not be considered as a substitute for net income and does not reflect the overall profitability of the business.
The table below includes GAAP operating ratios we use to measure our profitability. We believe that they enhance an investor’s understanding of our profitability. They are calculated as follows:
· Claims and claims expense (“loss”) ratio - the ratio of claims and claims expense to premiums earned. Loss ratios include the impact of catastrophe losses.
· Expense ratio - the ratio of amortization of DAC, operating costs and expenses, and restructuring and related charges to premiums earned.
· Combined ratio - - the ratio of claims and claims expense, amortization of DAC, operating costs and expenses, and restructuring and related charges to premiums earned. The combined ratio is the sum of the loss ratio and the expense ratio. The difference between 100% and the combined ratio represents underwriting income as a percentage of premiums earned.earned, or underwriting margin.
We have also calculated the following impacts of specific items on the GAAP operating ratios because of the volatility of these items between fiscal periods.
· Effect of catastrophe losses on combined ratio - the percentage of catastrophe losses included in claims and claims expense to premiums earned. This ratio includes prior year reserve reestimates of catastrophe losses.
· Effect of prior year reserve reestimates on combined ratio - the percentage of prior year reserve reestimates included in claims and claims expense to premiums earned. This ratio includes prior year reserve reestimates of catastrophe losses.
· Effect of restructuring and related charges on combined ratio - the percentage of restructuring and related charges to premiums earned.
· Effect of Discontinued Lines and Coverages on combined ratio - the ratio of claims and claims expense and other costs and expenses in the Discontinued Lines and Coverages segment to Property-Liability premiums earned. The sum of the effect of Discontinued Lines and Coverages on the combined ratio and the Allstate Protection combined ratio is equal to the Property-Liability combined ratio.
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
Summarized financial data, a reconciliation of underwriting income to net income, and GAAP operating ratios for our Property-Liability operations are presented in the following table.
($ in millions, except ratios) |
| Three months ended |
| Nine months ended |
| Three months ended | ||||||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2011 |
| 2010 | ||||||
Premiums written | $ | 6,767 |
| $ | 6,810 |
| $ | 19,665 |
| $ | 19,694 |
| $ | 6,215 |
| $ | 6,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned | $ | 6,499 |
| $ | 6,535 |
| $ | 19,515 |
| $ | 19,677 |
| $ | 6,448 |
| $ | 6,503 |
|
Net investment income |
| 284 |
|
| 326 |
|
| 898 |
|
| 1,004 |
|
| 284 |
|
| 304 |
|
Realized capital gains and losses |
| (107 | ) |
| (290 | ) |
| (403 | ) |
| (403 | ) |
| 57 |
|
| (190 | ) |
Total revenues |
| 6,676 |
|
| 6,571 |
|
| 20,010 |
|
| 20,278 |
|
| 6,789 |
|
| 6,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and claims expense |
| (4,603 | ) |
| (4,573 | ) |
| (14,109 | ) |
| (14,295 | ) |
| (4,476 | ) |
| (4,792 | ) |
Amortization of DAC |
| (915 | ) |
| (943 | ) |
| (2,754 | ) |
| (2,832 | ) |
| (904 | ) |
| (925 | ) |
Operating costs and expenses |
| (706 | ) |
| (642 | ) |
| (2,074 | ) |
| (1,911 | ) |
| (730 | ) |
| (704 | ) |
Restructuring and related charges |
| (9 | ) |
| (31 | ) |
| (34 | ) |
| (88 | ) |
| (11 | ) |
| (11 | ) |
Total costs and expenses |
| (6,233 | ) |
| (6,189 | ) |
| (18,971 | ) |
| (19,126 | ) |
| (6,121 | ) |
| (6,432 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposition of operations |
| 5 |
|
| -- |
|
| 5 |
|
| -- |
| ||||||
Income tax expense |
| (117 | ) |
| (68 | ) |
| (250 | ) |
| (316 | ) |
| (200 | ) |
| (21 | ) |
Net income | $ | 331 |
| $ | 314 |
| $ | 794 |
| $ | 836 |
| $ | 468 |
| $ | 164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income | $ | 266 |
| $ | 346 |
| $ | 544 |
| $ | 551 |
| $ | 327 |
| $ | 71 |
|
Net investment income |
| 284 |
|
| 326 |
|
| 898 |
|
| 1,004 |
|
| 284 |
|
| 304 |
|
Income tax expense on operations |
| (154 | ) |
| (170 | ) |
| (391 | ) |
| (346 | ) |
| (181 | ) |
| (88 | ) |
Realized capital gains and losses, after-tax |
| (69 | ) |
| (188 | ) |
| (261 | ) |
| (373 | ) |
| 38 |
|
| (123 | ) |
Gain on disposition of operations, after-tax |
| 4 |
|
| -- |
|
| 4 |
|
| -- |
| ||||||
Net income | $ | 331 |
| $ | 314 |
| $ | 794 |
| $ | 836 |
| $ | 468 |
| $ | 164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe losses (1) | $ | 386 |
| $ | 407 |
| $ | 1,670 |
| $ | 1,741 |
| $ | 333 |
| $ | 648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP operating ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and claims expense ratio |
| 70.8 |
|
| 70.0 |
|
| 72.3 |
|
| 72.6 |
|
| 69.4 |
|
| 73.7 |
|
Expense ratio |
| 25.1 |
|
| 24.7 |
|
| 24.9 |
|
| 24.6 |
|
| 25.5 |
|
| 25.2 |
|
Combined ratio |
| 95.9 |
|
| 94.7 |
|
| 97.2 |
|
| 97.2 |
|
| 94.9 |
|
| 98.9 |
|
Effect of catastrophe losses on combined ratio (1) |
| 5.9 |
|
| 6.2 |
|
| 8.6 |
|
| 8.8 |
|
| 5.2 |
|
| 10.0 |
|
Effect of prior year reserve reestimates on combined ratio (1) |
| 0.2 |
|
| (0.7 | ) |
| (0.9 | ) |
| (0.4 | ) |
| (0.7 | ) |
| (0.4 | ) |
Effect of restructuring and related charges on combined ratio |
| 0.1 |
|
| 0.5 |
|
| 0.2 |
|
| 0.4 |
|
| 0.2 |
|
| 0.2 |
|
Effect of Discontinued Lines and Coverages on combined ratio |
| 0.3 |
|
| 0.3 |
|
| 0.1 |
|
| 0.1 |
|
| 0.1 |
|
| 0.1 |
|
(1)Prior year reserve reestimates included in catastrophe losses totaled $42 million and $140$34 million favorable in the three months and nine months ended September 30 2010, respectively, March 31, 2011
compared to $80 million and $139$15 million favorable in the three months and nine months ended September 30, 2009, respectively.March 31, 2010.
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
Premiums written, an operating measure, is the amount of premiums charged for policies issued during a fiscal period. Premiums earned is a GAAP measure. Premiums are considered earned and are included in the financial results on a pro-rata basis over the policy period. The portion of premiums written applicable to the unexpired terms of the policies is recorded as unearned premiums on our Condensed Consolidated Statements of Financial Position.
A reconciliation of premiums written to premiums earned is shown in the following table.
($ in millions) |
| Three months ended |
| Nine months ended |
| Three months ended | ||||||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2011 |
| 2010 | ||||||
Premiums written: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Allstate Protection | $ | 6,767 |
| $ | 6,810 |
| $ | 19,665 |
| $ | 19,695 |
| $ | 6,216 |
| $ | 6,258 |
|
Discontinued Lines and Coverages |
| -- |
|
| -- |
|
| -- |
|
| (1 | ) |
| (1 | ) |
| -- |
|
Property-Liability premiums written |
| 6,767 |
|
| 6,810 |
|
| 19,665 |
|
| 19,694 |
|
| 6,215 |
|
| 6,258 |
|
Increase in unearned premiums |
| (319 | ) |
| (315 | ) |
| (184 | ) |
| (48 | ) | ||||||
Decrease in unearned premiums |
| 234 |
|
| 245 |
| ||||||||||||
Other |
| 51 |
|
| 40 |
|
| 34 |
|
| 31 |
|
| (1 | ) |
| -- |
|
Property-Liability premiums earned | $ | 6,499 |
| $ | 6,535 |
| $ | 19,515 |
| $ | 19,677 |
| $ | 6,448 |
| $ | 6,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allstate Protection | $ | 6,498 |
| $ | 6,535 |
| $ | 19,514 |
| $ | 19,678 |
| $ | 6,449 |
| $ | 6,503 |
|
Discontinued Lines and Coverages |
| 1 |
|
| -- |
|
| 1 |
|
| (1 | ) |
| (1 | ) |
| -- |
|
Property-Liability | $ | 6,499 |
| $ | 6,535 |
| $ | 19,515 |
| $ | 19,677 |
| $ | 6,448 |
| $ | 6,503 |
|
Premiums written by brand are shown in the following table.
($ in millions) |
| Three months ended September 30, | ||||||||||||||||
|
| Allstate brand |
|
| Encompass brand |
|
| Allstate Protection | ||||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2010 |
| 2009 | ||||||
Standard auto | $ | 4,028 |
| $ | 4,049 |
| $ | 166 |
| $ | 208 |
| $ | 4,194 |
| $ | 4,257 |
|
Non-standard auto |
| 223 |
|
| 235 |
|
| 1 |
|
| 6 |
|
| 224 |
|
| 241 |
|
Homeowners |
| 1,610 |
|
| 1,573 |
|
| 98 |
|
| 110 |
|
| 1,708 |
|
| 1,683 |
|
Other personal lines (1) |
| 616 |
|
| 605 |
|
| 25 |
|
| 24 |
|
| 641 |
|
| 629 |
|
Total | $ | 6,477 |
| $ | 6,462 |
| $ | 290 |
| $ | 348 |
| $ | 6,767 |
| $ | 6,810 |
|
|
| Nine months ended September 30, | ||||||||||||||||||||||||||||
($ in millions) |
| Three months ended March 31, | ||||||||||||||||||||||||||||
|
| Allstate brand |
| Encompass brand |
| Allstate Protection |
| Allstate brand |
| Encompass brand |
| Allstate Protection | ||||||||||||||||||
|
| 2010 |
|
| 2009 |
|
| 2010 |
|
| 2009 |
|
| 2010 |
|
| 2009 |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Standard auto | $ | 11,999 |
| $ | 11,903 |
| $ | 495 |
| $ | 629 |
| $ | 12,494 |
| $ | 12,532 |
| $ | 3,984 | $ | 4,023 | $ | 144 | $ | 160 | $ | 4,128 | $ | 4,183 |
Non-standard auto |
| 680 |
| 708 |
| 5 |
| 19 |
| 685 |
| 727 |
|
| 210 |
| 237 |
| 1 |
| 3 |
| 211 |
| 240 | |||||
Homeowners |
| 4,364 |
| 4,276 |
| 272 |
| 319 |
| 4,636 |
| 4,595 |
|
| 1,225 |
| 1,189 |
| 79 |
| 80 |
| 1,304 |
| 1,269 | |||||
Other personal lines (1) |
| 1,781 |
|
| 1,764 |
|
| 69 |
|
| 77 |
|
| 1,850 |
|
| 1,841 |
|
| 552 |
| 546 |
| 21 |
| 20 |
| 573 |
| 566 |
Total | $ | 18,824 |
| $ | 18,651 |
| $ | 841 |
| $ | 1,044 |
| $ | 19,665 |
| $ | 19,695 |
| $ | 5,971 | $ | 5,995 | $ | 245 | $ | 263 | $ | 6,216 | $ | 6,258 |
(1) Other personal lines include commercial, condominium, renters, involuntary auto and other personal lines.
Allstate brand premiums written excluding Allstate Canada, by the direct channel, excluding Allstate Canada, increased 15.4%11.4% to $195 million in the third quarter of 2010 from $169 million in the third quarter of 2009, and 21.7% to $561$206 million in the first nine monthsquarter of 20102011 from $461$185 million in the first nine monthsquarter of 2009. Both periods are impacted2010, reflecting an impact by profitability management actions taken in New York, Florida, California and North Carolina. The direct channel includes call centers and the internet.
Premiums earned by brand are shown in the following table.
($ in millions) |
| Three months ended March 31, | ||||||||||
|
| Allstate brand |
| Encompass brand |
| |||||||
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Standard auto | $ | 3,928 | $ | 3,943 | $ | 160 | $ | 194 | $ | 4,088 | $ | 4,137 |
Non-standard auto |
| 210 |
| 230 |
| 1 |
| 4 |
| 211 |
| 234 |
Homeowners |
| 1,448 |
| 1,416 |
| 91 |
| 100 |
| 1,539 |
| 1,516 |
Other personal lines |
| 588 |
| 592 |
| 23 |
| 24 |
| 611 |
| 616 |
Total | $ | 6,174 | $ | 6,181 | $ | 275 | $ | 322 | $ | 6,449 | $ | 6,503 |
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
Premiums earned by brand are shown in the following table.
($ in millions) |
| Three months ended September 30, | ||||||||||||||||
|
| Allstate brand |
| Encompass brand |
| Allstate Protection | ||||||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2010 |
| 2009 | ||||||
Standard auto | $ | 3,961 |
| $ | 3,946 |
| $ | 173 |
| $ | 221 |
| $ | 4,134 |
| $ | 4,167 |
|
Non-standard auto |
| 222 |
|
| 231 |
|
| 2 |
|
| 6 |
|
| 224 |
|
| 237 |
|
Homeowners |
| 1,430 |
|
| 1,396 |
|
| 96 |
|
| 108 |
|
| 1,526 |
|
| 1,504 |
|
Other personal lines |
| 591 |
|
| 601 |
|
| 23 |
|
| 26 |
|
| 614 |
|
| 627 |
|
Total | $ | 6,204 |
| $ | 6,174 |
| $ | 294 |
| $ | 361 |
| $ | 6,498 |
| $ | 6,535 |
|
|
| Nine months ended September 30, | ||||||||||||||||
|
| Allstate brand |
| Encompass brand |
| Allstate Protection | ||||||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2010 |
| 2009 | ||||||
Standard auto | $ | 11,873 |
| $ | 11,791 |
| $ | 552 |
| $ | 702 |
| $ | 12,425 |
| $ | 12,493 |
|
Non-standard auto |
| 680 |
|
| 708 |
|
| 8 |
|
| 22 |
|
| 688 |
|
| 730 |
|
Homeowners |
| 4,262 |
|
| 4,222 |
|
| 292 |
|
| 340 |
|
| 4,554 |
|
| 4,562 |
|
Other personal lines |
| 1,775 |
|
| 1,811 |
|
| 72 |
|
| 82 |
|
| 1,847 |
|
| 1,893 |
|
Total | $ | 18,590 |
| $ | 18,532 |
| $ | 924 |
| $ | 1,146 |
| $ | 19,514 |
| $ | 19,678 |
|
Premium operating measures and statistics that are used to analyze the business are calculated and described below. Measures and statistics presented for Allstate brand exclude Allstate Canada, loan protection and specialty auto.
· PIF: Policy counts are based on items rather than customers. A multi-car customer would generate multiple item (policy) counts, even if all cars were insured under one policy.
· Average premium-gross written: Gross premiums written divided by issued item count. Gross premiums written include the impacts from discounts and surcharges, and exclude the impacts from mid-term premium adjustments, ceded reinsurance premiums, and premium refund accruals. Allstate brand average gross premiums represent the appropriate policy term for each line, which is 6 months for standard and non-standard auto and 12 months for homeowners. Encompass brand average gross premiums represent the appropriate policy term for each line, which is 12 months for standard auto and homeowners and 6 months for non-standard auto.
· Renewal ratio: Renewal policies issued during the period, based on contract effective dates, divided by the total policies issued 6 months prior for standard and non-standard auto (12 months prior for Encompass brand standard auto) or 12 months prior for homeowners.
· New issued applications: Item counts of automobiles or homeowners insurance applications for insurance policies that were issued during the period. Does not include automobiles that are added by existing customers.
·Net items added to existing policies: Net increases in insured cars by policy endorsement activity.
Standard auto premiums written totaled $4.19 billion in the third quarter of 2010, a decrease of 1.5% from $4.26 billion in the third quarter of 2009, and $12.49$4.13 billion in the first nine monthsquarter of 2010,2011, a decrease of 0.3%1.3% from $12.53$4.18 billion in the first nine monthsquarter of 2009.2010.
|
| Allstate brand |
| Encompass brand |
| Allstate brand |
| Encompass brand | ||||||||||||
Standard Auto |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2011 |
| 2010 |
| 2011 |
| 2010 | ||||
Three months ended September 30, |
|
|
|
|
|
|
|
|
|
| ||||||||||
PIF (thousands) |
| 17,479 |
|
| 17,774 |
|
| 710 |
| 921 |
|
| 17,456 |
| 17,581 |
| 676 |
| 802 | |
Average premium-gross written (1) | $ | 441 |
| $ | 435 |
| $ | 974 |
| $ | 981 |
| $ | 439 | $ | 443 | $ | 953 | $ | 996 |
Renewal ratio (%) (1) |
| 88.7 |
|
| 89.1 |
|
| 67.4 |
|
| 69.1 |
|
| 88.9 |
| 88.8 |
| 71.2 |
| 68.6 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Nine months ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
PIF (thousands) |
| 17,479 |
|
| 17,774 |
|
| 710 |
|
| 921 |
| ||||||||
Average premium-gross written (1) | $ | 443 |
| $ | 432 |
| $ | 986 |
| $ | 968 |
| ||||||||
Renewal ratio (%) (1) |
| 88.8 |
|
| 88.9 |
| 67.7 |
| 69.6 |
|
(1)Policy term is six months for Allstate brand and twelve months for Encompass brand.
Allstate brand standard auto premiums written totaled $3.98 billion in the first quarter of 2011, a decrease of 1.0% from $4.02 billion in the first quarter of 2010 and an increase of 3.7% from $3.84 billion in the fourth quarter of 2010. Contributing to the Allstate brand standard auto premiums written decrease in the first quarter of 2011 compared to the first quarter of 2010 were the following:
56–decrease in PIF as of March 31, 2011 compared to March 31, 2010, due to fewer policies available to renew and a slight decrease in net items added to existing policies
–11.9% increase in new issued applications on a countrywide basis to 519 thousand in the first quarter of 2011 from 464 thousand in the first quarter of 2010. Excluding Florida and New York (impacted by actions to improve profitability), new issued applications on a countrywide basis increased 16.6% to 449 thousand in the first quarter of 2011 from 385 thousand in the first quarter of 2010. New issued applications increased in 41 states.
–decreased average gross premium in the first quarter of 2011 compared to the first quarter of 2010, partially due to rate decreases taken during 2010 to improve competitive position, as well as customers electing to lower coverage levels on their policy
–0.1 point increase in the renewal ratio in the first quarter of 2011 compared to the first quarter of 2010. Approximately half of the 51 states are showing favorable comparisons to same period of prior year. No single state is having a significant impact on countrywide results, either favorably or unfavorably.
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
Allstate brand standard auto premiums written totaled $4.03 billion in the third quarter of 2010, a decrease of 0.5% from $4.05 billion in the third quarter of 2009, and $12.00 billion in the first nine months of 2010, an increase of 0.8% from $11.90 billion in the first nine months of 2009. Contributing to the Allstate brand standard auto premiums written were the following:
–decrease in PIF as of September 30, 2010 compared to September 30, 2009, due to fewer policies available to renew and impacts from industry trends reflecting declines in vehicle registrations and vehicle sales per households
–2.5% increase in new issued applications on a countrywide basis to 537 thousand in the third quarter of 2010 from 524 thousand in the third quarter of 2009. A 2.7% decrease to 1,499 thousand in the first nine months of 2010 from 1,541 thousand in the first nine months of 2009 impacted by decreases in Florida and California, due in part to rate actions that were approved in 2009 in these markets and other actions to improve profitability. Excluding Florida and California, new issued applications on a countrywide basis increased 13.5% to 428 thousand in the third quarter of 2010 from 377 thousand in the third quarter of 2009, and increased 11.1% to 1,185 thousand in the first nine months of 2010 from 1,067 thousand in the first nine months of 2009. New issued application increased in 39 states, most of which offer an auto discount (the Preferred Package Discount) for our target customer (multi-car residence owner).
–increased average gross premium in the third quarter and first nine months of 2010 compared to the same periods of 2009, primarily due to rate changes, partially offset by customers electing to lower coverage levels of their policy
–0.4 point decrease in the renewal ratio in the third quarter of 2010 compared to the same period of 2009, primarily due to profitability management actions in California, Georgia, New York and North Carolina, and the renewal ratio in the first nine months of 2010 was comparable to the same period of 2009
The level of Encompass premiums written continues to be impacted by comprehensive actions designed to improve Encompass brand profitability.
Rate changes that are indicated based on loss trend analysis to achieve a targeted return will continue to be pursued. The following table shows the rate changes that were approved for standard auto and does not include rating plan enhancements, including the introduction of discounts and surcharges, that result in no change in the overall rate level in the state. These rate changes do not reflect initial rates filed for insurance subsidiaries initially writing business in a state.
|
| Three months ended September 30, | Three months ended March 31, | |||||||||||||||||||||||||||||||||||||||||
|
| # of States |
| Countrywide(%) (1) |
| State Specific(%) (2) (3) |
| # of States |
|
| Countrywide(%) (1) |
| State Specific(%) (2) (3) | |||||||||||||||||||||||||||||||
|
|
| 2010 |
| 2009 |
|
|
| 2010 |
|
| 2009 |
|
|
| 2010 |
|
| 2009 |
|
| 2011 |
|
| 2010 |
|
|
| 2011 |
| 2010 |
|
|
| 2011 |
| 2010 |
| ||||||
Allstate brand |
| 21 (5) |
| 15 |
| 0.5 |
|
| 1.4 |
|
| 2.8 |
|
| 6.5 |
|
| 13 (4) (5) |
|
| 8 |
|
|
| 1.1 |
| 0.3 |
|
|
| 4.1 |
| 2.9 |
| ||||||||||
Encompass brand |
| 12 |
| 13 |
| (0.1) |
|
| 1.6 |
|
| (1.3) |
|
| 9.6 |
|
| 3 |
|
| 6 |
|
|
| 4.9 |
| 1.5 |
|
|
| 5.0 |
| 7.1 |
|
|
| Nine months ended September 30, | ||||||||||||||||||||||
|
| # of States |
| Countrywide(%) (1) |
| State Specific(%) (2) (3) | ||||||||||||||||||
|
|
| 2010 |
|
|
| 2009 |
|
|
| 2010 |
|
|
| 2009 |
|
|
| 2010 |
|
|
| 2009 |
|
Allstate brand (4) |
|
| 43 (5) |
|
|
| 33 |
|
|
| 1.0 |
|
|
| 3.1 |
|
|
| 2.0 |
|
|
| 6.1 |
|
Encompass brand |
|
| 22 |
|
|
| 35 |
|
|
| 1.2 |
|
|
| 6.1 |
|
|
| 2.6 |
|
|
| 9.1 |
|
(1) | Represents the impact in the states where rate changes were approved during the three months ended March 31, 2011 and |
(2) | Represents the impact in the states where rate changes were approved during the three months ended March 31, 2011 and |
(3) | Based on historical premiums written in those states, rate changes approved for standard auto totaled |
(4) |
|
| Includes targeted rate decreases in certain markets to improve our competitive position for target customers |
(5) | Includes the impact of a 20.9% and 2.3% rate increase in Florida and a 12.0% rate increase in New York in the first quarter of 2011. |
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
Non-standard auto premiums written totaled $224 million in the third quarter of 2010, a decrease of 7.1% from $241 million in the third quarter of 2009, and $685$211 million in the first nine monthsquarter of 2010,2011, a decrease of 5.8%12.1% from $727$240 million in the first nine monthsquarter of 2009.2010.
|
| Allstate brand |
| Encompass brand | ||||||||
Non-Standard Auto |
| 2010 |
| 2009 |
| 2010 |
| 2009 | ||||
Three months ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
PIF (thousands) |
| 671 |
|
| 733 |
|
| 6 |
|
| 25 |
|
Average premium-gross written | $ | 630 |
| $ | 613 |
| $ | 387 |
| $ | 470 |
|
Renewal ratio (%) |
| 70.8 |
|
| 72.6 |
|
| 42.5 |
|
| 70.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
PIF (thousands) |
| 671 |
|
| 733 |
|
| 6 |
|
| 25 |
|
Average premium-gross written | $ | 623 |
| $ | 613 |
| $ | 425 |
| $ | 480 |
|
Renewal ratio (%) |
| 71.7 |
|
| 72.5 |
|
| 44.6 |
|
| 69.5 |
|
|
| Allstate brand |
| Encompass brand | ||||
Non-Standard Auto |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
PIF (thousands) |
| 627 |
| 724 |
| 4 |
| 14 |
Average premium-gross written (6 months) | $ | 621 | $ | 619 | $ | 402 | $ | 441 |
Renewal ratio (%) (6 months) |
| 70.4 |
| 71.8 |
| 68.0 |
| 48.7 |
Allstate brand non-standard auto premiums written totaled $223 million in the third quarter of 2010, a decrease of 5.1% from $235 million in the third quarter of 2009, and $680$210 million in the first nine monthsquarter of 2010,2011, a decrease of 4.0%11.4% from $708$237 million in the first nine monthsquarter of 2009.2010. Contributing to the Allstate brand non-standard auto premiums written decrease in the third quarter and first nine months of 2010 compared to the same periods of 2009 were the following:
– decrease in PIF as of September 30, 2010March 31, 2011 compared to September 30, 2009,March 31, 2010, due to a decline in the number of policespolicies available to renew, a lower retention rate and fewer new issued applications
– 23.1%21.2% decrease in new issued applications to 70 thousand in the third quarter of 2010 from 91 thousand in the third quarter of 2009, and 11.8% decrease to 24678 thousand in the first nine monthsquarter of 20102011 from 27999 thousand in the first nine monthsquarter of 20092010
– increase in average gross premium in the thirdfirst quarter and first nine months of 20102011 compared to the same periodsfirst quarter of 20092010
– 1.8 point and 0.81.4 point decrease in the renewal ratio in the thirdfirst quarter and first nine months of 2010, respectively,2011 compared to the same periodsfirst quarter of 20092010
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
Rate changes that are indicated based on loss trend analysis to achieve a targeted return will continue to be pursued. The following table shows the rate changes that were approved for non-standard auto and does not include rating plan enhancements, including the introduction of discounts and surcharges, that result in no change in the overall rate level in the state. These rate changes do not reflect initial rates filed for insurance subsidiaries initially writing business in a state.
|
| Three months ended September 30, | Three months ended March 31, | |||||||||||||||||||||||||||||||||||||||||
|
| # of States |
| Countrywide(%) (1) |
| State Specific(%) (2) (3) |
| # of States |
|
| Countrywide(%) (1) |
| State Specific(%) (2) (3) | |||||||||||||||||||||||||||||||
|
|
| 2010 |
|
| 2009 |
|
|
| 2010 |
| 2009 |
|
|
| 2010 |
| 2009 |
|
| 2011 |
|
| 2010 |
|
|
| 2011 |
| 2010 |
|
|
| 2011 |
| 2010 |
| |||||||
Allstate brand |
| 4 |
|
| 4 |
|
| 0.7 |
| 1.2 |
|
| 5.8 |
| 5.5 |
|
| 3 |
|
| 1 |
|
|
| 3.6 |
| 0.9 |
|
|
| 18.4 |
| 22.1 |
| ||||||||||
Encompass brand |
| -- |
|
| -- |
|
| -- |
| -- |
|
| -- |
| -- |
|
| -- |
|
| -- |
|
|
| -- |
| -- |
|
|
| -- |
| -- |
|
|
| Nine months ended September 30, | ||||||||||||||||||||||
|
| # of States |
| Countrywide(%) (1) |
| State Specific(%) (2) (3) | ||||||||||||||||||
|
|
| 2010 |
|
|
| 2009 |
|
|
| 2010 |
|
|
| 2009 |
|
|
| 2010 |
|
|
| 2009 |
|
Allstate brand |
|
| 10 (4) |
|
|
| 9 |
|
|
| 4.2 |
|
|
| 1.5 |
|
|
| 10.5 |
|
|
| 4.5 |
|
Encompass brand |
|
| -- |
|
|
| 1 |
|
|
| -- |
|
|
| 0.9 |
|
|
| -- |
|
|
| 31.7 |
|
(1) | Represents the impact in the states where rate changes were approved during the three months ended March 31, 2011 and |
(2) | Represents the impact in the states where rate changes were approved during the three months ended March 31, 2011 and |
(3) | Based on historical premiums written in those states, rate changes approved for non-standard auto totaled |
|
|
Homeowners premiums written totaled $1.71 billion in the third quarter of 2010, an increase of 1.5% from $1.68 billion in the third quarter of 2009, and $4.64 billion in the first nine months of 2010, an increase of 0.9% from $4.60 billion in the first nine months of 2009. Excluding the cost of catastrophe reinsurance, premiums written increased 0.5% and 0.3% in the third quarter and first nine months of 2010, respectively, compared to the same periods of 2009.
|
| Allstate brand |
| Encompass brand | ||||||||
Homeowners |
| 2010 |
| 2009 |
| 2010 |
| 2009 | ||||
Three months ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
PIF (thousands) |
| 6,740 |
|
| 7,027 |
|
| 322 |
|
| 391 |
|
Average premium-gross written (12 months) | $ | 953 |
| $ | 889 |
| $ | 1,311 |
| $ | 1,279 |
|
Renewal ratio (%) |
| 88.6 |
|
| 88.5 |
|
| 76.5 |
|
| 79.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
PIF (thousands) |
| 6,740 |
|
| 7,027 |
|
| 322 |
|
| 391 |
|
Average premium-gross written (12 months) | $ | 937 |
| $ | 878 |
| $ | 1,304 |
| $ | 1,262 |
|
Renewal ratio (%) |
| 88.3 |
|
| 88.0 |
|
| 76.7 |
|
| 79.4 |
|
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
Homeowners premiums written totaled $1.30 billion in the first quarter of 2011, an increase of 2.8% from $1.27 billion in the first quarter of 2010. Excluding the cost of catastrophe reinsurance, premiums written increased 1.7% in the first quarter of 2011 compared to the first quarter of 2010.
|
| Allstate brand |
| Encompass brand | ||||
Homeowners |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
PIF (thousands) |
| 6,631 |
| 6,886 |
| 310 |
| 354 |
Average premium-gross written (12 months) | $ | 975 | $ | 921 | $ | 1,296 | $ | 1,299 |
Renewal ratio (%) (12 months) |
| 88.3 |
| 88.0 |
| 82.3 |
| 77.3 |
Allstate brand homeowners premiums written totaled $1.61 billion in the third quarter of 2010, an increase of 2.4% from $1.57 billion in the third quarter of 2009, and $4.36$1.23 billion in the first nine monthsquarter of 2010,2011, an increase of 2.1%3.0% from $4.28$1.19 billion in the first nine monthsquarter of 2009.2010. Contributing to the Allstate brand homeowners premiums written increase in the third quarter and first nine months of 2010 compared to the same periods of 2009 were the following:
– decrease in PIF of 4.1%3.7% as of September 30, 2010March 31, 2011 compared to September 30, 2009,March 31, 2010, due to fewer policies available to renew and fewer new issued applications
– 5.4%4.2% decrease in new issued applications to 140 thousand in the third quarter of 2010 from 148 thousand in the third quarter of 2009 and 2.4% decrease to 410114 thousand in the first nine monthsquarter of 20102011 from 420119 thousand in the first nine monthsquarter of 2009.2010. Our Castle Key Indemnity Company subsidiary continues to have a slightly favorable impact on new issued applications, due to a 2008 regulatory consent decree to sell 50,000 new homeowners policies in Florida by November 2011. Excluding Florida, new issued applications on a countrywide basis decreased 16.2%5.2% to 124 thousand in the third quarter of 2010 from 148 thousand in the third quarter of 2009, and 10.7% to 375109 thousand in the first nine monthsquarter of 20102011 from 420115 thousand in the first nine monthsquarter of 2009.2010.
– increase in average gross premium in the thirdfirst quarter and first nine months of 20102011 compared to the same periodsfirst quarter of 2009,2010, primarily due to rate changes
– 0.1 point and 0.3 point increase in the renewal ratio in the thirdfirst quarter and first nine months of 2010, respectively,2011 compared to the same periodsfirst quarter of 20092010
– decrease in the net cost of our catastrophe reinsurance program in both the thirdfirst quarter and first nine months of 20102011 compared to the same periodsfirst quarter of 20092010
As of September 30, 2010, an increased Home and Auto discount is now available in 38 states. This has successfully shifted our mix of new business towards multi-line customers.
Rate changes that are indicated based on loss trend analysis to achieve a targeted return will continue to be pursued. The following table shows the rate changes that were approved for homeowners, including rate changes approved based on our net cost of reinsurance, and does not include rating plan enhancements, including the introduction of discounts and surcharges, that result in no change in the overall rate level in the state.
| Three months ended September 30, | Three months ended March 31, | ||||||||||||||||||||||||||
| # of States |
| Countrywide(%) (1) |
| State Specific(%) (2) (3) |
| # of States |
|
| Countrywide(%) (1) |
| State Specific(%) (2) (3) | ||||||||||||||||
| 2010 | 2009 |
| 2010 | 2009 |
| 2010 | 2009 |
| 2011 |
|
| 2010 |
|
|
| 2011 |
| 2010 |
|
|
| 2011 |
| 2010 |
| ||
Allstate brand | 15 | 19 (4) |
| 1.0 | 2.4 |
| 4.2 | 6.9 |
| 12 (4) |
|
| 6 |
|
|
| 1.8 |
| 0.9 |
|
|
| 9.9 |
| 7.4 |
| ||
Encompass brand | 8 (4) | 17 |
| -- | 2.0 |
| (0.1) | 4.8 |
| 5 |
|
| 5 |
|
|
| 0.8 |
| 0.7 |
|
|
| 2.9 |
| 5.2 |
|
| Nine months ended September 30, | |||||||
| # of States |
| Countrywide(%) (1) |
| State Specific(%) (2) (3) | |||
| 2010 | 2009 |
| 2010 | 2009 |
| 2010 | 2009 |
Allstate brand (4) | 26 | 33 |
| 3.8 | 6.6 |
| 9.4 | 9.9 |
Encompass brand (4) | 18 | 33 |
| 0.6 | 4.1 |
| 1.8 | 6.0 |
(1) | Represents the impact in the states where rate changes were approved during the three months ended March 31, 2011 and |
(2) | Represents the impact in the states where rate changes were approved during the three months ended March 31, 2011 and |
(3) | Based on historical premiums written in those states, rate changes approved for homeowners totaled |
(4) | Includes Washington D.C. |
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
Underwriting results are shown in the following table.
($ in millions)
|
| Three months ended |
| Nine months ended |
| Three months ended | ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2011 |
| 2010 | ||
Premiums written | $ | 6,767 | $ | 6,810 | $ | 19,665 | $ | 19,695 | $ | 6,216 |
| $ | 6,258 |
|
|
|
|
|
|
|
|
|
| ||||||
Premiums earned | $ | 6,498 | $ | 6,535 | $ | 19,514 | $ | 19,678 | $ | 6,449 |
| $ | 6,503 |
|
Claims and claims expense |
| (4,582) |
| (4,557) |
| (14,085) |
| (14,274) |
| (4,472 | ) |
| (4,790 | ) |
Amortization of DAC |
| (915) |
| (943) |
| (2,754) |
| (2,832) |
| (904 | ) |
| (925 | ) |
Other costs and expenses |
| (705) |
| (641) |
| (2,070) |
| (1,906) |
| (729 | ) |
| (702 | ) |
Restructuring and related charges |
| (9) |
| (31) |
| (34) |
| (88) |
| (11 | ) |
| (11 | ) |
Underwriting income | $ | 287 | $ | 363 | $ | 571 | $ | 578 | $ | 333 |
| $ | 75 |
|
Catastrophe losses | $ | 386 | $ | 407 | $ | 1,670 | $ | 1,741 | $ | 333 |
| $ | 648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss) by line of business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard auto | $ | 258 | $ | 284 | $ | 688 | $ | 743 | $ | 188 |
| $ | 213 |
|
Non-standard auto |
| 23 |
| 24 |
| 48 |
| 64 |
| 25 |
|
| 15 |
|
Homeowners |
| (63) |
| 27 |
| (312) |
| (293) |
| 127 |
|
| (192 | ) |
Other personal lines |
| 69 |
| 28 |
| 147 |
| 64 |
| (7 | ) |
| 39 |
|
Underwriting income | $ | 287 | $ | 363 | $ | 571 | $ | 578 | $ | 333 |
| $ | 75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss) by brand |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allstate brand | $ | 292 | $ | 364 | $ | 611 | $ | 576 | $ | 334 |
| $ | 118 |
|
Encompass brand |
| (5) |
| (1) |
| (40) |
| 2 |
| (1 | ) |
| (43 | ) |
Underwriting income | $ | 287 | $ | 363 | $ | 571 | $ | 578 | $ | 333 |
| $ | 75 |
|
Allstate Protection experienced underwriting income of $287 million in the third quarter of 2010 compared to $363 million in the third quarter of 2009, and $571$333 million in the first nine monthsquarter of 20102011 compared to $578$75 million in the first nine months of 2009. The decrease in the third quarter of 2010, compared to the same period of 2009 was primarily due to decreasesincreases in homeowners and standard auto underwriting income, partially offset by increasesdecreases in other personal lines and standard auto underwriting income. Homeowners underwriting loss was $63income increased $319 million in the third quarter of 2010 compared to an underwriting income of $27$127 million in the thirdfirst quarter of 2009 primarily due to increases in expenses and catastrophe losses, including prior year reserve reestimates for catastrophes, and a $70 million unfavorable prior year reserve reestimate related to a litigation settlement, partially offset by average earned premiums increasing faster than loss costs. Standard auto underwriting income decreased 9.2% to2011 from an underwriting incomeloss of $258$192 million in the thirdfirst quarter of 2010 from an underwriting income of $284 million in the third quarter of 2009 primarily due to increases in auto claim frequency and expenses, partially offset by favorable reserve reestimates and decreases in catastrophe losses. Other personal lines underwriting income increased 146.4% to an underwriting income of $69 million in the third quarter of 2010 from an underwriting income of $28 million in the third quarter of 2009 primarily due to increases in favorable reserve reestimates.
The Allstate Protection underwriting income decreased in the first nine months of 2010 compared to the same period of 2009 primarily due to decreases in standard auto underwriting income, increases in homeowners underwriting losses and decreases in non-standard auto underwriting income, partially offset by increases in other personal lines underwriting income. Standard auto underwriting income decreased 7.4% to an underwriting income of $688 million in the first nine months of 2010 from an underwriting income of $743 in the first nine months of 2009 primarily due to increases in auto claim frequency and expenses, partially offset by favorable reserve reestimates and decreases in catastrophe losses. Homeowners underwriting loss increased 6.5% to an underwriting loss of $312 million in the first nine months of 2010 from an underwriting loss of $293 million in the first nine months of 2009 primarily due to a $70 million unfavorable prior year reserve reestimate related to a litigation settlement and increases in expenses and catastrophe losses, including prior year reestimates partially offset by average earned premiums increasing faster thanfor catastrophes. Other personal lines underwriting income decreased $46 million to an underwriting loss costs. Non-standardof $7 million in the first quarter of 2011 from an underwriting income of $39 million in the first quarter of 2010 primarily due to a litigation accrual and unfavorable reserve reestimates. Standard auto underwriting income decreased 25.0%11.7% to an underwriting income of $48$188 million in the first nine monthsquarter of 20102011 from an underwriting income of
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
$64 $213 million in the first nine monthsquarter of 20092010 primarily due to decreases in premiums earned and increases in auto claim frequency, partially offset by favorable reserve reestimates and decreases in catastrophe losses. Other personal lines underwriting income increased 129.7% to an underwriting income of $147 million in the first nine months of 2010 from an underwriting income of $64 million in the first nine months of 2009 primarily due to increases in favorable reserve reestimates.
Catastrophe losses in the thirdfirst quarter and first nine months of 20102011 were $386$333 million and $1.67 billion, respectively, as detailed in the table below. This compares to catastrophe losses in the thirdfirst quarter and first nine months of 20092010 of $407 million and $1.74 billion, respectively.$648 million.
We define a “catastrophe” as an event that produces pre-tax losses before reinsurance in excess of $1 million and involves multiple first party policyholders, or an event that produces a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time following the event. Catastrophes are caused by various natural events including high winds, winter storms, tornadoes, hailstorms, wildfires, tropical storms, hurricanes, earthquakes and volcanoes. We are also exposed to man-made catastrophic events, such as certain acts of terrorism or industrial accidents. The nature and level of catastrophes in any future period cannot be reliably predicted.
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010
Catastrophe losses related to events that occurred by the size of the event are shown in the following table.
($ in millions) |
| Three months ended | ||||||||||
|
| Number |
|
|
| Claims |
|
|
| Combined |
| Average |
Size of catastrophe |
|
|
|
|
|
|
|
|
|
|
|
|
$50 million to $100 million |
| 1 |
| 3.4% | $ | 66 |
| 17.1% |
| 1.0 | $ | 66 |
Less than $50 million |
| 28 |
| 96.6 |
| 305 |
| 79.0 |
| 4.7 |
| 11 |
Total |
| 29 |
| 100.0% |
| 371 |
| 96.1 |
| 5.7 |
| 13 |
Prior year reserve reestimates |
|
|
|
|
| (42) |
| (10.9) |
| (0.6) |
|
|
Prior quarter reserve reestimates |
|
|
|
|
| 57 |
| 14.8 |
| 0.8 |
|
|
Total catastrophe losses |
|
|
|
| $ | 386 |
| 100.0% |
| 5.9 |
|
|
|
| Nine months ended | ||||||||||
|
| Number |
|
|
| Claims |
|
|
| Combined |
| Average |
Size of catastrophe |
|
|
|
|
|
|
|
|
|
|
|
|
$101 million to $250 million |
| 3 |
| 4.3% | $ | 485 |
| 29.1% |
| 2.5 | $ | 162 |
$50 million to $100 million |
| 8 |
| 11.4 |
| 538 |
| 32.2 |
| 2.8 |
| 67 |
Less than $50 million |
| 59 |
| 84.3 |
| 787 |
| 47.1 |
| 4.0 |
| 13 |
Total |
| 70 |
| 100.0% |
| 1,810 |
| 108.4 |
| 9.3 |
| 26 |
Prior year reserve reestimates |
|
|
|
|
| (140) |
| (8.4) |
| (0.7) |
|
|
Total catastrophe losses |
|
|
|
| $ | 1,670 |
| 100.0% |
| 8.6 |
|
|
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
($ in millions) |
| Three months ended March 31, 2011 | ||||||||||
|
| Number |
|
|
| Claims |
|
|
| Combined |
| Average |
Size of catastrophe |
|
|
|
|
|
|
|
|
|
|
|
|
$50 million to $100 million |
| 2 |
| 12.5% | $ | 161 |
| 48.3% |
| 2.5 | $ | 81 |
Less than $50 million |
| 14 |
| 87.5 |
| 206 |
| 61.9 |
| 3.2 |
| 15 |
Total |
| 16 |
| 100.0% |
| 367 |
| 110.2 |
| 5.7 |
| 23 |
Prior year reserve reestimates |
|
|
|
|
| (34) |
| (10.2) |
| (0.5) |
|
|
Total catastrophe losses |
|
|
|
| $ | 333 |
| 100.0% |
| 5.2 |
|
|
Catastrophe losses incurred by the type of event are shown in the following table.
($ in millions)
|
| Three months ended |
| Nine months ended |
| Three months ended |
| ||||||||||||||||||
|
| 2010 |
| Number |
| 2009 |
| Number |
| 2010 |
| Number |
| 2009 |
| Number |
| 2011 |
| 2010 |
| ||||
Hurricanes/Tropical storms | $ | 18 |
| 1 | $ | -- |
| -- | $ | 18 |
| 1 | $ | -- |
| -- | |||||||||
|
|
|
| Number |
|
|
| Number |
| ||||||||||||||||
Tornadoes |
| 5 |
| 1 |
| -- |
| -- |
| 138 |
| 6 |
| 332 |
| 4 | $ | 19 |
| 1 | $ | -- |
| -- |
|
Wind/Hail |
| 327 |
| 25 |
| 384 |
| 22 |
| 1,384 |
| 55 |
| 1,334 |
| 57 |
| 176 |
| 10 |
| 379 |
| 6 |
|
Wildfires |
| 5 |
| 2 |
| -- |
| -- |
| ||||||||||||||||
Other events |
| 21 |
| 2 |
| 17 |
| 2 |
| 270 |
| 8 |
| 214 |
| 8 |
| 167 |
| 3 |
| 284 |
| 5 |
|
Prior year reserve reestimates |
| (42) |
|
|
| (80) |
|
|
| (140) |
|
|
| (139) |
|
|
| (34) |
|
|
| (15) |
|
|
|
Prior quarter reserve reestimates |
| 57 |
|
|
| 86 |
|
|
| -- |
|
|
| -- |
|
| |||||||||
Total catastrophe losses | $ | 386 |
| 29 | $ | 407 |
| 24 | $ | 1,670 |
| 70 | $ | 1,741 |
| 69 | $ | 333 |
| 16 | $ | 648 |
| 11 |
|
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010
Combined ratio Loss ratios are a measure of profitability. Loss ratios by product, and expense and combined ratios by brand, are shown in the following table. These ratios are defined in the Property-Liability Operations section of the MD&A.
|
| Three months ended |
| Nine months ended |
| Three months ended March 31, |
| ||||||||||||||||||||||||
|
| Loss ratio (1) |
| Effect of | Effect of |
| Loss ratio (1) |
| Effect of | Effect of |
| Loss ratio (1) |
| Effect of |
| Effect of |
| ||||||||||||||
|
| 2010 |
| 2009 |
| 2010 | 2009 | 2010 | 2009 | 2010 |
| 2009 | 2010 | 2009 | 2010 | 2009 |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
| ||
Allstate brand loss ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Standard auto |
| 68.7 |
| 68.6 |
| 0.4 | 1.3 | (0.6) | 0.3 | 69.5 |
| 69.4 | 1.0 | 1.7 | (0.9) | (0.1) |
| 70.3 |
| 69.4 |
| 0.5 |
| 0.7 |
| (0.4) |
| (0.1) |
| ||
Non-standard auto |
| 61.7 |
| 63.6 |
| -- | 0.4 | (6.8) | (3.9) | 66.5 |
| 66.4 | 0.3 | 0.8 | (4.3) | (2.3) |
| 64.8 |
| 68.7 |
| -- |
| 0.4 |
| (3.3) |
| (1.3) |
| ||
Homeowners |
| 80.5 |
| 75.4 |
| 23.1 | 22.3 | 5.2 | (5.2) | 83.5 |
| 84.5 | 31.6 | 31.9 | 0.2 | (2.4) |
| 67.9 |
| 87.5 |
| 17.7 |
| 37.1 |
| (2.7) |
| (0.4) |
| ||
Other personal lines |
| 61.4 |
| 64.1 |
| 4.4 | 4.0 | (6.3) | (0.8) | 63.5 |
| 67.5 | 6.6 | 7.2 | (3.6) | 1.7 |
| 67.3 |
| 63.5 |
| 7.0 |
| 7.3 |
| 2.6 |
| (3.9) |
| ||
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
| ||
Total Allstate brand loss ratio |
| 70.5 |
| 69.5 |
| 6.0 | 6.3 | -- | (1.2) | 72.0 |
| 72.5 | 8.5 | 9.1 | (1.0) | (0.6) |
| 69.2 |
| 73.0 |
| 5.1 |
| 9.7 |
| (0.8) |
| (0.6) |
| ||
Allstate brand expense ratio |
| 24.8 |
| 24.6 |
|
|
|
|
| 24.7 |
| 24.4 |
|
|
|
|
| 25.4 |
| 25.1 |
|
|
|
|
|
|
|
|
| ||
Allstate brand combined ratio |
| 95.3 |
| 94.1 |
|
|
|
|
| 96.7 |
| 96.9 |
|
|
|
|
| 94.6 |
| 98.1 |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
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|
|
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| ||
Encompass brand loss ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
| ||
Standard auto |
| 75.7 |
| 76.9 |
| 0.6 | 0.5 | (1.7) | 3.6 | 75.2 |
| 74.8 | 0.7 | 0.6 | 1.8 | 1.0 |
| 75.7 |
| 76.8 |
| -- |
| 1.0 |
| 3.1 |
| 5.2 |
| ||
Non-standard auto |
| 100.0 |
| 66.7 |
| -- | -- | -- | (16.7) | 100.0 |
| 72.7 | -- | -- | -- | (9.1) |
| 100.0 |
| 100.0 |
| -- |
| -- |
| -- |
| -- |
| ||
Homeowners |
| 63.5 |
| 67.6 |
| 13.5 | 15.7 | (7.3) | (1.9) | 77.4 |
| 68.6 | 25.3 | 16.2 | (3.4) | (4.4) |
| 65.9 |
| 103.0 |
| 16.5 |
| 46.0 |
| 1.1 |
| (2.0) |
| ||
Other personal lines |
| 60.9 |
| 65.4 |
| -- | -- | (4.3) | 7.7 | 72.2 |
| 72.0 | 4.2 | 1.2 | (1.4) | 9.8 |
| 65.2 |
| 91.7 |
| 8.7 |
| 12.5 |
| (8.7) |
| 4.2 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total Encompass brand loss ratio |
| 70.7 |
| 73.1 |
| 4.8 | 5.0 | (3.7) | 1.9 | 75.9 |
| 72.7 | 8.8 | 5.2 | (0.1) | (0.2) |
| 71.7 |
| 86.4 |
| 6.2 |
| 15.8 |
| 1.5 |
| 2.8 |
| ||
Encompass brand expense ratio |
| 31.0 |
| 27.2 |
|
|
|
|
| 28.4 |
| 27.1 |
|
|
|
|
| 28.7 |
| 27.0 |
|
|
|
|
|
|
|
|
| ||
Encompass brand combined ratio |
| 101.7 |
| 100.3 |
|
|
|
|
| 104.3 |
| 99.8 |
|
|
|
|
| 100.4 |
| 113.4 |
|
|
|
|
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|
|
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| ||
|
|
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|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
| ||
Allstate Protection loss ratio |
| 70.5 |
| 69.7 |
| 5.9 | 6.2 | (0.2) | (1.0) | 72.2 |
| 72.6 | 8.6 | 8.8 | (1.0) | (0.5) |
| 69.3 |
| 73.6 |
| 5.2 |
| 10.0 |
| (0.7) |
| (0.4) |
| ||
Allstate Protection expense ratio |
| 25.1 |
| 24.7 |
|
|
|
|
| 24.9 |
| 24.5 |
|
|
|
|
| 25.5 |
| 25.2 |
|
|
|
|
|
|
|
|
| ||
Allstate Protection combined ratio |
| 95.6 |
| 94.4 |
|
|
|
|
| 97.1 |
| 97.1 |
|
|
|
|
| 94.8 |
| 98.8 |
|
|
|
|
|
|
|
|
|
(1) Ratios are calculated using the premiums earned for the respective line of business.
Standard auto loss ratio for the Allstate brand increased 0.10.9 points in both the thirdfirst quarter and first nine months of 20102011 compared to the same periodsfirst quarter of 20092010 due to higher claim frequency, partially offset by favorable reserve reestimates and lower catastrophe losses. Florida and New York continue to have a loss ratio higher than countrywide average. In the thirdfirst quarter and first nine months of 2010,2011, claim frequencies in the bodily injury and physical damage coverages have increased compared to the same periodsfirst quarter of
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010, AND 2009
2009, but remain within historical norms. We continued to address adverse loss cost trends during the first quarter of 2011, particularly in the states of New York and Florida. These actions included rate increases, underwriting restrictions, increased claims staffing and review, and continued advocacy for legislative reform. Bodily injury and physical damage coverages severity results increased in line with historical Consumer Price Index (“CPI”) trends.
Non-standard auto loss ratio for the Allstate brand decreased 1.93.9 points in the thirdfirst quarter of 20102011 compared to the same periodfirst quarter of 20092010 due to higher favorable reserve reestimates and lower catastrophe losses, partially offset by higher claim frequencies. Non-standard auto loss ratio for the Allstate brand increased 0.1 points in the first nine months of 2010 compared to the same period of 2009 due to higher claim frequencies, partially offset by higher favorable reserve reestimates and lower catastrophe losses. Bodily injury and physical damage coverages severity results increased in line with historical CPI trends.
Homeowners loss ratio for the Allstate brand increased 5.1decreased 19.6 points to 80.567.9 in the thirdfirst quarter of 2011 from 87.5 in the first quarter of 2010 from 75.4 in the third quarter of 2009, and decreased 1.0 points to 83.5 in the first nine months of 2010 from 84.5 in the first nine months of 2009. The increase in the third quarter of 2010 compared to the same period of 2009 was due to a $70 million unfavorable prior year reserve reestimate related to a litigation settlement and higher catastrophe losses including prior year reserve reestimates for catastrophes, partially offset by average earned premiums increasing faster than loss costs. The decrease in the first nine months of 2010 compared to the same period of 2009 was due to average earned premiums increasing faster than loss costs and lower catastrophe losses including prior year reserve reestimates for catastrophes, partially offset by a $70 million unfavorable prior year reserve reestimate related to a litigation settlement.catastrophes.
Expense ratio for Allstate Protection increased 0.40.3 points in both the thirdfirst quarter and first nine months of 20102011 compared to the same periodsfirst quarter of 2009.2010, driven by a litigation accrual, marketing costs and lower premiums earned, partially offset by
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010
improved operational efficiencies. Restructuring costs decreased 0.4 points and 0.2 points in the thirdfirst quarter and first nine months of 2010, respectively, compared2011 were comparable to the same periodsfirst quarter of 2009, driven by costs associated with claim office consolidations and technology prioritization and efficiency efforts. Excluding restructuring, the expense ratio for Allstate Protection increased 0.8 points and 0.6 points in the third quarter and first nine months of 2010, respectively, compared to the same periods of 2009. Improved operational efficiencies were offset by increased investments in marketing and increases in the net costs of employee benefits.2010.
The impact of specific costs and expenses on the expense ratio are included in the following table.
| Three months ended September 30, | ||||||||||
| Allstate brand |
| Encompass brand |
| Allstate Protection | ||||||
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
Amortization of DAC | 13.9 |
| 14.2 |
| 18.1 |
| 18.3 |
| 14.1 |
| 14.4 |
Other costs and expenses | 10.8 |
| 9.9 |
| 11.6 |
| 8.6 |
| 10.9 |
| 9.8 |
Restructuring and related charges | 0.1 |
| 0.5 |
| 1.3 |
| 0.3 |
| 0.1 |
| 0.5 |
Total expense ratio | 24.8 |
| 24.6 |
| 31.0 |
| 27.2 |
| 25.1 |
| 24.7 |
| Nine months ended September 30, | ||||||||||
| Allstate brand |
| Encompass brand |
| Allstate Protection | ||||||
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
Amortization of DAC | 13.9 |
| 14.1 |
| 18.2 |
| 18.5 |
| 14.1 |
| 14.4 |
Other costs and expenses | 10.7 |
| 9.8 |
| 9.4 |
| 8.3 |
| 10.6 |
| 9.7 |
Restructuring and related charges | 0.1 |
| 0.5 |
| 0.8 |
| 0.3 |
| 0.2 |
| 0.4 |
Total expense ratio | 24.7 |
| 24.4 |
| 28.4 |
| 27.1 |
| 24.9 |
| 24.5 |
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
Allstate Protection Reinsurance
Our catastrophe reinsurance program was designed, utilizing our risk management methodology, to address our exposure to catastrophes nationwide. Our program provides reinsurance protection for catastrophes including storms named or numbered by the National Weather Service, fires following earthquakes, earthquakes and wildfires, including California wildfires. These reinsurance agreements are part of our catastrophe management strategy, which is intended to provide our shareholders an acceptable return on the risks assumed in our property business, and to reduce variability of earnings while providing protection to our customers.
Our reinsurance program coordinates coverage under various agreements and comprises agreements that provide coverage for the occurrence of:
·certain qualifying catastrophes in specific states including New York, New Jersey, Connecticut, Rhode Island, Pennsylvania, and California for multiple perils (“multi-peril”). The California contracts that expire May 31, 2011 and May 31, 2012, provide coverage only for fires following earthquakes, and the California contract, expiring May 31, 2013, reinsures multiple perils, including earthquakes and fires following earthquakes, resulting in the classification of the California agreement as a “multi-peril” agreement;
·hurricane catastrophe losses in the states of Texas, Louisiana, Mississippi and Alabama (“Gulf States”) and Georgia, South Carolina, North Carolina, Virginia, Maryland and Delaware and the District of Columbia (“Atlantic States”);
·hurricane catastrophe losses in the state of Texas (“Texas Hurricane”); and for earthquakes and fires following earthquakes losses in the state of Kentucky (“Kentucky”); and
·the aggregate or sum of qualifying losses nationwide, excluding Florida, in excess of an annual retention associated with storms named or numbered by the National Weather Service, fires following earthquakes and California wildfires (“aggregate excess”).
During the second quarter of 2010, we placed reinsurance contracts for the state of Florida. The Florida component of the reinsurance program is designed separately from the other components of the program to address the distinct needs of our separately capitalized legal entities in that state. See The Allstate Corporation Form 10-Q for the quarterly period ended June 30, 2010 for additional details on our current Florida program.
We estimate that the total annualized cost of all catastrophe reinsurance programs for the year beginning June 1, 2010 will be approximately $560 million or $140 million per quarter compared to $640 million annualized cost for the year beginning June 1, 2009. The total cost of our reinsurance programs during 2009 was $158 million in the first quarter, $156 million in the second quarter, $162 million in the third quarter and $153 million in the fourth quarter. The total cost of our property catastrophe reinsurance programs during the first, second and third quarter of 2010 was $151 million, $152 million and $142 million, respectively. We continue to attempt to capture our reinsurance cost in premium rates as allowed by state regulatory authorities.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
|
| Three months ended March 31, | ||||||||||
|
| Allstate brand |
| Encompass brand |
| Allstate Protection | ||||||
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Amortization of DAC |
| 13.9 |
| 14.0 |
| 18.0 |
| 18.5 |
| 14.0 |
| 14.2 |
Other costs and expenses |
| 11.3 |
| 11.0 |
| 10.9 |
| 7.8 |
| 11.3 |
| 10.8 |
Restructuring and related charges |
| 0.2 |
| 0.1 |
| (0.2) |
| 0.7 |
| 0.2 |
| 0.2 |
Total expense ratio |
| 25.4 |
| 25.1 |
| 28.7 |
| 27.0 |
| 25.5 |
| 25.2 |
Reserve reestimates The tables below show Allstate Protection net reserves representing the estimated cost of outstanding claims as they were recorded at the beginning of years 20102011 and 2009,2010, and the effect of reestimates in each year.
($ in millions) |
| January 1 reserves |
| January 1 reserves |
| ||||
|
| 2010 |
| 2009 |
| 2011 |
| 2010 |
|
Auto | $ | 10,606 | $ | 10,220 | $ | 11,034 | $ | 10,606 |
|
Homeowners |
| 2,399 |
| 2,824 |
| 2,442 |
| 2,399 |
|
Other personal lines |
| 2,145 |
| 2,207 |
| 2,141 |
| 2,145 |
|
Total Allstate Protection | $ | 15,150 | $ | 15,251 | $ | 15,617 | $ | 15,150 |
|
($ in millions, except ratios) |
| Three months ended |
| Nine months ended |
| Three months ended | ||||||||||||||||||
|
| Reserve |
| Effect on |
| Reserve |
| Effect on |
| 2011 |
| 2010 | ||||||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| Reserve |
| Effect on |
| Reserve |
| Effect on |
Auto | $ | (40) | $ | 11 |
| (0.6) |
| 0.2 | $ | (120) | $ | (28) |
| (0.6) |
| (0.1) | $ | (19) |
| (0.3) | $ | 5 |
| 0.1 |
Homeowners |
| 67 |
| (75) |
| 1.0 |
| (1.2) |
| (2) |
| (118) |
| -- |
| (0.6) |
| (38) |
| (0.6) |
| (8) |
| (0.1) |
Other personal lines |
| (38) |
| (3) |
| (0.6) |
| -- |
| (65) |
| 38 |
| (0.4) |
| 0.2 |
| 13 |
| 0.2 |
| (22) |
| (0.4) |
Total Allstate Protection (3) | $ | (11) | $ | (67) |
| (0.2) |
| (1.0) | $ | (187) | $ | (108) |
| (1.0) |
| (0.5) | $ | (44) |
| (0.7) | $ | (25) |
| (0.4) |
|
|
|
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|
|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
Allstate brand | $ | -- | $ | (74) |
| -- |
| (1.1) | $ | (186) | $ | (106) |
| (1.0) |
| (0.5) | $ | (48) |
| (0.8) | $ | (34) |
| (0.5) |
Encompass brand |
| (11) |
| 7 |
| (0.2) |
| 0.1 |
| (1) |
| (2) |
| -- |
| -- |
| 4 |
| 0.1 |
| 9 |
| 0.1 |
Total Allstate Protection (3) | $ | (11) | $ | (67) |
| (0.2) |
| (1.0) | $ | (187) | $ | (108) |
| (1.0) |
| (0.5) | $ | (44) |
| (0.7) | $ | (25) |
| (0.4) |
(1)
| Favorable reserve reestimates are shown in parentheses. |
(2) | Discontinued Lines and Coverages segment reserve reestimates in the three months ended March 31, 2011 totaled $3 million unfavorable compared to $2 million unfavorable in the three months ended March 31, 2010. There was no effect on the combined ratio in the three months ended March 31, 2011 and 2010. |
(3) | Reserve reestimates included in catastrophe losses totaled $34 million favorable in the three months ended March 31, 2011 compared to $15 million favorable in the three months ended March 31, 2010. |
DISCONTINUED LINES AND COVERAGES SEGMENT
Overview The Discontinued Lines and Coverages segment includes results from insurance coverage that we no longer write and results for certain commercial and other businesses in run-off. Our exposure to asbestos, environmental and other discontinued lines claims is reported in this segment. We have assigned management of this segment to a designated group of professionals with expertise in claims handling, policy coverage interpretation, exposure identification and reinsurance collection. As part of its responsibilities, this group is also regularly engaged in policy buybacks, settlements and reinsurance assumed and ceded commutations.
Summarized underwriting results are presented in the following table.
($ in millions) |
| Three months ended |
| Nine months ended | ||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
Premiums written | $ | -- | $ | -- | $ | -- | $ | (1) |
|
|
|
|
|
|
|
|
|
Premiums earned | $ | 1 | $ | -- | $ | 1 | $ | (1) |
Claims and claims expense |
| (21) |
| (16) |
| (24) |
| (21) |
Operating costs and expenses |
| (1) |
| (1) |
| (4) |
| (5) |
Underwriting loss | $ | (21) | $ | (17) | $ | (27) | $ | (27) |
Underwriting losses of $21 million and $27 million in the third quarter and first nine months of 2010, respectively, were primarily related to our annual review using established industry and actuarial best practices resulting in a $18 million unfavorable reestimate of environmental reserves and a $5 million unfavorable reestimate of asbestos reserves, partially offset by a $4 million favorable reestimate of other reserves. Underwriting losses of $17 million and $27 million in the third quarter and first nine months of 2009, respectively, were primarily related to a $13 million unfavorable reestimate of environmental reserves, a $2 million unfavorable reestimate of
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
other reserves and a $4 million increase of our allowance for future uncollectible reinsurance, partially offset by an $8 million favorable reestimate of asbestos reserves.Summarized underwriting results are presented in the following table.
Reserve additions for environmental claims totaling $18 million in the third quarter of 2010 were primarily related to site-specific remediations where the clean-up cost estimates and responsibility for the clean-up were more fully determined. Reserves for environmental claims were $205 million and $198 million, net of reinsurance recoverables of $47 million and $49 million, at September 30, 2010 and December 31, 2009, respectively. Incurred but not reported (“IBNR”) represents 62% of total net environmental reserves, 3 points lower than at December 31, 2009. In the third quarter of 2009, reserve additions for environmental claims totaling $13 million were primarily related to site-specific remediations where the clean-up cost estimates and responsibility for the clean-up were more fully determined.
For asbestos exposures, our 2010 annual review resulted in an increase in estimated reserves of $5 million for products related coverage. Reserves for asbestos claims were $1.13 billion and $1.18 billion, net of reinsurance recoverables of $565 million and $600 million, at September 30, 2010 and December 31, 2009, respectively. We continue to be encouraged that the pace of industry claim activity has slowed, reflecting various state legislative actions and increased legal scrutiny of the legitimacy of claims. IBNR represents 58% of total net asbestos reserves, 4 points lower than at December 31, 2009. IBNR provides for estimated probable future unfavorable reserve development of known claims and future reporting of additional unknown claims from current and new policyholders and ceding companies. In the third quarter of 2009, our review resulted in a decrease in estimated reserves of $8 million.
As of September 30, 2010, the allowance for uncollectible reinsurance was $142 million, or approximately 17.3% of total recoverables from reinsurers in the Discontinued Lines and Coverages segment, compared to $142 million or 16.2% of total recoverables as of December 31, 2009.
We believe that our reserves are appropriately established based on assessments of pertinent factors and characteristics of exposure (i.e. claim activity, potential liability, jurisdiction, products versus non-products exposure) presented by individual policyholders, assuming no change in the legal, legislative or economic environment.
|
| Three months ended | ||||
($ in millions) |
| 2011 |
| 2010 | ||
Premiums written | $ | (1 | ) | $ | -- |
|
|
|
|
|
|
|
|
Premiums earned | $ | (1 | ) | $ | -- |
|
Claims and claims expense |
| (4 | ) |
| (2 | ) |
Operating costs and expenses |
| (1 | ) |
| (2 | ) |
Underwriting loss | $ | (6 | ) | $ | (4 | ) |
PROPERTY-LIABILITY INVESTMENT RESULTS
Net investment income decreased 12.9%6.6% or $42$20 million to $284 million in the thirdfirst quarter of 20102011 from $326 million in the third quarter of 2009, and 10.6% or $106 million to $898 million in the first nine months of 2010 from $1.00 billion in the first nine months of 2009. The decreases in both periods were primarily due to lower yields and duration shortening actions taken to protect the portfolio from rising interest rates, partially offset by higher average asset balances. Net investment income was $304 million and $310 million in the first quarter of 20102010. The decrease was primarily due to lower yields resulting from prior risk mitigation actions. Net investment income was $284 million and second$291 million in the third and fourth quarter of 2010, respectively.
Net realized capital gains and losses are presented in the following table.
($ in millions) |
| Three months ended |
| Nine months ended |
| Three months ended | ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2011 |
| 2010 | ||
Impairment write-downs | $ | (57) | $ | (100) | $ | (232) | $ | (443) | $ | (64 | ) | $ | (79 | ) |
Change in intent write-downs |
| (10) |
| (10) |
| (29) |
| (83) |
| (27 | ) |
| (9 | ) |
Net other-than-temporary impairment losses recognized in earnings |
| (67) |
| (110) |
| (261) |
| (526) |
| (91 | ) |
| (88 | ) |
Sales |
| 228 |
| 91 |
| 390 |
| 234 |
| 172 |
|
| 41 |
|
Valuation of derivative instruments |
| (143) |
| (209) |
| (378) |
| (1) |
| 26 |
|
| (101 | ) |
Settlements of derivative instruments |
| (118) |
| (99) |
| (164) |
| (82) |
| (95 | ) |
| (49 | ) |
EMA limited partnership income |
| (7) |
| 37 |
| 10 |
| (28) |
| 45 |
|
| 7 |
|
Realized capital gains and losses, pre-tax |
| (107) |
| (290) |
| (403) |
| (403) |
| 57 |
|
| (190 | ) |
Income tax benefit |
| 38 |
| 102 |
| 142 |
| 30 | ||||||
Income tax (expense) benefit |
| (19 | ) |
| 67 |
| ||||||||
Realized capital gains and losses, after-tax | $ | (69) | $ | (188) | $ | (261) | $ | (373) | $ | 38 |
| $ | (123 | ) |
For a further discussion of net realized capital gains and losses, see the Investments section of the MD&A.
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
· | Net income was $97 million in first quarter of | |
· | Premiums and contract charges on underwritten products, including traditional life, interest-sensitive life and accident and health insurance, | |
· | During the first quarter of 2011, an $11 million pre-tax charge to income was recorded related to our annual comprehensive review of the DAC, deferred sales inducement costs (“DSI”) and secondary guarantee liability balances and assumptions for our interest-sensitive life, fixed annuities and other investment contracts. This compares to a $12 million pre-tax credit to income in the first quarter of 2010. | |
|
| |
· | Loss on dispositionof $25 million, pre-tax, recorded related to the agreement to sell substantially all of the deposits of Allstate Bank to Discover Bank and our plans to wind down the remainder of the Allstate Bank’s operations, dissolve or settle any residual assets and liabilities, and cancel its banking charter. | |
|
| |
· | Net realized capital gains totaled $39 million in the first quarter of 2011 compared to net realized capital losses of $162 million in the first quarter of 2010. | |
· | Investments as of March 31, 2011 totaled $60.48 billion, reflecting a decrease in carrying value of $1.10 billion from $61.58 billion as of December 31, 2010. Net investment income decreased 6.4% to $684 million in the first quarter of 2011 from $731 million in the first quarter of 2010. | |
· | Contractholder funds as of |
Summary analysis Summarized financial data is presented in the following table.
($ in millions) |
| Three months ended |
| Nine months ended |
| Three months ended | ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2011 |
| 2010 | ||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||
Life and annuity premiums and contract charges | $ | 548 | $ | 482 | $ | 1,637 | $ | 1,460 | $ | 569 |
| $ | 544 |
|
Net investment income |
| 707 |
| 744 |
| 2,161 |
| 2,327 |
| 684 |
|
| 731 |
|
Realized capital gains and losses |
| (38) |
| (234) |
| (553) |
| (156) |
| 39 |
|
| (162 | ) |
Total revenues |
| 1,217 |
| 992 |
| 3,245 |
| 3,631 |
| 1,292 |
|
| 1,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life and annuity contract benefits |
| (445) |
| (382) |
| (1,372) |
| (1,176) |
| (454 | ) |
| (442 | ) |
Interest credited to contractholder funds |
| (445) |
| (496) |
| (1,358) |
| (1,636) |
| (418 | ) |
| (463 | ) |
Amortization of DAC |
| (91) |
| (80) |
| (215) |
| (817) |
| (147 | ) |
| (89 | ) |
Operating costs and expenses |
| (118) |
| (99) |
| (354) |
| (325) |
| (109 | ) |
| (120 | ) |
Restructuring and related charges |
| -- |
| (4) |
| 1 |
| (24) |
| 2 |
|
| -- |
|
Total costs and expenses |
| (1,099) |
| (1,061) |
| (3,298) |
| (3,978) |
| (1,126 | ) |
| (1,114 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposition of operations |
| 4 |
| 2 |
| 7 |
| 6 | ||||||
(Loss) gain on disposition of operations |
| (23 | ) |
| 1 |
| ||||||||
Income tax (expense) benefit |
| (37) |
| 29 |
| 28 |
| (5) |
| (46 | ) |
| 4 |
|
Net income (loss) | $ | 85 | $ | (38) | $ | (18) | $ | (346) | ||||||
Net income | $ | 97 |
| $ | 4 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments at September 30 |
|
|
|
| $ | 62,915 | $ | 61,891 | ||||||
Investments at March 31 | $ | 60,484 |
| $ | 62,336 |
|
Net income in the thirdfirst quarter of 20102011 was $85$97 million compared to a net loss of $38$4 million in the same periodfirst quarter of 2009.2010. The favorable changeincrease of $123$93 million was primarily due to lowernet realized capital gains in the current year compared to net realized capital losses higher premiums and contract charges, and lower interest credited to contractholder funds, partially offset by increased contract benefits and lower net investment income.
Net loss in the first nine months of 2010 was $18 million compared to $346 million in the first nine months of 2009. The improvement of $328 million was primarily due to lower amortization of DAC,prior year, decreased interest credited to contractholder funds and higher premiums and contract charges, partially offset by increased net realized capital losses, higher contract benefitsamortization of DAC, loss on disposition related to the Allstate Bank and lower net investment income. Additionally,
Analysis of revenues Total revenues increased 16.1% or $179 million in the first nine monthsquarter of 2009 included expense of $142 million attributable2011 compared to an increase in the valuation allowance relating to the deferred tax asset on capital losses.
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
Analysis of revenues Total revenues increased 22.7% or $225 million in the thirdfirst quarter of 2010 compared to the third quarter of 2009 due to lower net realized capital gains in the current year compared to net realized capital losses in the prior year and higher premiums and contract charges, partially offset by lower net investment income. Total revenues decreased 10.6% or $386 million in the first nine months of 2010 compared to the same period in 2009 due to higher net realized capital losses and lower net investment income, partially offset by higher premiums and contract charges.
Life and annuity premiums and contract charges Premiums represent revenues generated from traditional life insurance, immediate annuities with life contingencies, and accident and health insurance products that have significant mortality or morbidity risk. Contract charges are revenues generated from interest-sensitive and variable life insurance and fixed annuities for which deposits are classified as contractholder funds or separate account liabilities. Contract charges are assessed against the contractholder account values for maintenance, administration, cost of insurance and surrender prior to contractually specified dates. As a result, changes in contractholder funds are considered in the evaluation of growth and as indicators of future levels of revenues.
The following table summarizes life and annuity premiums and contract charges by product.
($ in millions) |
| Three months ended |
| Nine months ended | ||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
Premiums |
|
|
|
|
|
|
|
|
Traditional life insurance | $ | 107 | $ | 103 | $ | 317 | $ | 303 |
Immediate annuities with life contingencies |
| 26 |
| 15 |
| 84 |
| 83 |
Accident and health insurance |
| 157 |
| 114 |
| 464 |
| 340 |
Total premiums |
| 290 |
| 232 |
| 865 |
| 726 |
|
|
|
|
|
|
|
|
|
Contract charges |
|
|
|
|
|
|
|
|
Interest-sensitive life insurance |
| 249 |
| 238 |
| 740 |
| 699 |
Fixed annuities |
| 9 |
| 12 |
| 32 |
| 35 |
Total contract charges (1) |
| 258 |
| 250 |
| 772 |
| 734 |
|
|
|
|
|
|
|
|
|
Life and annuity premiums and contract charges (2) | $ | 548 | $ | 482 | $ | 1,637 | $ | 1,460 |
($ in millions) |
| Three months ended | ||||
|
| 2011 |
| 2010 | ||
Underwritten products |
|
|
|
|
|
|
Traditional life insurance premiums | $ | 108 |
| $ | 106 |
|
Accident and health insurance premiums |
| 161 |
|
| 156 |
|
Interest-sensitive life insurance contract charges |
| 248 |
|
| 242 |
|
Subtotal |
| 517 |
|
| 504 |
|
|
|
|
|
|
|
|
Annuities |
|
|
|
|
|
|
Immediate annuities with life contingencies premiums |
| 43 |
|
| 27 |
|
Other fixed annuity contract charges |
| 9 |
|
| 13 |
|
Subtotal |
| 52 |
|
| 40 |
|
|
|
|
|
|
|
|
Life and annuity premiums and contract charges (1) | $ | 569 |
| $ | 544 |
|
(1)Contract charges related to the cost of insurance totaled $162 million and $156 million, for the first quarter of 2011 and 2010, respectively. |
|
|
|
Total premiums and contract charges increased 25.0% and 19.1%4.6% in the thirdfirst quarter and first nine months of 2010, respectively,2011 compared to the same periodsfirst quarter of 20092010 primarily due to higher sales of accident and health insurance through the Allstate Workplace Division,immediate annuities with a significant portion of the increase resulting from sales to employees of one large company. In addition, increased traditional life insurance premiums in the third quarter and first nine months of 2010 were primarilycontingencies due to lower reinsurance premiums resulting frommore competitive pricing, higher retention.
Total contract charges increased 3.2% and 5.2% in the third quarter and first nine months of 2010, respectively, compared to the same periods of 2009 primarily due to higher cost of insurance and maintenance contract charges on interest-sensitive life insurance products resulting from a shift in the mix of policies in force.force to contracts with higher cost of insurance rates, and higher sales of accident and health insurance products at Allstate Benefits.
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
Contractholder funds represent interest-bearing liabilities arising from the sale of individual and institutional products, such as interest-sensitive life insurance, fixed annuities, funding agreements and bank deposits. The balance of contractholder funds is equal to the cumulative deposits received and interest credited to the contractholder less cumulative contract maturities, benefits, surrenders, withdrawals and contract charges for mortality or administrative expenses. The following table shows the changes in contractholder funds.
($ in millions) |
| Three months ended |
| Nine months ended |
| Three months ended | ||||||||
|
| 2011 |
| 2010 | ||||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
|
|
|
|
|
|
Contractholder funds, beginning balance | $ | 49,443 | $ | 53,999 | $ | 52,582 | $ | 58,413 | $ | 48,195 |
| $ | 52,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed annuities |
| 224 |
| 343 |
| 752 |
| 1,613 |
| 164 |
|
| 291 |
|
Interest-sensitive life insurance |
| 363 |
| 355 |
| 1,149 |
| 1,054 |
| 329 |
|
| 395 |
|
Bank and other deposits |
| 262 |
| 208 |
| 748 |
| 903 |
| 213 |
|
| 252 |
|
Total deposits |
| 849 |
| 906 |
| 2,649 |
| 3,570 |
| 706 |
|
| 938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
| 445 |
| 498 |
| 1,355 |
| 1,544 |
| 410 |
|
| 462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities, benefits, withdrawals and other adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities and retirements of institutional products |
| (3) |
| (212) |
| (1,784) |
| (4,715) |
| (487 | ) |
| (954 | ) |
Benefits |
| (397) |
| (379) |
| (1,187) |
| (1,235) |
| (372 | ) |
| (395 | ) |
Surrenders and partial withdrawals |
| (1,295) |
| (1,184) |
| (3,898) |
| (3,632) |
| (1,293 | ) |
| (1,248 | ) |
Contract charges |
| (247) |
| (232) |
| (731) |
| (680) |
| (251 | ) |
| (241 | ) |
Net transfers from separate accounts |
| 3 |
| 2 |
| 8 |
| 8 |
| 3 |
|
| 2 |
|
Fair value hedge adjustments for institutional products |
| 24 |
| 1 |
| (173) |
| 31 |
| (34 | ) |
| (123 | ) |
Other adjustments (1) |
| 114 |
| (63) |
| 115 |
| 32 |
| (43 | ) |
| 4 |
|
Total maturities, benefits, withdrawals and other adjustments |
| (1,801) |
| (2,067) |
| (7,650) |
| (10,191) |
| (2,477 | ) |
| (2,955 | ) |
Contractholder funds, ending balance | $ | 48,936 | $ | 53,336 | $ | 48,936 | $ | 53,336 | $ | 46,834 |
| $ | 51,027 |
|
(1) | The table above illustrates the changes in contractholder funds, which are presented gross of reinsurance recoverables on the Condensed Consolidated Statements of Financial Position. The table above is intended to supplement our discussion and analysis of revenues, which are presented net of reinsurance on the Condensed Consolidated Statements of Operations. As a result, the net change in contractholder funds associated with products reinsured to third parties is reflected as a component of the other adjustments line. |
Contractholder funds decreased 1.0%2.8% and 6.9%3.0% in the thirdfirst quarter of 2011 and first nine months of 2010, respectively, compared to a decrease of 1.2% and 8.7% in the third quarter and first nine months of 2009, respectively. Average contractholder funds decreased 8.3% and 9.2% in the thirdfirst quarter and first nine months of 2010, respectively,2011 compared to the same periodsperiod of 2009.2010.
Contractholder deposits decreased 6.3% and 25.8%24.7% in the thirdfirst quarter and first nine months of 2010, respectively,2011 compared to the same periodsperiod of 20092010 primarily due to lower deposits on fixed annuities. Deposits on fixed annuities decreased 34.7% and 53.4%43.6% in the thirdfirst quarter and first nine months of 2010, respectively,2011 compared to the same periodsperiod of 20092010 due to our strategic decision to discontinue distributing fixed annuities through banks and broker-dealersbroker dealers in the first quarter of 2010 and our goal to reduce our concentration in spread based products and improve returns on new business.
Maturities and retirements of institutional products decreased 98.6%49.0% to $3$487 million in the thirdfirst quarter of 2010 and 62.2% to $1.78 billion2011 from $954 million in the first nine monthssame period of 2010 from $212 million and $4.72 billion in the third quarter and first nine months of 2009, respectively. The third quarter and first nine months of 2009 included the retirement of $9 million and $1.45 billion, respectively, of extendible institutional market obligations, all of which were retired during 2009. In addition, the first nine months of 2009 included the redemption of $1.39 billion of institutional product liabilities in conjunction with cash tender offers.2010.
Surrenders and partial withdrawals on deferred fixed annuities, interest-sensitive life insurance products and Allstate Bank products (including maturities of certificates of deposit) increased 9.4%3.6% to $1.30 billion in the third quarter of 2010 and 7.3% to $3.90$1.29 billion in the first nine monthsquarter of 20102011 from $1.18 billion and $3.63$1.25 billion in the third quarter and first nine monthssame period of 2009, respectively. The increase in the third quarter of 2010 was primarily due
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
to higher surrenders and partial withdrawals on fixed annuities. In the first nine months of 2010, the increase was primarily due to higher surrenders and partial withdrawals on Allstate Bank products and fixed annuities, partially offset by lower surrenders and partial withdrawals on Allstate Bankinterest-sensitive life insurance products. The annualized surrender and partial withdrawal rate on deferred fixed annuities, interest-sensitive life insurance products and Allstate Bank products, based on the beginning of periodyear contractholder funds, was 12.2%12.8% in the first nine monthsquarter of 20102011 compared to 11.1%11.7% in the first nine monthssame period of 2009.2010.
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010
Net investment income decreased 5.0%6.4% or $37$47 million to $707 millionin the third quarter of 2010 and 7.1% or $166 million to $2.16 billion in the first nine months of 2010 from $744 million and $2.33 billion in the third quarter and first nine months of 2009, respectively, primarily due to reduced average asset balances, lower yields and actions to reduce the portfolio’s exposure to commercial real estate. Net investment income was $731 million and $723$684 million in the first quarter of 2011 from $731 million in the same period of 2010 primarily due to reduced average investment balances. Net investment income was $707 million and second$692 million in the third and fourth quarter of 2010, respectively.
Net realized capital gains and losses are presented in the following table.
($ in millions) |
| Three months ended |
| Nine months ended |
| Three months ended | ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2011 |
| 2010 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment write-downs | $ | (80) | $ | (281) | $ | (367) | $ | (842) | $ | (50 | ) | $ | (144 | ) |
Change in intent write-downs |
| (20) |
| (1) |
| (100) |
| (59) |
| (42 | ) |
| (23 | ) |
Net other-than-temporary impairment losses recognized in earnings |
| (100) |
| (282) |
| (467) |
| (901) |
| (92 | ) |
| (167 | ) |
Sales |
| 89 |
| 106 |
| 151 |
| 628 |
| 111 |
|
| 44 |
|
Valuation of derivative instruments |
| 10 |
| (60) |
| (193) |
| 202 |
| (4 | ) |
| (54 | ) |
Settlements of derivative instruments |
| (34) |
| 7 |
| (45) |
| 30 |
| 6 |
|
| 19 |
|
EMA limited partnership income |
| (3) |
| (5) |
| 1 |
| (115) |
| 18 |
|
| (4 | ) |
Realized capital gains and losses, pre-tax |
| (38) |
| (234) |
| (553) |
| (156) |
| 39 |
|
| (162 | ) |
Income tax benefit (expense) |
| 13 |
| 83 |
| 193 |
| (83) | ||||||
Income tax (expense) benefit |
| (14 | ) |
| 57 |
| ||||||||
Realized capital gains and losses, after-tax | $ | (25) | $ | (151) | $ | (360) | $ | (239) | $ | 25 |
| $ | (105 | ) |
For further discussion of realized capital gains and losses, see the Investments section of the MD&A.
Analysis of costs and expenses Total costs and expenses increased 3.6%1.1% or $38$12 million in the thirdfirst quarter of 20102011 compared to the third quartersame period of 20092010 primarily due to higher amortization of DAC and contract benefits, and operating costs and expenses, partially offset by lower interest credited to contractholder funds. Totalfunds and operating costs and expenses decreased 17.1% or $680 million in the first nine months of 2010 compared to the same period in 2009 primarily due to lower amortization of DAC and interest credited to contractholder funds, partially offset by higher contract benefits.expenses.
Life and annuity contract benefits increased 16.5%2.7% or $63 million in the third quarter of 2010 and 16.7% or $196$12 million in the first nine monthsquarter of 20102011 compared to the same periods of 2009. In the third quarter of 2010, higher contract benefits on accident and health insurance business were proportionate to growth in premiums and an increase in contract benefits on immediate annuities was due to favorable mortality experience in the third quarter of 2009.
The increase in contract benefits in the first nine monthsperiod of 2010 primarily reflects higher contract benefits on interest-sensitive life insurance due to the re-estimation of reserves for certain secondary guarantees on universal life insurance policies and unfavorable mortality experience as well as increased contract benefits on accident and health insurance business, partially offset by lowerhigher contract benefits on immediate annuities with life contingencies, due toreflecting the re-estimation of reserves for benefits payable to certain annuitants to reflect current contractholder information.
The reserve re-estimations utilized more refined policy level information and assumptions in the second quarter of 2010. The increase in reserves for certain secondary guaranteespremiums on universal life insurance policies resulted in a charge to contract benefits of $68 million and a related reduction in amortization of DAC of $50 million. The decrease in reserves for immediate annuities resulted in a credit to contract benefits of $26 million. The net impact was an increase to income of $8 million, pre-tax.these products.
We analyze our mortality and morbidity results using the difference between premiums and contract charges earned for the cost of insurance and life and annuity contract benefits excluding the portion related to the implied
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
interest on immediate annuities with life contingencies (“benefit spread”). This implied interest totaled $135 million and $413$139 million in the thirdfirst quarter of 2011 and first nine months of 2010, respectively, compared to $139 million and $418 million in the third quarter and first nine months of 2009, respectively.
The benefit spread by product group is disclosed in the following table.
($ in millions) |
| Three months ended |
| Nine months ended |
| Three months ended | ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2011 |
| 2010 | ||
Life insurance | $ | 93 | $ | 96 | $ | 204 | $ | 295 | $ | 93 |
| $ | 88 |
|
Accident and health insurance |
| 65 |
| 50 |
| 189 |
| 149 |
| 74 |
|
| 64 |
|
Annuities |
| (17) |
| (1) |
| (11) |
| (18) |
| (12 | ) |
| (10 | ) |
Total benefit spread | $ | 141 | $ | 145 | $ | 382 | $ | 426 | $ | 155 |
| $ | 142 |
|
Benefit spread decreased 2.8%increased 9.2% or $4 million in the third quarter of 2010 and 10.3% or $44$13 million in the first nine monthsquarter of 20102011 compared to the same periodsperiod of 2009.2010. The decrease in the third quarter of 2010increase was primarily due to favorable mortalitylower morbidity experience on annuities in the third quarter of 2009, partially offset by growth incertain accident and health products and growth at Allstate Benefits, and increased cost of insurance business sold through the Allstate Workplace Division. The decrease in the first nine months of 2010 was primarily due to re-estimations of reserves that increased contract benefits for interest-sensitive life insurance and decreased contract benefits for immediate annuities and unfavorable mortality experiencecharges on interest-sensitive life insurance and immediate annuities with life contingencies, partially offset by growth in accident and health insurance business sold through the Allstate Workplace Division.products.
Interest credited to contractholder funds decreased 10.3%9.7% or $51 million in the third quarter of 2010 and 17.0% or $278$45 million in the first nine monthsquarter of 20102011 compared to the same periodsperiod of 20092010 primarily due to lower average contractholder funds and management actions to reducelower interest crediting rates on deferredinterest-sensitive life insurance and immediate fixed annuities. In addition, the declineAdditionally, valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged decreased interest credited to contractholder funds by $12 million in the first nine monthsquarter of 2011.
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010 also reflects lower amortization of deferred sales inducement costs (“DSI”).
Amortization of DSI in the thirdfirst quarter and first nine months of 20102011 was $3$10 million and $14 million, respectively, compared to $4 million and $114$5 million in the third quarter and first nine monthssame period of 2009, respectively.2010. The decline in amortization of DSI in the first nine months of 2010increase was primarily due to a $44 million decrease inhigher amortization relating toresulting from realized capital gains and losses and a $38 million reductionon sales of fixed income securities in amortization acceleration for changes in assumptions.2011.
In order to analyze the impact of net investment income and interest credited to contractholders on net income, we monitor the difference between net investment income and the sum of interest credited to contractholder funds and the implied interest on immediate annuities with life contingencies, which is included as a component of life and annuity contract benefits on the Condensed Consolidated Statements of Operations (“investment spread”).
The investment spread by product group is shown in the following table.
($ in millions) |
| Three months ended |
| Nine months ended |
| Three months ended | ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2011 |
| 2010 | ||
Annuities and institutional products | $ | 44 | $ | 44 | $ | 148 | $ | 81 | $ | 48 |
| $ | 50 |
|
Life insurance |
| 11 |
| (2) |
| 24 |
| 2 |
| 11 |
|
| 7 |
|
Allstate Bank products |
| 8 |
| 8 |
| 24 |
| 21 |
| 8 |
|
| 8 |
|
Accident and health insurance |
| 5 |
| 5 |
| 13 |
| 13 |
| 5 |
|
| 4 |
|
Net investment income on investments supporting capital |
| 59 |
| 54 |
| 181 |
| 156 |
| 59 |
|
| 60 |
|
Total investment spread | $ | 127 | $ | 109 | $ | 390 | $ | 273 | $ | 131 |
| $ | 129 |
|
Investment spread increased 16.5%1.6% or $18 million in the third quarter of 2010 and 42.9% or $117$2 million in the first nine monthsquarter of 20102011 compared to the same periodsperiod of 2009 as lower net investment income was more than offset by2010 primarily due to decreased interest credited to contractholder funds, which includespartially offset by lower amortization of DSI. Excluding amortization of DSI,net investment spread increased 15.0% or $17 million in the third quarter of 2010 and 4.4% or $17 million in the first nine months of 2010 compared to the same periods in 2009.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009income.
To further analyze investment spreads, the following tables summarizetable summarizes the weighted average investment yield on assets supporting product liabilities and capital, interest crediting rates and investment spreads.spreads for three months ended March 31.
| Three months ended September 30, |
| ||||||||||
| Weighted average |
| Weighted average |
| Weighted average |
| ||||||
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
|
Interest-sensitive life insurance | 5.5 | % | 5.4 | % | 4.4 | % | 4.7 | % | 1.1 | % | 0.7 | % |
Deferred fixed annuities and institutional products | 4.4 |
| 4.3 |
| 3.3 |
| 3.4 |
| 1.1 |
| 0.9 |
|
Immediate fixed annuities with and without life contingencies | 6.3 |
| 6.4 |
| 6.3 |
| 6.4 |
| -- |
| -- |
|
Investments supporting capital, traditional life and other products | 3.7 |
| 3.9 |
| n/a |
| n/a |
| n/a |
| n/a |
|
| Nine months ended September 30, |
| ||||||||||||||||||||||||
| Weighted average |
| Weighted average |
| Weighted average |
|
| Weighted average investment yield |
| Weighted average interest crediting rate |
| Weighted average investment spreads |
| |||||||||||||
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
| |
Interest-sensitive life insurance | 5.5 | % | 5.4 | % | 4.4 | % | 4.6 | % | 1.1 | % | 0.8 | % |
| 5.4 | % | 5.4 | % | 4.2 | % | 4.4 | % | 1.2 | % | 1.0 |
| % |
Deferred fixed annuities and institutional products | 4.4 |
| 4.5 |
| 3.2 |
| 3.4 |
| 1.2 |
|
1.1 |
|
| 4.5 |
| 4.4 |
| 3.3 |
| 3.2 |
| 1.2 |
| 1.2 |
|
|
Immediate fixed annuities with and without life contingencies | 6.4 |
|
6.3 |
|
6.4 |
|
6.4 |
|
-- |
|
(0.1) |
|
| 6.2 |
| 6.3 |
| 6.2 |
| 6.4 |
| -- |
| (0.1 | ) |
|
Investments supporting capital, traditional life and other products | 3.7 |
|
3.8 |
|
n/a |
|
n/a |
|
n/a |
|
n/a |
|
| 3.7 |
| 3.6 |
| n/a |
| n/a |
| n/a |
| n/a |
|
|
The following table summarizes our product liabilities and indicates the account value of those contracts and policies in which an investment spread is generated.
($ in millions) |
| September 30, |
| March 31, | ||||||
|
| 2010 |
| 2009 |
| 2011 |
| 2010 | ||
Immediate fixed annuities with life contingencies | $ | 8,651 | $ | 8,419 | $ | 8,753 |
| $ | 8,517 |
|
Other life contingent contracts and other |
| 5,304 |
| 4,430 |
| 4,799 |
|
| 4,535 |
|
Reserve for life-contingent contract benefits | $ | 13,955 | $ | 12,849 | $ | 13,552 |
| $ | 13,052 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-sensitive life insurance | $ | 10,578 | $ | 10,166 | $ | 10,720 |
| $ | 10,417 |
|
Deferred fixed annuities |
| 30,071 |
| 32,977 |
| 28,586 |
|
| 31,570 |
|
Immediate fixed annuities without life contingencies |
| 3,809 |
| 3,856 |
| 3,797 |
|
| 3,870 |
|
Institutional products |
| 2,678 |
| 4,394 |
| 2,193 |
|
| 3,448 |
|
Allstate Bank products |
| 1,103 |
| 1,067 |
| 1,033 |
|
| 1,095 |
|
Market value adjustments related to fair value hedges and other |
| 697 |
| 876 |
| 505 |
|
| 627 |
|
Contractholder funds | $ | 48,936 | $ | 53,336 | $ | 46,834 |
| $ | 51,027 |
|
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
Amortization of DAC increased 13.8%65.2% or $11 million in the third quarter of 2010 and decreased 73.7% or $602$58 million in the first nine monthsquarter of 20102011 compared to the same periodsperiod of 2009.2010. The components of amortization of DAC are summarized in the following table.
($ in millions) |
| Three months ended |
| Nine months ended |
| Three months ended | ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2011 |
| 2010 | ||
Amortization of DAC before amortization relating to realized capital gains and losses and changes in assumptions | $ | (101) | $ | (108) | $ | (240) | $ | (382) | $ | (100 | ) | $ | (98 | ) |
Accretion (amortization) relating to realized capital gains and losses (1) |
| 10 |
| 28 |
| 13 |
| (158) | ||||||
Amortization deceleration (acceleration) for changes in assumptions (“DAC unlocking”) |
| -- |
| -- |
| 12 |
| (277) | ||||||
Amortization relating to realized capital gains and losses (1) |
| (35 | ) |
| (3 | ) | ||||||||
Amortization (acceleration) deceleration for changes in assumptions (“DAC unlocking”) |
| (12 | ) |
| 12 |
| ||||||||
Total amortization of DAC | $ | (91) | $ | (80) | $ | (215) | $ | (817) | $ | (147 | ) | $ | (89 | ) |
(1)The impact of realized capital gains and losses on amortization of DAC is dependent upon the relationship between the assets that give rise to the gain or loss and the product liability supported by the assets. Fluctuations result from changes in the impact of realized capital gains and losses on actual and expected gross profits. |
|
The increase of $11$58 million in the thirdfirst quarter of 20102011 was primarily due to a decline in accretionincreased amortization relating to realized capital gains and losses. The decrease of $602 million in the first nine months of 2010 was primarily due to a favorablelosses and an unfavorable change in amortization acceleration/deceleration for changes in assumptions, a favorable change in amortization/accretionassumptions. DAC amortization relating to realized capital gains and losses a decreased amortization rateprimarily resulted from realized capital gains on sales of fixed annuities and lower amortization from decreased benefit spread on interest-sensitive life insurance due to the re-estimation of reserves.
Duringincome securities in the first quarter of 2010, we completed our2011.
Our annual comprehensive review of the profitability of our products to determine DAC balances for our interest-sensitive life, fixed annuities and other investment contracts which covers assumptions for investment returns, including capital gains and losses, interest crediting rates to policyholders, the effect of any hedges, persistency, mortality and expenses in all product lines. In the first quarter of 2011, the review resulted in an acceleration of DAC amortization (charge to income) of $12 million. Amortization acceleration of $17 million related to interest-sensitive life insurance and was primarily due to an increase in projected expenses. Amortization deceleration of $5 million related to equity-indexed annuities and was primarily due to an increase in projected investment margins.
In the first quarter of 2010, the review resulted in a deceleration of DAC amortization (credit to income) of $12 million. Amortization deceleration of $45 million related to variable life insurance and was primarily due to appreciation in the underlying separate account valuations. Amortization acceleration of $32 million related to interest-sensitive life insurance and was primarily due to an increase in projected realized capital losses and lower projected renewal premium (which is also expected to reduce persistency), partially offset by lower expenses.
In the first quarter of 2009, our annual comprehensive review resulted in the acceleration of DAC amortization (charge to income) of $277 million. $289 million related to fixed annuities, of which $210 million was attributable to market value adjusted annuities, and $18 million related to variable life insurance. Partially offsetting these amounts was amortization deceleration (credit to income) for interest-sensitive life insurance of $30 million. The principal assumption impacting fixed annuity amortization acceleration was an increase in the level of expected realized capital losses in 2009 and 2010. For interest-sensitive life insurance, the amortization deceleration was due to a favorable change in our mortality assumptions, partially offset by increased expected capital losses.
Operating costs and expenses increased 19.2% and 8.9% in the third quarter and first nine months of 2010, respectively, compared to the same periods of 2009. The following table summarizes operating costsprovides the effect on DAC amortization of changes in assumptions relating to the gross profit components of investment margin, benefit margin and expenses.expense margin.
($ in millions) |
| Three months ended |
| Nine months ended | ||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
Non-deferrable acquisition costs | $ | 43 | $ | 38 | $ | 128 | $ | 118 |
Other operating costs and expenses |
| 75 |
| 61 |
| 226 |
| 207 |
Total operating costs and expenses | $ | 118 | $ | 99 | $ | 354 | $ | 325 |
|
|
|
|
|
|
|
|
|
Restructuring and related charges | $ | -- | $ | 4 | $ | (1) | $ | 24 |
Non-deferrable acquisition costs increased 13.2% or $5 million and 8.5% or $10 million in the third quarter and first nine months of 2010, respectively, compared to the same periods of 2009 primarily due to higher non-
($ in millions) |
| Three months ended | ||||
|
| 2011 |
| 2010 | ||
Investment margin | $ | 2 |
| $ | 15 |
|
Benefit margin |
| 7 |
|
| (45 | ) |
Expense margin |
| (21 | ) |
| 42 |
|
Net (acceleration) deceleration | $ | (12 | ) | $ | 12 |
|
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
deferrableOperating costs and expenses decreased 9.2% or $11 million in the first quarter of 2011 compared to the same period of 2010. The following table summarizes operating costs and expenses.
($ in millions) |
| Three months ended |
| ||||
|
| 2011 |
| 2010 |
| ||
Non-deferrable acquisition costs | $ | 42 |
| $ | 44 |
|
|
Other operating costs and expenses |
| 67 |
|
| 76 |
|
|
Total operating costs and expenses | $ | 109 |
| $ | 120 |
|
|
|
|
|
|
|
|
|
|
Restructuring and related charges | $ | (2 | ) | $ | -- |
|
|
Non-deferrable acquisition costs decreased 4.5% or $2 million in the first quarter of 2011 compared to the same period of 2010 primarily due to lower non-deferrable commissions and premium tax expenses related to accidentdiscontinuing sales through banks and health insurance business sold through the Allstate Workplace Division.broker dealers effective March 31, 2010. Other operating costs and expenses increased 23.0%decreased 11.8% or $14 million and 9.2% or $19$9 million in the thirdfirst quarter and first nine months of 2010, respectively,2011 compared to the same periodsperiod of 20092010 primarily due primarily to higher product distribution and marketing costs, increases in the net cost of employee benefits and lowerincreased reinsurance expense allowances, resulting from higher retention. Inlower occupancy costs due to consolidation of office buildings and non-recurring offsets to certain administrative costs of $4 million.
Loss on disposition of $23 million includes $25 million related to the first nine monthsagreement to sell substantially all of 2010, these increased costs were partially offset bythe deposits of Allstate Bank to Discover Bank and our expense reduction actions, which resulted in lower employee, professional servicesplans to wind down the remainder of the Allstate Bank’s operations, dissolve or settle any residual assets and sales support expenses. Through reductions in workforce positions combined with other actions completed as of September 30, 2010, we anticipate that we will exceed our targeted annual savings of $90 million beginning in 2011.liabilities, and cancel its banking charter.
Income tax expense of $37$46 million and benefit of $28 million werewas recognized for the thirdfirst quarter and first nine months of 2010, respectively,2011 compared to an income tax benefit of $29$4 million in the third quartersame period of 2009 and expense of $5 million2010. This change was due to the proportionate change in the first nine months of 2009. Incomeincome on which the income tax expense for the first nine months of 2009 included expense of $142 million attributable to an increase in the valuation allowance relating to the deferred tax asset on capital losses.was determined.
· Investments as of September 30, 2010March 31, 2011 totaled $102.21$99.61 billion, an increasea decrease of 2.4%0.9% from $99.83$100.48 billion as of December 31, 2009.2010.
· Unrealized net capital gains totaled $2.65$1.57 billion as of September 30, 2010,March 31, 2011, improving from unrealized net capital losses of $2.32$1.39 billion as of December 31, 2009.2010.
·As of March 31, 2011, the fair value for our below investment grade fixed income securities with gross unrealized losses totaled $3.86 billion compared to $3.29 billion as of December 31, 2010. The gross unrealized losses for these securities totaled $923 million as of March 31, 2011, an improvement of 14.5% from $1.08 billion as of December 31, 2010.
· Net investment income was $1.01 billion$982 million in the thirdfirst quarter of 2010,2011, a decrease of 7.3%6.5% from $1.08 billion in the third quarter of 2009, and $3.10$1.05 billion in the first nine monthsquarter of 2010, a decrease of 7.8% from $3.37 billion in the first nine months of 2009.2010.
· Net realized capital lossesgains were $144$96 million in the thirdfirst quarter of 20102011 compared to net realized capital losses of $519 million in the third quarter of 2009. Net realized capital losses were $943$348 million in the first nine monthsquarter of 2010 compared to net realized capital losses of $550 million in the first nine months of 2009.2010.
· Derivative net realized capital losses totaled $285$67 million in the thirdfirst quarter of 20102011 compared to net realized capital losses of $361 million in the third quarter of 2009, and net realized capital losses of $780$185 million in the first nine monthsquarter of 2010 compared to net realized capital gains of $149 million in the first nine months of 2009.2010. Derivative net realized capital losses in the thirdfirst quarter and first nine months of 20102011 resulted primarily from our risk mitigation (“macro hedge”) and other risk management actions.
· Substantially all of the macro hedge program was terminated during the first quarter of 2011. The macro hedge program resulted in $69 million of net realized capital losses in the first quarter of 2011.
·During the first nine monthsquarter of 2010,2011, our fixed income and mortgage loan portfolio generated $7.43$2.25 billion of cash flows from interest and maturities.
We continue to focusImproved market fundamentals in combination with our strategic risk mitigation efforts towards managingand return optimization strategies have strengthened our capital position, enabling us to execute yield and return enhancement strategies, while continuing to manage interest rate, equity, credit, andequity, real estate and municipal bond investment risks, whilerisks. Consistent with our return optimization efforts focus on investing in new opportunitieseconomic outlook, we modified the maturity profile of our fixed income portfolio through shifts out of longer term fixed rate and shorter term lower yielding securities into intermediate term maturity securities. Additionally, we increased our exposure to generatebelow investment grade corporate fixed income securities through a higher targeted allocation and capital appreciation. As a result, duringreinvestment of proceeds from the first nine monthssale of 2010 we took the following actions:lower rated structured securities.
|
| |
|
| |
|
| |
|
|
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
The composition of the investment portfolios at September 30, 2010as of March 31, 2011 is presented in the table below.
($ in millions) |
| Property-Liability (5) |
| Allstate Financial (5) |
| Corporate |
| Total |
|
| Property-Liability (5) |
| Allstate Financial (5) |
| Corporate |
| Total |
| ||||||||||||||||||||||||
|
|
|
| Percent |
|
|
| Percent |
|
|
| Percent |
|
|
| Percent |
|
|
|
| Percent |
|
|
| Percent |
|
|
| Percent |
|
|
| Percent |
| ||||||||
Fixed income securities (1) | $ | 29,422 |
| 82.3% | $ | 51,540 |
| 81.9% | $ | 2,231 |
| 62.8% | $ | 83,193 |
| 81.4% |
| $ | 28,068 |
|
| 79.2 | % | $ | 49,178 |
|
| 81.3 | % | $ | 2,996 |
|
| 81.6 | % | $ | 80,242 |
|
| 80.6 | % |
|
Equity securities (2) |
| 3,499 |
| 9.8 |
| 208 |
| 0.3 |
| -- |
| -- |
| 3,707 |
| 3.6 |
|
| 4,199 |
|
| 11.9 |
|
| 238 |
|
| 0.4 |
|
| -- |
|
| -- |
|
| 4,437 |
|
| 4.4 |
|
|
Mortgage loans |
| 28 |
| 0.1 |
| 6,933 |
| 11.0 |
| -- |
| -- |
| 6,961 |
| 6.8 |
|
| 16 |
|
| -- |
|
| 6,566 |
|
| 10.9 |
|
| -- |
|
| -- |
|
| 6,582 |
|
| 6.6 |
|
|
Limited partnership interests (3) |
| 2,289 |
| 6.4 |
| 1,128 |
| 1.8 |
| 37 |
| 1.0 |
| 3,454 |
| 3.4 |
|
| 2,684 |
|
| 7.6 |
|
| 1,358 |
|
| 2.2 |
|
| 35 |
|
| 1.0 |
|
| 4,077 |
|
| 4.1 |
|
|
Short-term (4) |
| 454 |
| 1.3 |
| 1,038 |
| 1.7 |
| 1,284 |
| 36.1 |
| 2,776 |
| 2.7 |
|
| 473 |
|
| 1.3 |
|
| 874 |
|
| 1.4 |
|
| 639 |
|
| 17.4 |
|
| 1,986 |
|
| 2.0 |
|
|
Other |
| 53 |
| 0.1 |
| 2,068 |
| 3.3 |
| 2 |
| 0.1 |
| 2,123 |
| 2.1 |
|
| 17 |
|
| -- |
|
| 2,270 |
|
| 3.8 |
|
| -- |
|
| -- |
|
| 2,287 |
|
| 2.3 |
|
|
Total | $ | 35,745 |
| 100.0% | $ | 62,915 |
| 100.0% | $ | 3,554 |
| 100.0% | $ | 102,214 |
| 100.0% |
| $ | 35,457 |
|
| 100.0 | % | $ | 60,484 |
|
| 100.0 | % | $ | 3,670 |
|
| 100.0 | % | $ | 99,611 |
|
| 100.0 | % |
|
(1)Fixed income securities are carried at fair value. Amortized cost basis for these securities was $28.75 billion, $49.87 billion and $2.17 billion for Property-Liability, Allstate Financial and Corporate and Other, respectively.
(2)Equity securities are carried at fair value. Cost basis for these securities was $3.27 billion and $181 million for Property-Liability and Allstate Financial, respectively.
(3)We have commitments to invest in additional limited partnership interests totaling $702 million and $668 million for Property-Liability and Allstate Financial, respectively.
(4)Short-term investments are carried at fair value. Amortized cost basis for these investments was $454 million, $1.04 billion and $1.28 billion for Property-Liability, Allstate Financial and Corporate and Other, respectively.
(5)Balances reflect the elimination of related party investments between segments.
(1) | Fixed income securities are carried at fair value. Amortized cost basis for these securities was $28.06 billion, $48.28 billion and $2.95 billion for Property-Liability, Allstate Financial and Corporate and Other, respectively. |
(2) | Equity securities are carried at fair value. Cost basis for these securities was $3.62 billion and $176 million for Property-Liability and Allstate Financial, respectively. |
(3) | We have commitments to invest in additional limited partnership interests totaling $915 million and $736 million for Property-Liability and Allstate Financial, respectively. |
(4) | Short-term investments are carried at fair value. Amortized cost basis for these investments was $473 million, $874 million and $639 million for Property-Liability, Allstate Financial and Corporate and Other, respectively. |
(5) | Balances reflect the elimination of related party investments between segments. |
Total investments increaseddecreased to $102.21$99.61 billion at September 30, 2010,as of March 31, 2011, from $99.83$100.48 billion atas of December 31, 2009,2010, primarily due to net reductions in contractholder obligations, partially offset by an increase of $374 million in collateral from securities lending activities and higher valuations for fixed income securities, partially offset by net reductions in contractholder obligations.securities. Valuations of fixed income securities are typically driven by a combination of changes in relevant risk-free interest rates and credit spreads over the period. Risk-free interest rates are typically defined as the yield on U.S. Treasury securities, whereas credit spread is the additional yield on fixed income securities above the risk-free rate that market participants require to compensate them for assuming credit, liquidity and/or prepayment risks. The increase in valuation forof fixed income securities for the ninethree months ended September 30, 2010March 31, 2011 was mainly due to declining risk-free interest rates, partially offset by wideningtightening of credit spreads in certain sectors.
The Property-Liability investment portfolio increased to $35.75$35.46 billion at September 30, 2010,as of March 31, 2011, from $34.53$35.05 billion atas of December 31, 2009,2010, primarily due to higher valuations for fixed income and equity securities and positive operating cash flows and increased collateral from securities lending activities, partially offset by dividends paid by Allstate Insurance Company (“AIC”) to its parent, The Allstate Corporation (the “Corporation”).
The Allstate Financial investment portfolio increaseddecreased to $62.91$60.48 billion at September 30, 2010,as of March 31, 2011, from $62.22$61.58 billion atas of December 31, 2009,2010, primarily due to higher valuations for fixed income securities, partially offset by net reductions in contractholder obligations of $3.64 billion.$1.36 billion, partially offset by higher valuations for fixed income securities.
The Corporate and Other investment portfolio increaseddecreased to $3.55$3.67 billion at September 30, 2010,as of March 31, 2011, from $3.09$3.85 billion atas of December 31, 2009,2010, primarily due to dividends of $600 million paid by AIC to the Corporation, and higher valuations for fixed income securities, partially offset byshare repurchases, dividends paid to shareholders and interest paid on debt.debt, partially offset by dividends of $200 million paid by AIC to the Corporation.
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
Fixed income securitiesby type are listed in the table below.
($ in millions) |
| Fair value at |
| Percent to |
| Fair value at |
| Percent to |
|
| Fair value as of |
| Percent to |
| Fair value as of |
| Percent to |
| ||||
U.S. government and agencies | $ | 11,253 |
| 11.0% | $ | 7,536 |
| 7.6% |
| $ | 6,766 |
|
| 6.8 | % | $ | 8,596 |
|
| 8.6 | % |
|
Municipal |
| 16,768 |
| 16.4 |
| 21,280 |
| 21.3 |
|
| 15,246 |
|
| 15.3 |
|
| 15,934 |
|
| 15.9 |
|
|
Corporate |
| 37,204 |
| 36.4 |
| 33,115 |
| 33.2 |
|
| 42,395 |
|
| 42.6 |
|
| 37,655 |
|
| 37.5 |
|
|
Foreign government |
| 3,428 |
| 3.4 |
| 3,197 |
| 3.2 |
|
| 3,117 |
|
| 3.1 |
|
| 3,158 |
|
| 3.1 |
|
|
Residential mortgage-backed securities (“RMBS”) |
| 8,499 |
| 8.3 |
| 7,987 |
| 8.0 |
|
| 6,530 |
|
| 6.6 |
|
| 7,993 |
|
| 7.9 |
|
|
Commercial mortgage-backed securities (“CMBS”) |
| 1,993 |
| 2.0 |
| 2,586 |
| 2.6 |
|
| 2,053 |
|
| 2.1 |
|
| 1,994 |
|
| 2.0 |
|
|
Asset-backed securities (“ABS”) |
| 4,010 |
| 3.9 |
| 3,026 |
| 3.0 |
|
| 4,111 |
|
| 4.1 |
|
| 4,244 |
|
| 4.2 |
|
|
Redeemable preferred stock |
| 38 |
| -- |
| 39 |
| -- |
|
| 24 |
|
| -- |
|
| 38 |
|
| -- |
|
|
Total fixed income securities | $ | 83,193 |
| 81.4% | $ | 78,766 |
| 78.9% |
| $ | 80,242 |
|
| 80.6 | % | $ | 79,612 |
|
| 79.2 | % |
|
At September 30, 2010, 92.3%As of March 31, 2011, 90.5% of the consolidated fixed income securities portfolio was rated investment grade, which is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from Standard & Poor’s (“S&P”), Fitch, Dominion, or Realpoint, a rating of aaa, aa, a, or bbb from A.M. Best, or a comparable internal rating if an externally provided rating is not available.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
The following table summarizes the fair value and unrealized net capital gains and losses for All of our fixed income securities by credit rating as of September 30, 2010.
($ in millions) |
| Aaa |
| Aa |
| A |
| ||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
|
U.S. government and agencies | $ | 11,253 | $ | 532 | $ | -- | $ | -- | $ | -- | $ | -- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt |
| 1,512 |
| 117 |
| 4,682 |
| 242 |
| 2,916 |
| 130 |
|
Taxable |
| 189 |
| 12 |
| 2,506 |
| 160 |
| 1,177 |
| 19 |
|
Auction rate securities (“ARS”) |
| 940 |
| (47) |
| 92 |
| (12) |
| 116 |
| (16) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Public |
| 1,792 |
| 54 |
| 2,776 |
| 184 |
| 7,210 |
| 628 |
|
Privately placed |
| 1,158 |
| 74 |
| 1,672 |
| 104 |
| 3,632 |
| 268 |
|
Hybrid |
| 35 |
| 5 |
| 44 |
| 5 |
| 402 |
| (48) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign government |
| 2,057 |
| 357 |
| 431 |
| 32 |
| 548 |
| 57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored entities (“U.S. Agency”) |
| 5,025 |
| 180 |
| -- |
| -- |
| -- |
| -- |
|
Prime residential mortgage-backed securities (“Prime”) |
| 505 |
| 4 |
| 74 |
| (2) |
| 213 |
| 1 |
|
Alt-A residential mortgage-backed securities (“Alt-A”) |
| 43 |
| (1) |
| 66 |
| (6) |
| 125 |
| (7) |
|
Subprime residential mortgage-backed securities (“Subprime”) |
| 92 |
| (3) |
| 292 |
| (123) |
| 93 |
| (25) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS |
| 1,205 |
| 34 |
| 219 |
| (28) |
| 217 |
| (63) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations (“CDO”) |
| 28 |
| -- |
| 608 |
| (21) |
| 507 |
| (69) |
|
Consumer and other asset-backed securities (“Consumer and other ABS”) |
| 1,253 |
| 37 |
| 349 |
| 4 |
| 309 |
| -- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stock |
| -- |
| -- |
| 1 |
| -- |
| 2 |
| -- |
|
Total fixed income securities | $ | 27,087 | $ | 1,355 | $ | 13,812 | $ | 539 | $ | 17,467 | $ | 875 |
|
|
| Baa |
| Ba or lower |
| Total |
| ||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
|
U.S. government and agencies | $ | -- | $ | -- | $ | -- | $ | -- | $ | 11,253 | $ | 532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt |
| 1,277 |
| (8) |
| 581 |
| (57) |
| 10,968 |
| 424 |
|
Taxable |
| 471 |
| (52) |
| 166 |
| (59) |
| 4,509 |
| 80 |
|
ARS |
| 42 |
| (8) |
| 101 |
| (19) |
| 1,291 |
| (102) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Public |
| 8,561 |
| 688 |
| 1,692 |
| 64 |
| 22,031 |
| 1,618 |
|
Privately placed |
| 6,307 |
| 312 |
| 1,326 |
| 53 |
| 14,095 |
| 811 |
|
Hybrid |
| 462 |
| (67) |
| 135 |
| 10 |
| 1,078 |
| (95) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign government |
| 392 |
| 36 |
| -- |
| -- |
| 3,428 |
| 482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency |
| -- |
| -- |
| -- |
| -- |
| 5,025 |
| 180 |
|
Prime |
| 20 |
| (5) |
| 533 |
| (9) |
| 1,345 |
| (11) |
|
Alt-A |
| 40 |
| (5) |
| 404 |
| (106) |
| 678 |
| (125) |
|
Subprime |
| 100 |
| (26) |
| 874 |
| (560) |
| 1,451 |
| (737) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS |
| 230 |
| (183) |
| 122 |
| (142) |
| 1,993 |
| (382) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS |
|
|
|
|
|
|
|
|
|
|
|
|
|
CDO |
| 240 |
| (91) |
| 430 |
| (123) |
| 1,813 |
| (304) |
|
Consumer and other ABS |
| 266 |
| (3) |
| 20 |
| (4) |
| 2,197 |
| 34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stock |
| 34 |
| 2 |
| 1 |
| -- |
| 38 |
| 2 |
|
Total fixed income securities | $ | 18,442 | $ | 590 | $ | 6,385 | $ | (952) | $ | 83,193 | $ | 2,407 |
|
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
Municipal Bonds, including tax exempt, taxable and ARS securities, totaled $16.77 billion as of September 30, 2010 with an unrealized net capital gain of $402 million.
Included in our municipal bond holdings at September 30, 2010 are $1.02 billion of municipal securities which are not rated by third party credit rating agencies, but are rated by the National Association of Insurance Commissioners (“NAIC”) and are also, and/or internally rated. These holdings include $525 million of below investment grade municipal bonds, most of which were purchased to provide the opportunity to achieve incremental returns. Our initial investment decisions and ongoing monitoring procedures for thesefixed income securities are based on a thorough due diligence process which includes, but is not limited to, an assessment of the credit quality, sector, structure, and liquidity risks of each issue.
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010
The following table summarizes the fair value and unrealized net capital gains and losses for fixed income securities by credit rating as of September 30,March 31, 2011.
($ in millions) |
| Aaa |
| Aa |
| A |
| ||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| ||||||
U.S. government and agencies | $ | 6,766 |
| $ | 257 |
| $ | -- |
| $ | -- |
| $ | -- |
| $ | -- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt |
| 1,401 |
|
| 79 |
|
| 4,185 |
|
| 72 |
|
| 2,382 |
|
| (10 | ) |
|
Taxable |
| 184 |
|
| -- |
|
| 2,528 |
|
| 2 |
|
| 1,064 |
|
| (38 | ) |
|
Auction rate securities (“ARS”) |
| 811 |
|
| (48 | ) |
| 61 |
|
| (6 | ) |
| 99 |
|
| (13 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public |
| 1,293 |
|
| 11 |
|
| 3,055 |
|
| 81 |
|
| 9,843 |
|
| 324 |
|
|
Privately placed |
| 1,047 |
|
| 10 |
|
| 1,947 |
|
| 50 |
|
| 4,220 |
|
| 162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign government |
| 1,693 |
|
| 224 |
|
| 522 |
|
| 17 |
|
| 535 |
|
| 32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored entities (“U.S. Agency”) |
| 3,628 |
|
| 131 |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
|
Prime residential mortgage-backed securities (“Prime”) |
| 375 |
|
| 9 |
|
| 69 |
|
| -- |
|
| 178 |
|
| (1 | ) |
|
Alt-A residential mortgage-backed securities (“Alt-A”) |
| 15 |
|
| -- |
|
| 56 |
|
| -- |
|
| 62 |
|
| -- |
|
|
Subprime residential mortgage-backed securities (“Subprime”) |
| 51 |
|
| -- |
|
| 83 |
|
| (19 | ) |
| 46 |
|
| (6 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS |
| 1,063 |
|
| 40 |
|
| 284 |
|
| -- |
|
| 166 |
|
| (9 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations (“CDO”) |
| 21 |
|
| -- |
|
| 642 |
|
| (7 | ) |
| 471 |
|
| (39 | ) |
|
Consumer and other asset-backed securities (“Consumer and other ABS”) |
| 1,305 |
|
| 21 |
|
| 397 |
|
| 2 |
|
| 340 |
|
| 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stock |
| -- |
|
| -- |
|
| 1 |
|
| -- |
|
| -- |
|
| -- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities | $ | 19,653 |
| $ | 734 |
| $ | 13,830 |
| $ | 192 |
| $ | 19,406 |
| $ | 404 |
|
|
|
| Baa |
| Ba or lower |
| Total |
| ||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| ||||||
U.S. government and agencies | $ | -- |
| $ | -- |
| $ | -- |
| $ | -- |
| $ | 6,766 |
| $ | 257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt |
| 1,232 |
|
| (64 | ) |
| 509 |
|
| (92 | ) |
| 9,709 |
|
| (15 | ) |
|
Taxable |
| 465 |
|
| (73 | ) |
| 119 |
|
| (38 | ) |
| 4,360 |
|
| (147 | ) |
|
ARS |
| 102 |
|
| (11 | ) |
| 104 |
|
| (14 | ) |
| 1,177 |
|
| (92 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public |
| 9,923 |
|
| 382 |
|
| 2,544 |
|
| 59 |
|
| 26,658 |
|
| 857 |
|
|
Privately placed |
| 6,608 |
|
| 190 |
|
| 1,915 |
|
| 31 |
|
| 15,737 |
|
| 443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign government |
| 367 |
|
| 22 |
|
| -- |
|
| -- |
|
| 3,117 |
|
| 295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency |
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| 3,628 |
|
| 131 |
|
|
Prime |
| 7 |
|
| -- |
|
| 577 |
|
| 2 |
|
| 1,206 |
|
| 10 |
|
|
Alt-A |
| 41 |
|
| 1 |
|
| 437 |
|
| (75 | ) |
| 611 |
|
| (74 | ) |
|
Subprime |
| 91 |
|
| (25 | ) |
| 814 |
|
| (394 | ) |
| 1,085 |
|
| (444 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS |
| 354 |
|
| (53 | ) |
| 186 |
|
| (81 | ) |
| 2,053 |
|
| (103 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDO |
| 279 |
|
| (56 | ) |
| 432 |
|
| (86 | ) |
| 1,845 |
|
| (188 | ) |
|
Consumer and other ABS |
| 199 |
|
| (1 | ) |
| 25 |
|
| (5 | ) |
| 2,266 |
|
| 19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stock |
| 23 |
|
| 1 |
|
| -- |
|
| -- |
|
| 24 |
|
| 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities | $ | 19,691 |
| $ | 313 |
| $ | 7,662 |
| $ | (693 | ) | $ | 80,242 |
| $ | 950 |
|
|
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010 47.5% or $7.96
Municipal bonds, including tax exempt, taxable and ARS securities, totaled $15.25 billion as of March 31, 2011 with an unrealized net capital loss of $254 million. The municipal bond portfolio includes general obligations of state and local issuers, revenue bonds and pre-refunded bonds, which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest.
The following table summarizes by state the fair value, amortized cost and credit rating of our municipal bond portfoliobonds, excluding $1.80 billion of pre-refunded bonds, as of March 31, 2011.
($ in millions) State |
| State |
| Local general |
| Revenue (1) |
| Fair value |
| Amortized |
| Average |
| |||||
California | $ | 98 |
| $ | 803 |
| $ | 792 |
| $ | 1,693 |
| $ | 1,835 |
|
| A |
|
Texas |
| 17 |
|
| 429 |
|
| 730 |
|
| 1,176 |
|
| 1,196 |
|
| Aa |
|
Florida |
| 56 |
|
| 233 |
|
| 545 |
|
| 834 |
|
| 844 |
|
| A |
|
New York |
| 32 |
|
| 30 |
|
| 544 |
|
| 606 |
|
| 607 |
|
| Aa |
|
Ohio |
| 38 |
|
| 205 |
|
| 286 |
|
| 529 |
|
| 571 |
|
| A |
|
Illinois |
| -- |
|
| 187 |
|
| 338 |
|
| 525 |
|
| 539 |
|
| A |
|
Missouri |
| 34 |
|
| 176 |
|
| 273 |
|
| 483 |
|
| 489 |
|
| A |
|
New Jersey |
| 146 |
|
| 37 |
|
| 290 |
|
| 473 |
|
| 485 |
|
| A |
|
Pennsylvania |
| 95 |
|
| 124 |
|
| 251 |
|
| 470 |
|
| 476 |
|
| Aa |
|
Michigan |
| 40 |
|
| 137 |
|
| 286 |
|
| 463 |
|
| 481 |
|
| Aa |
|
All others |
| 719 |
|
| 1,360 |
|
| 4,111 |
|
| 6,190 |
|
| 6,302 |
|
| A |
|
Total | $ | 1,275 |
| $ | 3,721 |
| $ | 8,446 |
| $ | 13,442 |
| $ | 13,825 |
|
| A |
|
(1) | The nature of the activities supporting revenue municipals is highly diversified and includes transportation, health care, industrial development, housing, higher education, utilities, recreation/convention centers and other activities. |
(2) | The municipal bonds are rated by third party credit rating agencies, the NAIC and/or internally rated. |
Our practice for acquiring and monitoring municipal bonds is insured by ninepredominantly based on the underlying credit quality of the primary obligor. We currently rely on the primary obligor to pay all contractual cash flows and are not relying on bond insurers and 46.1%for payments. As a result of these securities have adowngrades in the insurers’ credit ratingratings, the ratings of Aaa or Aa. 48.0%the insured municipal bonds generally reflect the underlying ratings of the primary obligor. As of March 31, 2011, 99.3% of our insured municipal bond portfolio was insured by National Public Finance Guarantee Corporation, Inc., 22.8% by Ambac Assurance Corporation, 21.5% by Assured Guaranty Municipal Corporation and 3.2% by Assured Guaranty Ltd.is rated investment grade. Given the effects of the economic crisis on bond insurers, the value inherent in thisthe insurance has declined. WeFurther, we believe the fair value of our insured municipal bond portfolio substantially reflects the decline in the value of the insurance. We believe that the loss of the benefit of insurance and further related valuation declines, if any,would not result in a material adverse impact on our results of operations, financial position or liquidity.
Included in our municipal bond holdings as of March 31, 2011 are $894 million of municipal securities which are not expected to be material. We expect to receive allrated by third party credit rating agencies, but are rated by the NAIC and are also internally rated. These holdings include $431 million of the contractual cash flows as our practice for acquiring and monitoringbelow investment grade municipal bonds, is predominantly based onmost of which were purchased to provide the underlying credit quality of the primary obligor.opportunity to achieve incremental returns.
Corporate bonds, including publicly traded and privately placed, and hybrid securities, totaled $37.20$42.40 billion as of September 30, 2010March 31, 2011 with an unrealized net capital gain of $2.33$1.30 billion. Privately placed securities primarily consist of corporate issued senior debt securities that are in unregistered form or are directly negotiated with the borrower. 53.7% of the privately placed corporate securities in our portfolio are rated by an independent rating agency and substantially all are rated by the NAIC.
The following table shows details of our hybrid securities as of September 30, 2010.
($ in millions) |
| Public |
| Privately placed |
| Total |
| ||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
|
United Kingdom (“UK”) | $ | 88 | $ | (2) | $ | 43 | $ | 2 | $ | 131 | $ | -- |
|
Europe (non-UK) |
| 126 |
| 6 |
| 249 |
| (18) |
| 375 |
| (12) |
|
Asia/Australia |
| 11 |
| (1) |
| 51 |
| (3) |
| 62 |
| (4) |
|
North America |
| 316 |
| (45) |
| 194 |
| (34) |
| 510 |
| (79) |
|
Total | $ | 541 | $ | (42) | $ | 537 | $ | (53) | $ | 1,078 | $ | (95) |
|
Hybrid securities have attributes most similar to those of fixed income securities such as stated interest rates and mandatory redemption dates. Additionally, some hybrids may have an interest rate step-up feature which is intended to incent the issuer to redeem the security at a specified call date. While hybrid securities are generally issued by investment grade-rated financial institutions, they have structural features, such as the ability to defer principal and interest payments, which make them more sensitive to credit market deterioration. $908 million of our hybrid securities with $93 million of unrealized net capital losses are Tier 1 securities, and $170 million with $2 million of unrealized net capital losses are Tier 2 securities. Tier 1 securities are lower in the capital structure than Tier 2 securities.
RMBS, CMBS and ABS are structured securities that are primarily collateralized by residential and commercial real estate related loans and other consumer relatedor corporate borrowings. The cash flows from the underlying collateral paid to the securitization trust are generally applied in a pre-determined order and are designed so that each security issued by the trust, typically referred to as a “class”, qualifies for a specific original rating. For example, the “senior” portion or “top” of the capital structure, or rating class, which would originally qualify for a rating of Aaa typically has priority in receiving principal repayments on the underlying collateral and retains this priority until the class is paid in full. In a sequential structure, underlying collateral principal repayments are directed to the most senior rated Aaa class in the structure until paid in full, after which principal repayments are directed to the next most senior Aaa class in the structure until it is paid in full. Senior Aaa classes generally share any losses from the underlying collateral on a pro-rata basis after losses are absorbed by classes with lower original ratings. The payment priority and class subordination included in these securities serves as credit enhancement for holders of the senior or top portions of the structures. These securities continue to retain the payment priority features that existed at the origination of the securitization trust. Other forms of credit enhancement may include structural features embedded in the securitization trust, such as overcollateralization, excess spread and bond insurance. The underlying collateral
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
underlying collateral can have fixed interest rates, variable interest rates (such as adjustable rate mortgages (“ARM”)) or may contain features of both fixed and variable rate mortgages.
RMBS, including U.S. Agency, Prime, Alt-A and Subprime, totaled $8.50$6.53 billion, with 78.7%72.0% rated investment grade, at September 30, 2010.as of March 31, 2011. The RMBS portfolio is subject to interest rate risk, but unlike other fixed income securities, is additionally subject to significant prepayment risk from the underlying residential mortgage loans. The credit risk associated with our RMBS portfolio is mitigated due to the fact that 59.1%55.6% of the portfolio consists of securities that were issued by or have underlying collateral guaranteed by U.S. government agencies. The unrealized net capital loss of $693$377 million at September 30, 2010as of March 31, 2011 was the result of wider credit spreads than at initial purchase on the non-U.S. Agency portion of our RMBS portfolio, largely due to increasedhigher risk premiums caused by macroeconomic conditions and credit market deterioration, including the impact of lower real estate valuations, which continuebegan to persist.show signs of stabilization in certain geographic areas in 2010. The following table shows our RMBS portfolio at September 30, 2010,as of March 31, 2011 based upon vintage year of the issuance of the securities.
($ in millions) |
| U.S. Agency |
| Prime |
| Alt-A |
| Subprime |
| Total RMBS |
|
| U.S. Agency |
| Prime |
| Alt-A |
| Subprime |
| Total RMBS |
| ||||||||||||||||||||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized gain/(loss) |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
|
| Fair |
|
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| |||||||||
2010 | $ | 378 | $ | 2 | $ | 243 | $ | 7 | $ | 66 | $ | 1 | $ | -- | $ | -- | $ | 687 | $ | 10 |
| $ | 173 |
| $ | 1 |
| $ | 201 |
| $ | 3 |
| $ | 59 |
| $ | 1 |
| $ | -- |
| $ | -- |
| $ | 433 |
| $ | 5 |
|
|
2009 |
| 854 |
| 19 |
| 87 |
| 1 |
| 9 |
| -- |
| -- |
| -- |
| 950 |
| 20 |
|
| 687 |
|
| 10 |
|
| 74 |
|
| 1 |
|
| 8 |
|
| -- |
|
| -- |
|
| -- |
|
| 769 |
|
| 11 |
|
|
2008 |
| 858 |
| 22 |
| -- |
| -- |
| -- |
| -- |
| -- |
| -- |
| 858 |
| 22 |
|
| 630 |
|
| 12 |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| 630 |
|
| 12 |
|
|
2007 |
| 482 |
| 9 |
| 259 |
| 1 |
| 106 |
| (64) |
| 350 |
| (270) |
| 1,197 |
| (324) |
|
| 246 |
|
| 7 |
|
| 273 |
|
| 9 |
|
| 84 |
|
| (32 | ) |
| 247 |
|
| (140 | ) |
| 850 |
|
| (156 | ) |
|
2006 |
| 340 |
| 10 |
| 224 |
| (5) |
| 202 |
| (21) |
| 417 |
| (201) |
| 1,183 |
| (217) |
|
| 212 |
|
| 9 |
|
| 222 |
|
| 2 |
|
| 175 |
|
| (18 | ) |
| 304 |
|
| (125 | ) |
| 913 |
|
| (132 | ) |
|
2005 |
| 676 |
| 25 |
| 210 |
| (16) |
| 134 |
| (17) |
| 420 |
| (173) |
| 1,440 |
| (181) |
|
| 456 |
|
| 20 |
|
| 189 |
|
| (8 | ) |
| 127 |
|
| (10 | ) |
| 289 |
|
| (112 | ) |
| 1,061 |
|
| (110 | ) |
|
Pre-2005 |
| 1,437 |
| 93 |
| 322 |
| 1 |
| 161 |
| (24) |
| 264 |
| (93) |
| 2,184 |
| (23) |
|
| 1,224 |
|
| 72 |
|
| 247 |
|
| 3 |
|
| 158 |
|
| (15 | ) |
| 245 |
|
| (67 | ) |
| 1,874 |
|
| (7 | ) |
|
Total | $ | 5,025 | $ | 180 | $ | 1,345 | $ | (11) | $ | 678 | $ | (125) | $ | 1,451 | $ | (737) | $ | 8,499 | $ | (693) |
| $ | 3,628 |
| $ | 131 |
| $ | 1,206 |
| $ | 10 |
| $ | 611 |
| $ | (74 | ) | $ | 1,085 |
| $ | (444 | ) | $ | 6,530 |
| $ | (377 | ) |
|
Prime are collateralized by residential mortgage loans issued to prime borrowers. As of September 30, 2010, $1.02 billionMarch 31, 2011, $908 million of the Prime werehad fixed rate underlying collateral and $330$298 million werehad variable rate.rate underlying collateral.
Alt-A includes securities collateralized by residential mortgage loans issued to borrowers who do not qualify for prime financing terms due to high loan-to-value ratios or limited supporting documentation, but have stronger credit profiles than subprime borrowers. As of September 30, 2010, $495March 31, 2011, $455 million of the Alt-A werehad fixed rate underlying collateral and $183$156 million werehad variable rate.rate underlying collateral.
Subprime includes securities that are collateralized by residential mortgage loans issued to borrowers that cannot qualify for Prime or Alt-A financing terms due in part to weak or limited credit history. It also includes securities that are collateralized by certain second lien mortgages regardless of the borrower’s credit history. The Subprime portfolio consisted of $1.18 billion$829 million and $271$256 million of first lien and second lien securities, respectively. Subprime included $718As of March 31, 2011, $603 million of the Subprime had fixed rate underlying collateral and $733$482 million ofhad variable rate securities.underlying collateral.
CMBS totaled $1.99$2.05 billion, with 93.9%90.9% rated investment grade, at September 30, 2010.as of March 31, 2011. The CMBS portfolio is subject to credit risk, but unlike certain other structured securities, is generally not subject to prepayment risk due to protections within the underlying commercial mortgage loans. Of the CMBS investments, 93.8%94.5% are traditional conduit transactions collateralized by commercial mortgage loans, broadly diversified across property types and geographical area. The remainder consists of non-traditional CMBS such as small balance transactions, large loan pools and single borrower transactions.
The following table shows our CMBS portfolio at September 30, 2010as of March 31, 2011 based upon vintage year.year of the underlying collateral.
($ in millions) |
| Fair |
| Unrealized |
|
| Fair |
| Unrealized |
| ||
2011 | $ | 1 |
| $ | -- |
|
| |||||
2010 | $ | 24 | $ | -- |
|
| 23 |
|
| -- |
|
|
2007 |
| 277 |
| (43) |
|
| 284 |
|
| (9 | ) |
|
2006 |
| 593 |
| (279) |
|
| 635 |
|
| (80 | ) |
|
2005 |
| 300 |
| (60) |
|
| 336 |
|
| (23 | ) |
|
Pre-2005 |
| 799 |
| -- |
|
| 774 |
|
| 9 |
|
|
Total CMBS | $ | 1,993 | $ | (382) |
| $ | 2,053 |
| $ | (103 | ) |
|
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010
The unrealized net capital loss of $382$103 million at September 30, 2010as of March 31, 2011 on our CMBS portfolio was the result of wider credit spreads than at initial purchase, largely due to the macroeconomic conditions and credit market deterioration, including the impact of declininglower real estate valuations, which continuebegan to persist.show signs of stabilization in certain geographic areas in 2010. While CMBS
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
spreads tightened during 2009 and 2010, credit spreads in most rating classes remain wider than at initial purchase, which is particularly evident in our 2005-2007 vintage year CMBS.
ABS, including CDO and Consumer and other ABS, totaled $4.01$4.11 billion, with 88.8%88.9% rated investment grade, at September 30, 2010.as of March 31, 2011. Credit risk is managed by monitoring the performance of the underlying collateral. In addition, manyMany of the securities in the ABS portfolio have credit enhancement with features such as overcollateralization, subordinated structures, reserve funds, guarantees and/or insurance. The unrealized net capital loss of $270$169 million at September 30, 2010as of March 31, 2011 on our ABS portfolio was the result of wider credit spreads than at initial purchase.
CDO totaled $1.81$1.85 billion, with 76.3%76.6% rated investment grade, at September 30, 2010.as of March 31, 2011. CDO consist primarily of obligations collateralized by high yield and investment grade corporate credits including $1.43$1.41 billion of cash flow collateralized loan obligations (“CLO”) with unrealized losses of $151$92 million. The remaining $383$435 million of securities consisted of synthetic CDO, trust preferred CDO, project finance CDO, market value CDO, project finance CDO, collateralized bond obligations and other CLO with unrealized losses of $153$96 million.
Cash flow CLO are structures collateralized primarily by below investment grade senior secured corporate loans. The underlying collateral is actively managed by external managers that monitor the collateral’s performance and is well diversified across industries and among issuers. A transaction will typically issue notes with various capital structure classes (i.e. Aaa, Aa, A, etc.) as well as equity-like tranches. In general, these securities are structured with overcollateralization ratios and performance is impacted primarily by defaults and recoveries of the underlying collateral within the structures, which reduce overcollateralization ratios over time. A violation of the senior overcollateralization test could result in an event of default of the structure.
Consumer and other ABS totaled $2.20$2.27 billion, with 99.1%98.9% rated investment grade, at September 30, 2010.as of March 31, 2011. Consumer and other ABS consists of $1.40$1.05 billion of consumer auto and $801 million$1.22 billion of other ABS securities with unrealized gains of $16$5 million and $18$14 million, respectively.
Mortgage loans Our mortgage loan portfolio, which is primarily held in the Allstate Financial portfolio, totaled $6.96$6.58 billion at September 30, 2010,as of March 31, 2011, compared to $7.94$6.68 billion atas of December 31, 2009,2010, and primarily comprisecomprises loans secured by first mortgages on developed commercial real estate. Key considerations used to manage our exposure include property type and geographic diversification. Our exposure to anydiversification by state and metropolitan area is highly diversified, with the largest exposure not exceeding 10.4% of the portfolio. The portfolio is also diversified across several property types, with the largest concentrations of 33.7% in office buildings and 26.3% in retail property. Debt service coverage ratios represent the amount of cash flows from the property available to the borrower to meet principal and interest payment obligations. For fixed rate mortgage loans, which comprise 90.6% and 89.9% of the total portfolio at September 30, 2010 and December 31, 2009, respectively, the average debt service coverage ratios as of September 30, 2010 and December 31, 2009 were 1.6 and 1.7, respectively. Mortgage loans with debt service coverage ratios below 1.0 generally have a higher level of risk. 5.6% and 5.8% of the mortgage loan portfolio had a debt service coverage ratio under 1.0 as of September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010, 28.4% or $112 million of these mortgage loans are impaired and have valuation allowances totaling $50 million compared to 18.4% or $85 million which had valuation allowances totaling $26 million as of December 31, 2009. Mortgage loans with debt service coverage below 1.0 which are not impaired primarily relate to instances where the borrower has the financial capacity to fund the revenue shortfalls from the properties for the foreseeable term, the decrease in occupancy is considered temporary, or there are other risk mitigating circumstances such as additional collateral, escrow balances or borrower guarantees.area.
In the first nine months of 2010, $828 million of mortgage loans were contractually due. Of these, 41% were paid as due, 14% were extended, 42% were refinanced for an average of six years at market rates using our standard underwriting criteria and 3% were real estate acquired through foreclosure or deed in lieu of mortgage loans. In addition, $388 million of mortgage loans that were not contractually due in the first nine months of 2010 were paid in full.
The net carrying value of impaired mortgage loans at September 30, 2010 and December 31, 2009 was $235 million and $383 million, respectively. Total valuation allowances of $75 million were held on impaired mortgage loans at September 30, 2010, compared to $95 million at December 31, 2009. We recognized $3 million and $44$6 million of realized capital losses related to net increases in the valuation allowancesallowance on impaired mortgage loans for the three months and nine months ended September 30, 2010, respectively. The net increases in both periods wereMarch 31, 2011, primarily due to deteriorating debt service coverage resulting from a decrease in occupancy and the risk
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
associated with refinancing near-term maturities due to declining underlying collateral valuations. Realized capital losses recognized on mortgage loans held for sale totaled $6 million for the nine months ended September 30, 2010. There were no realized capital losses recognized on mortgage loans held for sale for the three months ended September 30, 2010.
In total, we have sevenFor further detail on our mortgage loans totaling $64 million inloan portfolio, see Note 4 of the process of foreclosure, reflecting an increase from five mortgage loans totaling $49 million as of December 31, 2009. Real estate acquired through foreclosure or deed in lieu of mortgage loans during the first nine months of 2010 totaled $92 million and is included in other investments on the Condensed Consolidated Statement of Financial Position. We recognized $2 million of realized capital losses for both the three months and nine months ended September 30, 2010 related to sales of real estate assets with an active plan to sell. There were no impairment write-downs recognized on real estate for either the three or nine month periods ended September 30, 2010.condensed consolidated financial statements.
Limited partnership interests consist of investments in private equity/debt funds, real estate funds, hedge funds and hedgetax credit funds. The limited partnership interests portfolio is well diversified across a number of characteristics including fund sponsors, vintage years, strategies, geography (including international), and company/property types. The following table presents information about our limited partnership interests as of September 30, 2010.March 31, 2011.
($ in millions) |
| Private |
| Real estate |
| Hedge |
| Total |
|
| Private |
| Real estate |
| Hedge |
| Tax |
| Total |
Cost method of accounting (“Cost”) | $ | 894 | $ | 290 | $ | 77 | $ | 1,261 |
| $ | 965 | $ | 332 | $ | 79 | $ | 7 | $ | 1,383 |
Equity method of accounting (“EMA”) |
| 641 |
| 347 |
| 1,205 |
| 2,193 |
|
| 695 |
| 353 |
| 1,411 |
| 235 |
| 2,694 |
Total | $ | 1,535 | $ | 637 | $ | 1,282 | $ | 3,454 |
| $ | 1,660 | $ | 685 | $ | 1,490 | $ | 242 | $ | 4,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of sponsors |
| 86 |
| 44 |
| 11 |
|
|
|
| 90 |
| 42 |
| 12 |
| 7 |
|
|
Number of individual funds |
| 134 |
| 89 |
| 100 |
|
|
|
| 146 |
| 87 |
| 101 |
| 7 |
|
|
Largest exposure to single fund | $ | 41 | $ | 33 | $ | 84 |
|
|
| $ | 36 | $ | 35 | $ | 82 | $ | 50 |
|
|
Our aggregate limited partnership exposure represented 3.4%4.1% and 2.8%3.8% of total invested assets as of September 30, 2010March 31, 2011 and December 31, 2009.2010, respectively.
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2011 AND 2010 AND 2009
The following table shows the results from our limited partnership interests by fund type and accounting classification.classification for the three months ended March 31.
($ in millions) |
| Three months ended |
| ||||||||||||||
|
| 2010 |
| 2009 |
| ||||||||||||
|
| Cost |
| EMA |
| Total |
| Impairment |
| Cost |
| EMA |
| Total |
| Impairment |
|
Private equity/debt funds | $ | 6 | $ | (2) | $ | 4 | $ | (3) | $ | 4 | $ | 10 | $ | 14 | $ | (1) |
|
Real estate funds |
| -- |
| (6) |
| (6) |
| (6) |
| -- |
| (22) |
| (22) |
| (52) |
|
Hedge funds |
| -- |
| (3) |
| (3) |
| (1) |
| -- |
| 45 |
| 45 |
| -- |
|
Total | $ | 6 | $ | (11) | $ | (5) | $ | (10) | $ | 4 | $ | 33 | $ | 37 | $ | (53) |
|
|
| Nine months ended |
| ||||||||||||||||||||||||||||||
|
| 2010 |
| 2009 |
| ||||||||||||||||||||||||||||
($ in millions) |
| 2011 |
| 2010 | |||||||||||||||||||||||||||||
|
| Cost |
| EMA |
| Total |
| Impairment |
| Cost |
| EMA |
| Total |
| Impairment |
|
| Cost |
| EMA |
| Total |
| Impairment |
| Cost |
| EMA |
| Total |
| Impairment |
Private equity/debt funds | $ | 20 | $ | 33 | $ | 53 | $ | (5) | $ | 11 | $ | (75) | $ | (64) | $ | (78) |
| $ | 9 | $ | 19 | $ | 28 | $ | (1) | $ | 6 | $ | 15 | $ | 21 | $ | (2) |
Real estate funds |
| (1) |
| (42) |
| (43) |
| (35) |
| -- |
| (141) |
| (141) |
| (214) |
|
| 1 |
| 8 |
| 9 |
| -- |
| -- |
| (28) |
| (28) |
| (21) |
Hedge funds |
| -- |
| 22 |
| 22 |
| (2) |
| -- |
| 69 |
| 69 |
| (4) |
|
| -- |
| 36 |
| 36 |
| -- |
| -- |
| 17 |
| 17 |
| (1) |
Total | $ | 19 | $ | 13 | $ | 32 | $ | (42) | $ | 11 | $ | (147) | $ | (136) | $ | (296) |
| $ | 10 | $ | 63 | $ | 73 | $ | (1) | $ | 6 | $ | 4 | $ | 10 | $ | (24) |
(1)Impairment write-downs related to Cost limited partnerships were $10$1 million and $41$24 million in the three months ended March 31, 2011 and nine months ended September 30, 2010, respectively, compared to $53 million and $286 million in the three months and nine months ended September 30, 2009, respectively. There were no impairment write-downs related to EMA limited partnerships in both the three months ended September 30, 2010March 31, 2011 and 2009. Impairment write-downs related to EMA limited partnerships were $1 million in the nine months ended September 30, 2010 compared to $10 million in the nine months ended September 30, 2009.2010.
Limited partnership interests, excluding impairment write-downs, produced losses of $5 million and income of $32$73 million in the three months and nine months ended September 30, 2010, respectively,March 31, 2011 compared to income of $37 million and losses of $136$10 million in the three months and nine months ended September 30, 2009, respectively.March 31, 2010. Income on EMA limited partnerships is recognized on a delay due to the availability of the related financial statements. The recognition of income on hedge funds is primarily on a one-month delay and the income recognition on private equity/debt funds, and real estate funds and tax credit funds are generally on a three-month delay. Income on Cost limited partnerships is recognized only upon cash distributionsreceipt of amounts distributed by the partnership.
partnerships.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
Unrealized net capital gains totaled $2.65$1.57 billion as of September 30, 2010March 31, 2011 compared to unrealized net capital lossesgains of $2.32$1.39 billion as of December 31, 2009.2010. The improvement since December 31, 20092010 for fixed income securities was primarily a result of declining risk-free interest rates, partially offset by wideningtightening of credit spreads in certain sectors. The improvement for equity securities was primarily due to improved equity valuations. The following table presents unrealized net capital gains and losses, pre-tax and after-tax.
($ in millions) |
| September 30, |
| June 30, |
| March 31, |
| December 31, |
|
| March 31, |
| December 31, |
U.S. government and agencies | $ | 532 | $ | 512 | $ | 218 | $ | 203 |
| $ | 257 | $ | 276 |
Municipal |
| 402 |
| 89 |
| (256) |
| (403) |
|
| (254) |
| (267) |
Corporate |
| 2,334 |
| 1,445 |
| 914 |
| 345 |
|
| 1,300 |
| 1,395 |
Foreign government |
| 482 |
| 350 |
| 306 |
| 291 |
|
| 295 |
| 337 |
RMBS |
| (693) |
| (954) |
| (1,231) |
| (1,500) |
|
| (377) |
| (516) |
CMBS |
| (382) |
| (553) |
| (768) |
| (925) |
|
| (103) |
| (219) |
ABS |
| (270) |
| (390) |
| (387) |
| (488) |
|
| (169) |
| (181) |
Redeemable preferred stock |
| 2 |
| 1 |
| 2 |
| -- |
|
| 1 |
| 1 |
Fixed income securities (1) |
| 2,407 |
| 500 |
| (1,202) |
| (2,477) |
|
| 950 |
| 826 |
Equity securities |
| 260 |
| (102) |
| 371 |
| 179 |
|
| 645 |
| 583 |
Short-term investments |
| -- |
| -- |
| -- |
| -- |
| ||||
EMA limited partnership interests |
| 7 |
| -- | |||||||||
Derivatives |
| (17) |
| 2 |
| (18) |
| (23) |
|
| (30) |
| (22) |
Unrealized net capital gains and losses, pre-tax |
| 2,650 |
| 400 |
| (849) |
| (2,321) |
|
| 1,572 |
| 1,387 |
Amounts recognized for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance reserves (2) |
| (608) |
| (292) |
| -- |
| -- |
|
| (2) |
| (41) |
DAC and DSI (3) |
| (49) |
| 403 |
| 726 |
| 990 |
|
| 95 |
| 97 |
Amounts recognized |
| (657) |
| 111 |
| 726 |
| 990 |
|
| 93 |
| 56 |
Deferred income taxes |
| (701) |
| (183) |
| 39 |
| 461 |
|
| (586) |
| (508) |
Unrealized net capital gains and losses, after-tax | $ | 1,292 | $ | 328 | $ | (84) | $ | (870) |
| $ | 1,079 | $ | 935 |