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 JUNE 30, 2008
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11840
THE
ALLSTATE CORPORATION
(Exact name of registrant as specified in its
charter)
Delaware
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36-3871531
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(State of Incorporation)
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(I.R.S. Employer Identification No.)
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2775 Sanders Road
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Northbrook, Illinois
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60062
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code:
847/402-5000
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.
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
.
(Check one):
Large accelerated filer
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Accelerated
filer
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Non-accelerated filer
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Smaller reporting company
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x
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o
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o
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o
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(Do not check if a smaller reporting company)
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
As of July 31, 2008, the
registrant had 541,517,994 common shares, $.01 par value, outstanding.
THE ALLSTATE CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2008
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PAGE
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PART I
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FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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Condensed Consolidated
Statements of Operations for the Three-Month and Six-Month Periods Ended
June 30, 2008 and 2007 (unaudited)
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1
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Condensed Consolidated
Statements of Financial Position as of June 30, 2008 (unaudited) and
December 31, 2007
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2
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Condensed Consolidated
Statements of Cash Flows for the Six-Month Periods Ended June 30, 2008
and
2007 (unaudited)
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3
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Notes to Condensed
Consolidated Financial Statements (unaudited)
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4
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Report of Independent
Registered Public Accounting Firm
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27
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Item 2.
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Managements Discussion
and Analysis of Financial Condition and Results of Operations
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Highlights
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28
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Consolidated
Net Income
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29
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Property-Liability
Highlights
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29
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Allstate
Protection Segment
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33
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Discontinued
Lines and Coverages Segment
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46
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Property-Liability
Investment Results
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47
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Allstate
Financial Highlights
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48
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Allstate
Financial Segment
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48
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Investments
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54
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Application
of Critical Accounting Estimates
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72
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Capital
Resources and Liquidity
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80
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Item 4.
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Controls and Procedures
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83
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PART II
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OTHER INFORMATION
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Item 1.
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Legal Proceedings
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84
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Item 1A.
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Risk Factors
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84
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Item 2.
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Unregistered Sales of
Equity Securities and Use of Proceeds
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85
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Item 4.
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Submission of Matters to a
Vote of Security Holders
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86
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Item 6.
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Exhibits
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86
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PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE ALLSTATE
CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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($ in millions, except per share data)
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2008
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2007
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2008
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2007
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(unaudited)
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(unaudited)
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Revenues
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Property-liability insurance premiums
earned
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$
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6,750
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$
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6,822
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$
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13,514
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$
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13,628
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Life and annuity premiums and contract
charges
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471
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454
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923
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937
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Net investment income
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1,412
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1,634
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2,938
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3,205
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Realized capital gains and losses
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(1,215
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)
|
545
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|
(1,870
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)
|
1,016
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|
|
|
7,418
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|
9,455
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|
15,505
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18,786
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Costs and expenses
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Property-liability insurance claims and
claims expense
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|
4,776
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|
4,317
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9,452
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8,434
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|
Life and annuity contract benefits
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395
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|
386
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792
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814
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Interest credited to contractholder funds
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563
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|
673
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1,187
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1,322
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|
Amortization of deferred policy acquisition
costs
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959
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|
1,216
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2,034
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|
2,369
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|
Operating costs and expenses
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728
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734
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|
1,520
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1,461
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Restructuring and related charges
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(5
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)
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4
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(6
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)
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3
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|
Interest expense
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88
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83
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176
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155
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7,504
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7,413
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15,155
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14,558
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Gain (loss) on disposition of operations
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2
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(9
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)
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2
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(Loss) income from operations before income
tax (benefit) expense
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(86
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)
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2,044
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341
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4,230
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Income tax (benefit) expense
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(111
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)
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641
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(32
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)
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1,332
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Net income
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$
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25
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$
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1,403
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$
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373
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$
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2,898
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Earnings per share:
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Net income per share - Basic
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$
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0.05
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$
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2.33
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$
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0.67
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$
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4.75
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Weighted average shares - Basic
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549.6
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604.1
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554.2
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610.4
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Net income per share - Diluted
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$
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0.05
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$
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2.30
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$
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0.67
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$
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4.71
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Weighted average shares - Diluted
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552.9
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608.8
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557.2
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615.2
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Cash dividends declared per share
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$
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0.41
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$
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0.38
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$
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0.82
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$
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0.76
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See notes to condensed
consolidated financial statements.
1
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
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June 30,
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December 31,
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($ in millions, except par value data)
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2008
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2007
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(unaudited)
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Assets
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Investments
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Fixed income securities, at fair value
(amortized cost $84,438 and $93,495)
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$
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83,224
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$
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94,451
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|
Equity securities, at fair value (cost
$4,197 and $4,267)
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4,664
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|
5,257
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|
Mortgage loans
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|
10,629
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|
10,830
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|
Limited partnership interests
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2,890
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|
2,501
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|
Short-term
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|
9,639
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|
3,058
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Other
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|
2,557
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|
2,883
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|
Total investments
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|
113,603
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|
118,980
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|
Cash
|
|
748
|
|
422
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|
Premium installment receivables, net
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|
4,906
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|
4,879
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|
Deferred policy acquisition costs
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|
6,630
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|
5,768
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|
Reinsurance recoverables, net
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|
5,798
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|
5,817
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|
Accrued investment income
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|
968
|
|
1,050
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|
Deferred income taxes
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1,333
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|
467
|
|
Property and equipment, net
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1,017
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|
1,062
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|
Goodwill
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875
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|
825
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Other assets
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2,517
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|
2,209
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Separate Accounts
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12,438
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|
14,929
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|
Total assets
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|
$
|
150,833
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|
$
|
156,408
|
|
Liabilities
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|
|
|
|
|
Reserve for property-liability insurance
claims and claims expense
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|
$
|
18,863
|
|
$
|
18,865
|
|
Reserve for life-contingent contract
benefits
|
|
12,965
|
|
13,212
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|
Contractholder funds
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|
62,419
|
|
61,975
|
|
Unearned premiums
|
|
10,266
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|
10,409
|
|
Claim payments outstanding
|
|
833
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|
748
|
|
Other liabilities and accrued expenses
|
|
7,682
|
|
8,779
|
|
Short-term debt
|
|
18
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|
|
|
Long-term debt
|
|
5,640
|
|
5,640
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|
Separate Accounts
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|
12,438
|
|
14,929
|
|
Total liabilities
|
|
131,124
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|
134,557
|
|
|
|
|
|
|
|
Commitments and Contingent Liabilities
(Note 8)
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|
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|
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Shareholders equity
|
|
|
|
|
|
Preferred stock, $1 par value, 25 million
shares authorized, none issued
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|
|
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Common stock, $.01 par value, 2.0 billion
shares authorized and 900 million issued, 546 million and 563 million shares
outstanding
|
|
9
|
|
9
|
|
Additional capital paid-in
|
|
3,096
|
|
3,052
|
|
Retained income
|
|
32,701
|
|
32,796
|
|
Deferred ESOP expense
|
|
(49
|
)
|
(55
|
)
|
Treasury stock, at cost (354 million and
337 million shares)
|
|
(15,420
|
)
|
(14,574
|
)
|
Accumulated other comprehensive income:
|
|
|
|
|
|
Unrealized net capital gains and losses
|
|
(274
|
)
|
888
|
|
Unrealized foreign currency translation
adjustments
|
|
65
|
|
79
|
|
Net funded status of pension and other
postretirement benefit obligation
|
|
(419
|
)
|
(344
|
)
|
Total accumulated other comprehensive
(loss) income
|
|
(628
|
)
|
623
|
|
Total shareholders equity
|
|
19,709
|
|
21,851
|
|
Total liabilities and shareholders equity
|
|
$
|
150,833
|
|
$
|
156,408
|
|
See notes to condensed
consolidated financial statements.
2
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
Cash flows from operating activities
|
|
|
|
|
|
Net income
|
|
$
|
373
|
|
$
|
2,898
|
|
Adjustments to reconcile net income to net
cash provided by operating activities:
|
|
|
|
|
|
Depreciation, amortization and other
non-cash items
|
|
(141
|
)
|
(114
|
)
|
Realized capital gains and losses
|
|
1,870
|
|
(1,016
|
)
|
Gain (loss) on disposition of operations
|
|
9
|
|
(2
|
)
|
Interest credited to contractholder funds
|
|
1,187
|
|
1,322
|
|
Changes in:
|
|
|
|
|
|
Policy benefits and other insurance
reserves
|
|
(146
|
)
|
(213
|
)
|
Unearned premiums
|
|
(179
|
)
|
(108
|
)
|
Deferred policy acquisition costs
|
|
(269
|
)
|
36
|
|
Premium installment receivables, net
|
|
(12
|
)
|
(62
|
)
|
Reinsurance recoverables, net
|
|
51
|
|
(145
|
)
|
Income taxes (payable) receivable
|
|
(361
|
)
|
113
|
|
Other operating assets and liabilities
|
|
(83
|
)
|
(115
|
)
|
Net cash provided by operating activities
|
|
2,299
|
|
2,594
|
|
Cash flows from investing activities
|
|
|
|
|
|
Proceeds from sales
|
|
|
|
|
|
Fixed income securities
|
|
14,113
|
|
11,939
|
|
Equity securities
|
|
5,106
|
|
3,758
|
|
Limited partnership interests
|
|
214
|
|
648
|
|
Mortgage loans
|
|
204
|
|
|
|
Other investments
|
|
163
|
|
82
|
|
Investment collections
|
|
|
|
|
|
Fixed income securities
|
|
2,144
|
|
2,719
|
|
Mortgage loans
|
|
399
|
|
978
|
|
Other investments
|
|
69
|
|
265
|
|
Investment purchases
|
|
|
|
|
|
Fixed income securities
|
|
(9,430
|
)
|
(14,174
|
)
|
Equity securities
|
|
(5,155
|
)
|
(2,864
|
)
|
Limited partnership interests
|
|
(599
|
)
|
(750
|
)
|
Mortgage loans
|
|
(438
|
)
|
(1,472
|
)
|
Other investments
|
|
(75
|
)
|
(498
|
)
|
Change in short-term investments, net
|
|
(6,604
|
)
|
(1,707
|
)
|
Change in other investments, net
|
|
(274
|
)
|
96
|
|
(Acquisition) disposition of operations
|
|
(120
|
)
|
|
|
Purchases of property and equipment, net
|
|
(98
|
)
|
(150
|
)
|
Net cash used in investing activities
|
|
(381
|
)
|
(1,130
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
Change in short-term debt, net
|
|
18
|
|
(12
|
)
|
Proceeds from issuance of long-term debt
|
|
|
|
987
|
|
Repayment of long-term debt
|
|
|
|
(9
|
)
|
Contractholder fund deposits
|
|
7,035
|
|
5,009
|
|
Contractholder fund withdrawals
|
|
(7,441
|
)
|
(5,369
|
)
|
Dividends paid
|
|
(444
|
)
|
(451
|
)
|
Treasury stock purchases
|
|
(865
|
)
|
(1,826
|
)
|
Shares reissued under equity incentive
plans, net
|
|
13
|
|
90
|
|
Excess tax benefits on share-based payment
arrangements
|
|
2
|
|
27
|
|
Other
|
|
90
|
|
32
|
|
Net cash used in financing activities
|
|
(1,592
|
)
|
(1,522
|
)
|
Net increase (decrease) in cash
|
|
326
|
|
(58
|
)
|
Cash at beginning of period
|
|
422
|
|
443
|
|
Cash at end of period
|
|
$
|
748
|
|
$
|
385
|
|
See notes to condensed consolidated
financial statements.
3
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
propertyliability insurance company with various propertyliability 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 June 30, 2008, and for the three
month
and sixmonth periods ended June 30, 2008 and 2007 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 Companys
Annual Report on Form 10
K
for the year ended December 31, 2007.
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 2008 presentation, certain
amounts in the prior year condensed consolidated financial statements and notes
have been reclassified.
Adopted accounting standards
Statement of
Position 051, Accounting by Insurance Enterprises for Deferred Acquisition Costs
in Connection with Modifications or Exchanges of Insurance Contracts (SOP 051)
In October 2005,
the American Institute of Certified Public Accountants (AICPA) issued SOP 051. SOP 051 provides accounting guidance for
deferred policy acquisition costs (DAC) associated with internal replacements
of insurance and investment contracts other than those set forth in Statement
of Financial Accounting Standards (SFAS) No. 97, Accounting and
Reporting by Insurance Enterprises for Certain LongDuration Contracts and for
Realized Gains and Losses from the Sale of Investments. SOP 051 defines an internal replacement as a
modification in product benefits, features, rights or coverages that occurs
through the exchange of an existing contract for a new contract, or by
amendment, endorsement or rider to an existing contract, or by the election of
a feature or coverage within an existing contract. The Company adopted the provisions of SOP 051
on January 1, 2007 for internal replacements occurring in fiscal years
beginning after December 15, 2006.
The adoption resulted in a $9 million aftertax reduction to retained
income to reflect the impact on estimated future gross profits (EGP) from the
changes in accounting for certain costs associated with contract continuations
that no longer qualify for deferral under SOP 051 and a reduction of DAC and
deferred sales inducement balances of $13 million pretax as of January 1,
2007.
SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments an amendment of FASB
Statements No. 133 and 140 (SFAS No. 155)
In February 2006, the Financial Accounting Standards Board (FASB)
issued SFAS No. 155, which permits fair value remeasurement at the date of
adoption of any hybrid financial instrument containing an embedded
derivative that otherwise would require bifurcation under paragraph 12 or 13 of
SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS No. 133);
clarifies which interestonly strips and principalonly strips are not subject
to the requirements of SFAS No. 133; establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivat
ives or hybrid financial instruments that contain
embedded derivatives requiring bifurcation; and clarifies that co
ncentrations of credit risk in the form of
subordination are not embedded derivatives.
The Company adopted the provisions of SFAS No. 155 on January 1,
2007, which were effective for all financial instruments acquired, issued
or subject to a remeasurement event occurring after the beginning of the first
fiscal year after September 15, 2006.
The Company elected not to remeasure existing hybrid financial
instruments that contained embedded derivatives requiring bifurcation at the
date of adoption pursuant to paragraph
12 or 13 of SFAS No. 133. The
adoption of SFAS No. 155 did not have a material effect on the results of
operations or financial position of the Company.
4
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
and FASB Staff Position No. FIN 48
1, Definition of Settlement in FASB Interpretation No. 48 (FIN 48)
The FASB issued FIN 48 in July 2006 and the related staff position
in May 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an entitys financial
statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 requires an entity to recognize the
tax benefit of uncertain tax positions only when it is more likely than not,
based on the positions technical merits, that the position would be sustained
upon examination by the respective taxing authorities. The tax benefit is measured as the largest
benefit that is more than fiftypercent likely of being realized upon final
settlement with the respective taxing authorities. On January 1, 2007, the Company adopted
the provisions of FIN 48, which were effective for fiscal years beginning after
December 15, 2006. No cumulative
effect of a change in accounting principle or adjustment to the liability for
unrecognized tax benefits was recognized as a result of the adoption of FIN
48. Accordingly, the adoption of FIN 48
did not have an effect on the results of operations or financial position of
the Company.
SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87,
88, 106 and 132(R) (SFAS No. 158)
SFAS
No. 158 required, as of December 31, 2006 for calendar yearend
companies, recognition in the statements of financial position of the over or
underfunded status of defined pension and other postretirement plans, measured
as the difference between the fair value of plan assets and the projected
benefit obligation (PBO) for pension plans and the accumulated postretirement
benefit obligation (APBO) for other postretirement benefit plans. This effectively required the recognition of
all previously unrecognized actuarial gains and losses and prior service costs
as a component of accumulated other comprehensive income, net of tax, at the
date of adoption. In addition, SFAS No. 158
required, on a prospective basis, that the actuarial gains and losses and prior
service costs and credits that arise during any reporting period, but are not
recognized as components of net periodic benefit cost, be recognized as a
component of other comprehensive income (OCI) and that disclosure in the
notes to the financial statements include the anticipated impact on the net
periodic benefit cost of the actuarial gains and losses and the prior service
costs and credits previously deferred and recognized, net of tax, as a
component of OCI. The Company adopted
the funded status provisions of SFAS No. 158 as of December 31,
2006. The impact on the Consolidated
Statements of Financial Position of adopting SFAS No. 158, including the
interrelated impact to the minimum pension liability, was a decrease in
shareholders equity of $1.11 billion.
In
addition to the impacts of reporting the funded status of pension and other
postretirement benefit plans and the related additional disclosures, SFAS No. 158
also required reporting entities to conform plan measurement dates with the
fiscal yearend reporting date. The
effective date of the guidance relating to the measurement date of the plans is
for years ending after December 15, 2008.
The Company remeasured its plans as of January 1, 2008 to
transition to a December 31 measurement date in 2008. As a result, the Company recorded a decrease
of $13 million, net of tax, to beginning retained earnings in 2008 representing
the net periodic benefit cost for the period between October 31, 2007 and December 31,
2007 and a decrease of $80 million, net of tax, to beginning accumulated other
comprehensive income in 2008 to reflect changes in the fair value of plan
assets and the benefit obligations between October 31, 2007 and January 1,
2008, and for amortization of actuarial gains and losses and prior service cost
between October 31, 2007 and December 31, 2007.
SEC Staff Accounting Bulletin No. 109, Written Loan Commitments
That are Recorded At Fair Value Through Earnings (SAB 109)
In
October 2007, the SEC issued SAB 109, a replacement of SAB 105, Application
of Accounting Principles to Loan Commitments.
SAB 109 is applicable to both loan commitments accounted for under SFAS No. 133,
and other loan commitments for which the issuer elects fair value accounting
under SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SAB 109 states
that the expected net future cash flows related to the servicing of a loan
should be included in the fair value measurement of a loan commitment accounted
for at fair value through earnings. The
expected net future cash flows associated with loan servicing should be
determined in accordance with the guidance in SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, as amended by SFAS No. 156, Accounting for Servicing of
Financial Assets. SAB 109 should be
applied on a prospective basis to loan commitments accounted for under SFAS No. 133
that were issued or modified in fiscal quarters beginning after December 15,
2007. Earlier adoption was not
permitted. The adoption of SAB 109 did
not have a material impact on the Companys results of operations or financial
position.
5
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SFAS No. 157, Fair Value
Measurements (SFAS No. 157)
In
September 2006, the FASB issued SFAS No. 157, which redefines fair
value 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, establishes a framework for measuring fair value in GAAP, and
expands disclosures about fair value measurements. SFAS No. 157 establishes a threelevel
hierarchy for fair value measurements based upon the nature of the inputs to
the valuation of an asset or liability.
SFAS No. 157 applies where other accounting pronouncements require
or permit fair value measurements. In February 2008,
the FASB issued FASB Staff Position No. 1572, Effective Date of FASB
Statement No. 157 (FSP 1572), which permits the deferral of the
effective date of SFAS No. 157 to fiscal years beginning after November 15,
2008 for all nonfinancial assets and liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a
recurring basis. The Company adopted the
provisions of SFAS No. 157 for financial assets and liabilities recognized
or disclosed at fair value on a recurring and nonrecurring basis as of January 1,
2008. Consistent with the provisions of
FSP 1572, the Company decided to defer the adoption of SFAS No. 157 for
nonfinancial assets and liabilities measured at fair value on a nonrecurring
basis until January 1, 2009. The
adoption of SFAS No. 157 did not have a material effect on the Companys
results of operations or financial position (see Note 4).
SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115 (SFAS
No. 159)
In
February 2007, the FASB issued SFAS No. 159 which provides reporting
entities, on an ongoing basis, an option to report selected financial assets,
including investment securities, and financial liabilities, including most
insurance contracts, at fair value through earnings. SFAS No. 159 establishes presentation
and disclosure requirements designed to facilitate comparisons between
companies that choose different measurement alternatives for similar types of
financial assets and liabilities. The
standard also requires additional information to aid financial statement users
understanding of the impacts of a reporting entitys decision to use fair value
on its earnings and requires entities to display, on the face of the statement
of financial position, the fair value of those assets and liabilities for which
the reporting entity has chosen to measure at fair value. SFAS No. 159 was effective as of the
beginning of a reporting entitys first fiscal year beginning after November 15,
2007. The Company did not apply the fair
value option to any existing financial assets or liabilities as of January 1,
2008. Consequently, the initial adoption
of SFAS No. 159 had no impact on the Companys results of operations or
financial position.
FASB
Staff Position No. FIN 391, Amendment of FASB Interpretation No. 39
(FSP FIN 391)
In
April 2007, the FASB issued FSP FIN 391, which amends FASB Interpretation
No. 39, Offsetting of Amounts Related to Certain Contracts. FSP FIN 391 replaces the terms conditional
contracts and exchange contracts with the term derivative instruments and
requires a reporting entity to offset fair value amounts recognized for the
right to reclaim cash collateral or the obligation to return cash collateral
against fair value amounts recognized for derivative instruments executed with
the same counterparty under the same master netting arrangement that have been
offset in the statement of financial position. FSP FIN 391 was effective for
fiscal years beginning after November 15, 2007, with early adoption
permitted. The adoption of FSP FIN 391
did not have a material impact on the Companys results of operations or
financial position.
Pending accounting standards
SFAS No. 141(R), Business
Combinations (SFAS No. 141R)
In
December 2007, the FASB issued SFAS No. 141R which replaces SFAS No. 141,
Business Combinations (SFAS No. 141).
Among other things, SFAS No. 141R broadens the scope of SFAS No. 141
to include all transactions where an acquirer obtains control of one or more
other businesses; retains the guidance to recognize intangible assets
separately from goodwill; requires, with limited exceptions, that all assets acquired
and liabilities assumed, including certain of those that arise from contractual
contingencies, be measured at their acquisition date fair values; requires most
acquisition and restructuringrelated costs to be expensed as incurred;
requires that step acquisitions, once control is acquired, to be recorded at
the full amounts of the fair values of the identifiable assets, liabilities and
the noncontrolling interest in the acquiree; and replaces the reduction of
asset values and recognition of negative goodwill with a requirement to
recognize a gain in earnings. The
provisions of SFAS No. 141R are effective for fiscal years beginning after
December 15, 2008 and are to be applied prospectively only. Early adoption is not permitted. The Company
will apply the provisions of SFAS 141R as required when effective.
6
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51 (SFAS No. 160)
In
December 2007, the FASB issued SFAS No. 160 which clarifies that a
noncontrolling interest in a subsidiary is that portion of the subsidiarys
equity that is attributable to owners of the subsidiary other than its parent
or parents affiliates. Noncontrolling
interests are required to be reported as equity in the consolidated financial
statements and as such net income will include amounts attributable to both the
parent and the noncontrolling interest with disclosure of the amounts
attributable to each on the face of the consolidated statement of
operations. SFAS No. 160 requires
that all changes in a parents ownership interest in a subsidiary when control
of the subsidiary is retained, be accounted for as equity transactions. In contrast, SFAS No. 160 requires a
parent to recognize a gain or loss in net income when control over a subsidiary
is relinquished and the subsidiary is deconsolidated, as well as provide certain
associated expanded disclosures. SFAS No. 160
is effective as of the beginning of a reporting entitys first fiscal year
beginning after December 15, 2008.
Early adoption is prohibited.
SFAS No. 160 requires prospective application as of the beginning
of the fiscal year in which the standard is initially applied, except for the
presentation and disclosure requirements which are to be applied
retrospectively for all periods presented.
The adoption of SFAS No. 160 is not expected to have a material effect
on the Companys results of operations or financial position.
SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133 (SFAS No. 161)
In
March 2008, the FASB issued SFAS No. 161, which amends and expands
the disclosure requirements for derivatives currently accounted for in
accordance with SFAS No. 133. The new disclosures are designed to
enhance the understanding of how and why an entity uses derivative instruments
and how derivative instruments affect an entitys financial position, results
of operations, and cash flows. The standard requires, on a quarterly
basis, quantitative disclosures about the potential cash outflows associated
with the triggering of creditrelated contingent features, if any; tabular
disclosures about the classification and fair value amounts of derivative
instruments reported in the statement of financial position; disclosure of the
location and amount of gains and losses on derivative instruments reported in
the statement of operations; and qualitative information about how and why an
entity uses derivative instruments and how derivative instruments and related
hedged items affect the entitys financial statements. SFAS No. 161
is effective for fiscal periods beginning after November 15, 2008, and is
to be applied on a prospective basis only. SFAS No. 161 affects
disclosures and therefore will not impact the Companys results of operations
or financial position.
2.
Earnings per share
Basic earnings per share is computed based on
the weighted average number of common shares outstanding. Diluted earnings per share is computed based
on the weighted average number of common and dilutive potential common shares
outstanding. For Allstate, dilutive
potential common shares consist of outstanding stock options and restricted
stock units.
7
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The computation of basic and diluted earnings
per share is presented in the following table.
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
($ in millions, except per
share data)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25
|
|
$
|
1,403
|
|
$
|
373
|
|
$
|
2,898
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
549.6
|
|
604.1
|
|
554.2
|
|
610.4
|
|
Effect of dilutive potential securities:
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
1.0
|
|
2.9
|
|
0.9
|
|
3.1
|
|
Unvested restricted stock units
|
|
2.3
|
|
1.8
|
|
2.1
|
|
1.7
|
|
Weighted average common and dilutive
potential common shares outstanding
|
|
552.9
|
|
608.8
|
|
557.2
|
|
615.2
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share Basic:
|
|
$
|
0.05
|
|
$
|
2.33
|
|
$
|
0.67
|
|
$
|
4.75
|
|
Earnings per share Diluted:
|
|
$
|
0.05
|
|
$
|
2.30
|
|
$
|
0.67
|
|
$
|
4.71
|
|
The effect of dilutive potential securities
does not include the options with exercise prices that exceed the average
market price of Allstate common shares during the period or for which the
unrecognized compensation cost would have an antidilutive effect. Options to purchase 17.6 million and 4.1
million Allstate common shares, with exercise prices ranging from $48.01 to
$65.38 and $52.23 to $65.38, were outstanding at June 30, 2008 and 2007,
respectively, but were not included in the computation of diluted earnings per
share for the sixmonth periods.
3.
Supplemental Cash Flow Information
Non
cash investment exchanges and modifications, which
primarily reflect refinancings of fixed income securities and mergers completed
with equity securities and limited partnerships, totaled $20 million and $60
million for the six
month
periods ended June 30, 2008 and 2007, respectively.
Liabilities for collateral received in conjunction with the Companys
securities lending and other business activities and for funds received from
the Companys security repurchase business activities are reported in either
other liabilities and accrued expenses or other invested assets as
permitted under FSP FIN 39-1
in the Condensed Consolidated Statements of
Financial Position. The accompanying
cash flows are included in cash flows from operating activities in the
Condensed Consolidated Statements of Cash Flows along with the activities
resulting from management of the proceeds, which are as follows:
|
|
Six months ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
Net change in fixed income securities
|
|
$
|
399
|
|
$
|
(799
|
)
|
Net change in shortterm investments
|
|
82
|
|
(547
|
)
|
Operating cash flow provided (used)
|
|
481
|
|
(1,346
|
)
|
Net change in cash
|
|
|
|
2
|
|
Net change in proceeds managed
|
|
$
|
481
|
|
$
|
(1,344
|
)
|
|
|
|
|
|
|
Liabilities for collateral and security
repurchase, beginning of year
|
|
$
|
(3,461
|
)
|
$
|
(4,144
|
)
|
Liabilities for collateral and security
repurchase, end of period
|
|
(2,980
|
)
|
(5,488
|
)
|
Operating cash flow (used) provided
|
|
$
|
(481
|
)
|
$
|
1,344
|
|
8
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Fair Value of Financial Assets and Financial
Liabilities
The measurement basis for
a significant amount of the Companys financial assets is fair value. Financial
instruments measured at fair value on a recurring basis include:
Financial
Assets
Primarily investments including U.S.
treasuries, U.S. equities, international equities, money market funds,
corporates, municipals, U.S. government and agencies, commercial mortgagebacked
securities (CMBS), preferred stock, mortgagebacked securities (MBS),
foreign governments, assetbacked securities (ABS), commercial paper,
derivatives (exchange traded and overthecounter (OTC)), and separate
account assets.
Financial
Liabilities
Primarily freestanding derivatives
(exchange listed and OTC) and derivatives embedded in certain contractholder
liabilities in the Allstate Financial segment.
Financial instruments
measured at fair value on a nonrecurring basis include:
Financial
Assets
Primarily mortgage loans and other
investments writtendown to fair value in connection with recognizing otherthantemporary
impairments.
Financial
Liabilities
Includes certain reserves on a closed block
of policies expected to be transferred through a future reinsurance agreement
to an unrelated third party.
SFAS
No. 157 is effective for fiscal years beginning after November 15,
2007. The Company adopted the provisions of SFAS No. 157 as of January 1,
2008 for its financial assets and financial liabilities that are measured at
fair value. SFAS No. 157:
·
Defines fair value 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,
and establishes a framework for measuring fair value;
·
Establishes a three
level hierarchy for fair
value measurements based upon the transparency of inputs to the valuation as of
the measurement date;
·
Expands disclosures about
financial instruments measured at fair value.
In determining fair value, the Company principally uses the market
approach which generally utilizes market 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. SFAS
No. 157 establishes a hierarchy for inputs used in determining fair value
that maximize the use of observable inputs and minimizes the use of
unobservable inputs by requiring that observable inputs be used when
available. Certain financial 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, and
thus are only categorized in the fair value hierarchy when held at fair value
on a nonrecurring basis. In addition,
equity options embedded in fixed income securities are not disclosed in the
hierarchy with freestanding derivatives as the embedded derivatives are
presented as combined instruments in fixed income securities.
Observable inputs are
those used by market participants in valuing financial instruments that are
developed based on market data obtained from independent sources. In the absence of sufficient observable
inputs, unobservable inputs reflect the Companys estimates of the assumptions
market participants would use in valuing financial assets and financial
liabilities and are developed based on the best information available in the
circumstances.
Pursuant to SFAS No. 157,
fair value is a marketbased measure, considered from the perspective of a
market participant who owns an asset or owes a liability. Accordingly, when market observable data is
not readily available, the Companys own assumptions are set to reflect those
that market participants would be presumed to use in pricing the asset or
liability at the measurement date. 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.
This condition could cause an instrument to be reclassified from Level 1
to Level 2, or from Level 2 to Level 3.
9
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial assets and
financial liabilities recorded on the Condensed Consolidated Statements of
Financial Position at fair value are categorized based on the reliability of
inputs to the valuation techniques as follows:
Level 1
Financial assets and financial 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
Financial assets and financial 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 nonactive markets; or
|
c)
|
Valuation models whose
inputs are observable, directly or indirectly, for substantially the full
term of the asset or liability
|
Level 3
Financial assets and financial 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. These inputs may reflect the Companys
estimates of the assumptions that market participants would use in valuing the
financial assets and financial 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, inputs used to measure fair value
fall into different levels of the fair value hierarchy. In those
instances, for disclosure purposes, the level in the fair value hierarchy
within which the fair value measurement is categorized is determined based on
the lowest level input that is significant to the fair value measurement in
its entirety.
Summary of Significant Valuation
Techniques for Financial Assets and Financial Liabilities on a Recurring Basis
Level 1
Measurements
Fixed Income Securities:
U.S. treasuries are in Level 1 and 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:
Corporate,
including privately placed:
Valued based
on inputs including quoted prices for identical or similar assets in markets
that are not active. Also includes
privately placed securities totaling $4.4 billion that are valued based on marketobservable
external ratings from independent third party rating agencies.
Municipal:
Externally rated municipals are valued based on inputs including quoted
prices for identical or similar assets in markets that are not active. Included in municipals are $89 million of
auction rate securities (ARS) other than those backed by student loans. ARS backed by student loans are included in
Level 3.
U.S.
Government and Agencies:
Valued based on inputs
including quoted prices for identical or similar assets in markets that are not
active.
CMBS:
Valuation is principally based on inputs including quoted prices for
identical or similar assets in markets that are not active and are categorized
as Level 2.
Preferred
Stock; MBS; Foreign Government; ABS credit card and auto loans:
Valued based on inputs including quoted prices for identical or similar
assets in markets that are not active.
10
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Equity Securities
:
Valued based on inputs including quoted prices for identical or similar
assets in markets that are not active.
Shortterm:
Commercial paper and other shortterm are valued based on inputs including
amortized cost, which approximates fair value, and quoted prices for identical
or similar assets in markets that are not active.
Other Investments:
Freestanding exchange listed derivatives that are not actively traded
are valued based on quoted prices for identical instruments in markets that are
not active.
OTC derivatives including
interest rate swaps, foreign currency swaps, foreign exchange forward
contracts, certain credit default swaps, and commodity swaps are valued using
models that rely on inputs such as interest rate yield curves, currency rates,
counterparty credit risk, and commodity prices 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:
Corporate:
Valued based on nonbinding broker quotes and are categorized as Level
3.
Corporate
Privately Placed Securities:
Valued based
on nonbinding broker quotes and models that are widely accepted in the financial services industry and use internally
assigned credit ratings as inputs and instrument specific inputs. Instrument specific inputs used in
internal fair value determinations include: coupon rate, weighted average life,
sector of the issuer and call provisions.
Privately placed securities are categorized as Level 3 as a result of the significance of nonmarket observable inputs. The $11.4 billion of privately placed fixed
income securities included in Level 3 comprise $9.9 billion valued using an
internal model and $1.5 billion valued using nonbinding broker quotes. The
internally modeled securities are valued based on internal ratings, which are
not observable in the market. Multiple
internal ratings comprise a National Association of Insurance
Commissioners (NAIC) rating category
and when used in the internal model provide a more refined determination of
fair value. The Companys internal
ratings are primarily consistent with the NAIC ratings which are generally
updated annually.
ABS RMBS;
Alt-A Residential Mortgagebacked Securities (Alt-A):
ABS RMBS and Alt-A are principally valued based on inputs including
quoted prices for identical or similar assets in markets that exhibit less
liquidity relative to those markets supporting Level 2 fair value measurements. Certain ABS RMBS and Alt-A are valued based
on nonbinding 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, all ABS RMBS and Alt-A are categorized as Level 3.
Other
CDO; ABS CDO:
Valued based on nonbinding 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
CLO, ABS CDO, and Synthetic CDO are categorized as Level 3.
CMBS; Commercial Real Estate
Collateralized Debt Obligations (CRE CDO):
CRE CDO, which
are reported as CMBS, and other CMBS, are valued based on nonbinding broker
quotes and are categorized as Level 3.
Municipals:
Certain distressed municipal securities for which valuation is based on
valuation models that are widely accepted in the financial services industry
and require projections of future cash flows that are not marketobservable are
included in Level 3. Included in this
category are $1.9 billion of ARS that are backed by student loans. ARS backed by student loans are valued based
on a discounted cash flow model with certain inputs to the valuation model that
are significant to the valuation, but
are not market observable, including estimates of future coupon rates if
auction failures continue, maturity assumptions, and illiquidity premium.
11
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other Investments:
Certain freestanding OTC derivatives, such as caps, floors, certain
credit default swaps and OTC options (including swaptions), are valued using
valuation models that are widely accepted in the financial services
industry. Inputs include nonmarket
observable inputs such as volatility assumptions that are significant to the
valuation of the instruments.
Contractholder Funds:
Derivatives embedded in annuity contracts are valued internally using
models widely accepted in the financial services industry that determine a single best estimate of fair
value for a block of contractholder liabilities that contain certain embedded
derivatives. The models use
stochastically determined cash flows based on the contractual elements of
embedded derivatives and other applicable market data. These are categorized as Level 3 as a result of the significance of nonmarket observable inputs.
Financial Assets and Financial
Liabilities on a Non-recurring Basis
Mortgage loans, limited
partnerships and other investments writtendown to fair value in connection
with recognizing otherthantemporary impairments are primarily valued using
valuation models that are widely accepted in the financial services
industry. Inputs include nonmarket
observable inputs such as credit spreads.
At June 30, 2008, the fair value of mortgage loans, limited
partnerships and other investments totaled $282 million and were categorized as
Level 3.
Reserves
on a closed block of policies expected to be transferred through a future
reinsurance agreement to an unrelated third party are valued based on
significant nonobservable inputs. At June 30,
2008, the fair value of Reserves for lifecontingent contract benefits on a
closed block of policies totaled $89 million and were categorized as Level 3.
The
following table summarizes the Companys financial assets and financial
liabilities measured at fair value on a recurring and nonrecurring basis as of
June 30, 2008:
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Other
Valuations
and
|
|
Balance as of
|
|
($ in millions)
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Netting
|
|
June 30, 2008
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
875
|
|
$
|
60,062
|
|
$
|
22,287
|
|
|
|
$
|
83,224
|
|
Equity securities
|
|
3,968
|
|
621
|
|
75
|
|
|
|
4,664
|
|
Short-term investments:
|
|
895
|
|
7,797
|
|
|
|
|
|
8,692
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding derivatives
|
|
|
|
601
|
|
59
|
|
|
|
660
|
|
Total recurring basis assets
|
|
5,738
|
|
69,081
|
|
22,421
|
|
|
|
97,240
|
|
Nonrecurring basis
|
|
|
|
|
|
282
|
|
|
|
282
|
|
Valued at cost, amortized cost or using the equity method
|
|
|
|
|
|
|
|
$
|
16,495
|
|
16,495
|
|
Counterparty and cash collateral netting (1)
|
|
|
|
|
|
|
|
(414
|
)
|
(414
|
)
|
Total investments
|
|
5,738
|
|
69,081
|
|
22,703
|
|
16,081
|
|
113,603
|
|
Separate account assets
|
|
12,438
|
|
|
|
|
|
|
|
12,438
|
|
Other assets
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
Total financial assets
|
|
$
|
18,177
|
|
$
|
69,081
|
|
$
|
22,705
|
|
$
|
16,081
|
|
$
|
126,044
|
|
% of Total financial assets
|
|
14.4
|
%
|
54.8
|
%
|
18.0
|
%
|
12.8
|
%
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder funds:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives embedded in annuity contracts
|
|
$
|
|
|
$
|
(50
|
)
|
$
|
(20
|
)
|
|
|
$
|
(70
|
)
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding derivatives
|
|
|
|
(424
|
)
|
(78
|
)
|
|
|
(502
|
)
|
Nonrecurring basis
|
|
|
|
|
|
(89
|
)
|
|
|
(89
|
)
|
Counterparty and cash collateral netting (1)
|
|
|
|
|
|
|
|
$
|
263
|
|
263
|
|
Total financial liabilities
|
|
$
|
|
|
$
|
(474
|
)
|
$
|
(187
|
)
|
$
|
263
|
|
$
|
(398
|
)
|
% of Total financial liabilities
|
|
0.0
|
%
|
119.1
|
%
|
47.0
|
%
|
(66.1
|
)%
|
100.0
|
%
|
(1)
|
In
accordance with FSP FIN 39
1, the Company nets all fair value amounts recognized for derivative
instruments and fair value amounts recognized for the right to reclaim cash
collateral or the obligation to return cash collateral executed with the
same counterparty under a master netting agreement. At June 30,
2008, the right to reclaim cash collateral was offset by securities held, and
the obligation to return collateral was $151 million.
|
12
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As required by SFAS No. 157,
when the inputs used to measure fair value fall within different levels of the
hierarchy, the level within which the fair value measurement is categorized is
based on the lowest level input that is significant to the fair value
measurement in its entirety. Thus, a
Level 3 fair value measurement may include inputs that are observable (Level 1
or Level 2) and unobservable (Level 3).
Gains and losses for such assets and liabilities categorized within the
Level 3 table may include changes in fair value that are attributable to both
observable inputs (Level 1 and Level 2) and unobservable inputs (Level 3). Net transfers in and/or out of Level 3 are
reported as having occurred at the beginning of the period; therefore, all
realized and unrealized gains and losses on these securities for the period are
reflected in the table below. Further,
it should be noted that the following table does not take into consideration
the effect of offsetting Level 1 and Level 2 financial instruments entered into
that economically hedge certain exposures to the Level 3 positions.
The following table
provides a summary of changes in fair value during the threemonth period ended
June 30, 2008 of Level 3 financial assets and financial liabilities held
at fair value on a recurring basis at June 30, 2008.
|
|
|
|
Total realized and unrealized
Gains (Losses) included in:
|
|
|
|
|
|
|
|
Total
Gains (Losses)
included in
|
|
($ in millions)
|
|
Balance as of
March 31, 2008
|
|
Net Income (1)
|
|
OCI on
Statement of
Financial
Position
|
|
Purchases,
Sales, Issuances
and Settlements,
net
|
|
Net
Transfers In
and/or (Out)
of Level 3
|
|
Balance as of
June 30, 2008
|
|
Net Income for
Instruments
Still Held at
June 30, 2008 (4)
|
|
Financial
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
securities
|
|
$
|
22,566
|
|
$
|
(826
|
)
|
$
|
258
|
|
$
|
(1,223
|
)
|
$
|
1,512
|
|
$
|
22,287
|
|
$
|
(801
|
)
|
Equity securities
|
|
128
|
|
(4
|
)
|
(3
|
)
|
36
|
|
(82
|
)
|
75
|
|
(2
|
)
|
Other
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing
derivatives, net
|
|
(39
|
)
|
10
|
|
|
|
10
|
|
|
|
(19
|
)(2)
|
41
|
|
Total
investments
|
|
22,655
|
|
(820
|
)
|
255
|
|
(1,177
|
)
|
1,430
|
|
22,343
|
(3)
|
(762
|
)
|
Other assets
|
|
2
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
Total
recurring Level 3 financial assets
|
|
$
|
22,657
|
|
$
|
(820
|
)
|
$
|
255
|
|
$
|
(1,177
|
)
|
$
|
1,430
|
|
$
|
22,345
|
|
$
|
(762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder
funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
embedded in annuity contracts
|
|
$
|
(10
|
)
|
$
|
(11
|
)
|
$
|
|
|
$
|
1
|
|
$
|
|
|
$
|
(20
|
)
|
$
|
(11
|
)
|
Total
recurring Level 3 financial liabilities
|
|
$
|
(10
|
)
|
$
|
(11
|
)
|
$
|
|
|
$
|
1
|
|
$
|
|
|
$
|
(20
|
)
|
$
|
(11
|
)
|
(1)
|
The amounts
above total $(831) million and are reported in the Condensed Consolidated
Statements of Operations as follows: $(834) million in
Realized capital gains and losses; $15
million in Net investment income; $(1) million in Interest credited to
contractholder funds; and $(11) million in Life and annuity contract benefits.
|
|
|
(2)
|
Comprises
$59 million of financial assets and $(78) million of financial liabilities.
|
|
|
(3)
|
Comprises
$22.42 billion of investments and $(78) million of freestanding derivatives
included in financial liabilities.
|
|
|
(4)
|
The amounts
above represent gains and losses included in net income for the period of
time that the financial asset or financial liability was determined to be in
Level 3. These gains and losses total $(773) million and are reported in the
Condensed Consolidated Statements of Operations as follows: $(777) million in
Realized capital
gains and losses; $15 million in Net investment income; and $(11) million in
Life and annuity contract benefits.
|
13
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table
provides a summary of changes in fair value during the sixmonth period ended June 30,
2008 of Level 3 financial assets and financial liabilities held at fair value
on a recurring basis at June 30, 2008.
|
|
|
|
Total realized and unrealized
Gains (Losses) included in:
|
|
|
|
|
|
|
|
Total
Gains (Losses)
included in
|
|
($ in millions)
|
|
Balance as of
January 1,
2008
|
|
Net Income (1)
|
|
OCI on
Statement of
Financial
Position
|
|
Purchases,
Sales, Issuances
and Settlements,
net
|
|
Net
Transfers In
and/or (Out)
of Level 3
|
|
Balance as of
June 30, 2008
|
|
Net Income for
Instruments
Still Held at
June 30, 2008 (4)
|
|
Financial
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
securities
|
|
$
|
24,372
|
|
$
|
(1,159
|
)
|
$
|
(719
|
)
|
$
|
(1,899
|
)
|
$
|
1,692
|
|
$
|
22,287
|
|
$
|
(1,136
|
)
|
Equity securities
|
|
129
|
|
(5
|
)
|
(9
|
)
|
49
|
|
(89
|
)
|
75
|
|
(3
|
)
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing
derivatives, net
|
|
10
|
|
(42
|
)
|
|
|
13
|
|
|
|
(19
|
)(2)
|
3
|
|
Total
investments
|
|
24,511
|
|
(1,206
|
)
|
(728
|
)
|
(1,837
|
)
|
1,603
|
|
22,343
|
(3)
|
(1,136
|
)
|
Other assets
|
|
2
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
Total recurring
Level 3 financial assets
|
|
$
|
24,513
|
|
$
|
(1,206
|
)
|
$
|
(728
|
)
|
$
|
(1,837
|
)
|
$
|
1,603
|
|
$
|
22,345
|
|
$
|
(1,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder
funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
embedded in annuity contracts
|
|
$
|
4
|
|
$
|
(25
|
)
|
$
|
|
|
$
|
1
|
|
$
|
|
|
$
|
(20
|
)
|
$
|
(25
|
)
|
Total recurring
Level 3 financial liabilities
|
|
$
|
4
|
|
$
|
(25
|
)
|
$
|
|
|
$
|
1
|
|
$
|
|
|
$
|
(20
|
)
|
$
|
(25
|
)
|
(1)
|
The amounts
above total $(1.23) billion and are reported in the Condensed Consolidated
Statements of Operations as follows: $(1.23) billion in
Realized capital gains and losses; $28
million in Net investment income; $(4) million in Interest credited to
contractholder funds; and $(25) million in Life and annuity contract benefits.
|
|
|
(2)
|
Comprises
$59 million of financial assets and $(78) million of financial liabilities.
|
|
|
(3)
|
Comprises
$22.42 billion of investments and $(78) million of freestanding derivatives
included in financial liabilities.
|
|
|
(4)
|
The amounts
above represent gains and losses included in net income for the period of
time that the financial asset or financial liability was determined to be in
Level 3. These gains and losses total $(1.16) billion and are reported in the
Condensed Consolidated Statements of Operations as follows: $(1.16) billion in
Realized capital
gains and losses; $28 million in Net investment income; $(1) million in
Interest credited to contractholder funds; and $(25) million in Life and
annuity contract benefits.
|
5. Reserve for Propert
y
L
iability Insurance Claims and Claims Expense
The
Company establishes reserves for claims and claims expense (loss) on reported
and unreported claims of insured losses.
The Companys reserving process takes into account known facts and
interpretations of circumstances and factors including the Companys 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, law changes, court decisions, changes to
regulatory requirements 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, 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 (IBNR) 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 managements 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 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 Statement of Financial Position based on available facts,
technology, laws and regulations.
14
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Reinsurance
Property
liability insurance premiums
earned and life and annuity premiums and contract charges have been reduced by
the reinsurance premium ceded amounts shown in the following table.
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Propertyliability insurance premiums earned
|
|
$
|
294
|
|
$
|
349
|
|
$
|
624
|
|
$
|
696
|
|
Life and annuity premiums and contract charges
|
|
225
|
|
244
|
|
459
|
|
477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
liability
insurance claims and claims expense and life and annuity contract benefits and
interest credited to contractholder funds have been reduced by the reinsurance
recovery amounts shown in the following table.
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Property-liability insurance claims and claims expense
|
|
$
|
47
|
|
$
|
99
|
|
$
|
120
|
|
$
|
203
|
|
Life and annuity contract benefits
|
|
169
|
|
172
|
|
362
|
|
318
|
|
Interest credited to contractholder funds
|
|
8
|
|
11
|
|
18
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PropertyLiability
During the second
quarter, the Company entered into several reinsurance agreements effective in
June, 2008, including a Texas agreement that provides for coverage for Allstate
Protection personal property excess catastrophe losses in Texas for hurricane
catastrophe losses effective June 18, 2008 to June 17, 2011, and four
separate agreements for Allstate Floridian and its subsidiaries (Allstate
Floridian) that provide coverage for personal property excess catastrophe
losses in Florida effective June 1, 2008 to May 31, 2009. The Florida agreements coordinate coverage with
the Florida Hurricane Catastrophe Fund.
7. 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 postexit
rent expenses in connection with these programs, and noncash charges resulting
from pension benefit payments made to agents in connection with the 1999
reorganization of Allstates multiple agency programs to a single exclusive
agency program and the Companys 2006 voluntary termination offer. The expenses related to these activities are
included in the Condensed Consolidated Statements of Operations as
restructuring and related charges, and totaled $(5) million and $4 million
for the threemonth periods ended June 30, 2008 and 2007, respectively,
and $(6) million and $3 million for the sixmonth periods ended June 30,
2008 and 2007, respectively.
The following table illustrates the changes
in the restructuring liability during the sixmonth period ended June 30,
2008:
($ in millions)
|
|
Employee
costs
|
|
Exit
costs
|
|
Total
liability
|
|
Balance at the beginning of the year
|
|
$
|
23
|
|
$
|
2
|
|
$
|
25
|
|
Expense incurred
|
|
10
|
|
|
|
10
|
|
Adjustments to liability
|
|
(13
|
)
|
|
|
(13
|
)
|
Payments applied against liability
|
|
(8
|
)
|
|
|
(8
|
)
|
Balance at the end of the period
|
|
$
|
12
|
|
$
|
2
|
|
$
|
14
|
|
The payments applied against the liability
for employee costs primarily reflect severance costs.
15
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. 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
purchase such coverage from private insurers.
Because of the Companys 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 Companys results of operations.
Guarantees
The Company provides residual value guarantees on Company leased
automobiles. If all outstanding leases
were terminated effective June 30, 2008, the Companys maximum obligation
pursuant to these guarantees, assuming the automobiles have no residual value,
would be $19 million at June 30, 2008.
The remaining term of each residual value guarantee is equal to the term
of the underlying lease that range from less than one year to three years. Historically, the Company has not made any
material payments pursuant to these 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 referenced
entities. In the event all such specified
credit events were to occur, the Companys maximum amount at risk on these
fixed income securities, as measured by the amount of the aggregate initial
investment, was $207 million at June 30, 2008. The obligations associated with these fixed
income securities expire at various times during the next six years.
Related to the disposal
through reinsurance of substantially all of Allstate Financials variable
annuity business to Prudential Financial, Inc. and its subsidiary in 2006,
the Company and its consolidated subsidiaries, ALIC and Allstate Life Insurance
Company of New York (ALNY), have agreed to indemnify Prudential for certain
preclosing contingent liabilities (including extracontractual 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
postclosing liabilities that may arise from the acts of ALIC, ALNY and their
agents, including in connection with ALICs and ALNYs 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, in accordance with the
provisions of SFAS No. 113 Accounting and Reporting for Reinsurance of
ShortDuration and LongDuration Contracts.
Management does not believe this agreement will have a material adverse
effect on results of operations, cash flows or financial position of the
Company.
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 June 30, 2008.
16
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Regulation
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,
restrict the ability of insurers to cancel or nonrenew 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 and otherwise expand overall regulation of insurance products and
the insurance industry. The ultimate
changes and eventual effects of these initiatives on the Companys business, if
any, are uncertain.
The Florida Office of
Insurance Regulation (OIR) filed an Immediate Final Order (IFO) with
respect to ten affiliated Allstate companies on January 17, 2008,
suspending their certificates of authority in Florida and ordering them to
discontinue transacting any new insurance business in Florida until all
requested documents were produced in accordance with previously issued OIR
subpoenas. The subpoenas were issued in connection with the investigation of
residential property insurance rate practices but sought a wide range of
information. The IFO order allowed the
companies to continue all of their existing insurance business and renewals of
that insurance; only the writing of new insurance policies was prohibited. On January 18, 2008, the companies filed
an emergency motion for immediate relief with the First District Court of
Appeal of the State of Florida. The
Court granted the motion and stayed the order and subsequently upheld the stay
pending a final disposition on the merits.
On May 16, 2008, the OIR stayed enforcement of its IFO, relying on
the companies submission of an affidavit certifying that the companies have
complied with Florida law by providing documents requested by the OIR. That same day, the companies resumed writing
new property and casualty business. In June 2008,
the Florida Supreme Court denied the companies request to review the First
District Court of Appeals ruling that the OIR had the authority to issue the
IFO. The companies are abiding by the
Courts decision. In February 2008,
the OIR filed an administrative complaint against the companies regarding the
response to the subpoenas and their rate filing certification process. The filing of this complaint provides the
companies with an opportunity for an evidentiary hearing, which was required by
Florida law after the OIR issued the IFO.
Additionally, following hearings in February 2008 regarding
residential property insurance rate practices before the Florida Senate Select
Committee on Property Insurance Accountability, the Committee submitted a
request to the companies to produce certain documents. The companies have provided responsive
documents to both the OIR and the Committee.
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 the Proceedings subsection 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 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 multistate 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 on these matters may also 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.
17
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
·
In the lawsuits, plaintiffs seek a variety of
remedies including equitable relief in the form of injunctive and other
remedies and monetary relief in the form of contractual and extracontractual
damages. In some cases, the monetary
damages sought 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 Allstates
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.
·
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 Proceedings
subsection. The Company reviews these
matters on an ongoing basis and follows the provisions of SFAS No. 5, Accounting
for Contingencies, 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 Proceedings subsection 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 and may be material to the Companys
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.
Proceedings
There are a number of state and nationwide class action lawsuits
pending in various state courts challenging the legal propriety of Allstates
medical bill review processes on a number of grounds, including the manner in
which Allstate determines reasonableness and necessity. These lawsuits, which to a large degree
mirror similar lawsuits filed against other carriers in the industry, allege
these processes are used by Allstate systematically to undervalue claims. Plaintiffs seek monetary damages in the form
of contractual and extracontractual damages.
The Company denies these allegations.
One nationwide class action has been certified. The Company continues to vigorously defend
these cases.
There is a nationwide putative class action pending against Allstate
that challenges Allstates use of a vendors automated database in valuing
total loss automobiles. To a large
degree, this lawsuit mirrors similar lawsuits filed against other carriers in
the industry. Plaintiffs allege that
Allstate systematically underpays first party total loss vehicle claims. The plaintiffs are seeking actual and
punitive damages. The lawsuit is in the
early stages of discovery and Allstate is vigorously defending it.
The Company is defending a number
of matters filed in the aftermath of Hurricanes Katrina and Rita, including
individual lawsuits, and several statewide putative class action lawsuits
pending in Mississippi and Louisiana.
These matters are in various stages of development. The lawsuits and developments in litigation
arising from the hurricanes include the following:
·
The Mississippi Attorney General filed a suit
asserting that the flood exclusion found in Allstates and other insurance
companies policies is either ambiguous, unenforceable as unconscionable or
contrary to public policy, or inapplicable to the damage suffered in the wake
of Hurricane Katrina. Allstates motion
for judgment on the pleadings is pending.
·
In a putative class action in Mississippi, some
members of the Mississippi Windstorm Underwriters Association (MWUA) have
filed suit against the MWUA board members and the companies they represent,
including an Allstate subsidiary, alleging that the Board purchased
insufficient reinsurance to protect the MWUA members. Plaintiffs motion for class certification has
been denied. Discovery as to the
individual plaintiffs claims is ongoing.
18
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
·
In a putative class action in Louisiana, the federal trial court ruled
that Allstates and other insurers flood, water and negligent construction
exclusions do not preclude coverage for damage caused by flooding in the New
Orleans area to the extent it was caused by human negligence in the design,
construction and/or maintenance of the levees.
Allstate and other insurers pursued an interlocutory appeal and in June 2007
the United States Court of Appeals for the Fifth Circuit reversed the trial
courts ruling. The matter has been
remanded to the trial court for further proceedings, which have been
consolidated along with other putative class and individual actions brought
against the Company and other insurers, challenging the adjustment and
settlement of Hurricane Katrina claims.
In a case in Louisiana state court involving a similar challenge to the
flood exclusion of another carrier, the Louisiana Supreme Court issued its
ruling in April 2008 that the flood exclusion is clear and unambiguous,
and therefore valid and enforceable regardless of whether the source of the
flooding was natural or manmade. The
Louisiana Supreme Court has denied plaintiffs motion for reconsideration of
its ruling. In light of the Louisiana
Supreme Courts ruling, the federal trial court has issued an order that all
claims for insurance coverage for flood damage, where the policy has a flood
exclusion, are dismissed. The plaintiffs
bar has moved for reconsideration of the federal trial courts dismissal.
·
The Company has also been sued in a putative class action in the United
States District Court for the Western District of Louisiana. The plaintiffs allege that they were entitled
to, but did not receive, payment for general contractor overhead and profit or
that the overhead and profit they received was not adequate to compensate them
for the entire costs of a general contractor.
The Companys motion to strike the class allegations was denied and the
parties are proceeding with discovery.
Plaintiffs motion for class certification is pending.
·
The Louisiana Attorney General filed a 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 has upheld the denial of remand
motion. The matter will now proceed in
federal court.
·
The Louisiana Attorney General also has filed a lawsuit in state court
against Allstate, other insurers, a consulting company, and two computer
database companies. The lawsuit is
brought under the Louisiana Monopolies Act and generally alleges the defendants
conspired to suppress competition and thwart policyholder recoveries. The defendants removed the matter to federal
court. Plaintiffs motion to remand the
matter to state court was defeated at both the trial court and Court of Appeals
levels. The matter now will proceed in federal court.
·
Private plaintiffs have filed
qui tam
actions
under the Federal False Claims Act against Allstate and certain other insurers
in Louisiana and Mississippi federal courts regarding claims that they
administered under the federally funded National Flood Insurance Program. The basic allegations are that insurers and
engineering firms falsely or fraudulently identified the cause of Hurricane
Katrina related property damage as flood so that those claims would be paid through
the National Flood Insurance Program.
The action brought in federal court in Louisiana has been
dismissed. Plaintiffs are appealing that
dismissal. In the Mississippi action,
plaintiffs have, with the Governments consent, filed a motion to voluntarily
dismiss Allstate.
The various suits described above
seek a variety of remedies, including actual and/or punitive damages in
unspecified amounts and/or declaratory relief.
The Company has been vigorously defending these suits and other matters
related to Hurricanes Katrina and Rita.
In addition, the Company had been
providing documents to federal and state authorities conducting investigations
into the insurance industrys handling of claims in the aftermath of Hurricanes
Katrina and Rita, including a federal grand jury sitting in the Southern
District of Mississippi. With the
agreement of the respective authorities, the Company currently has suspended
the production of documents. Other
insurers have received similar subpoenas and requests for information.
Allstate is defending various lawsuits
involving worker classification issues.
These lawsuits include several certified class actions challenging the
overtime exemption claimed by the Company under the Fair Labor Standards Act or
a state wage and hour law. In these
cases, plaintiffs seek monetary relief, such as penalties and liquidated
damages, and nonmonetary relief, such as injunctive relief. These class actions mirror similar lawsuits
filed against other carriers in the industry and other employers.
Allstate is continuing to vigorously
defend its worker classification lawsuits.
19
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company is defending certain
matters relating to the Companys 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 courts 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 have 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
Companys motions for summary judgment.
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 Court along with the merits of the appeal.
·
The EEOC also filed another lawsuit in 2004 alleging age discrimination
with respect to a policy limiting the rehire of agents affected by the agency
program reorganization (the EEOC II suit).
In EEOC II, in 2006, the court granted partial summary judgment to the
EEOC. Although the court did not
determine that the Company was liable for age discrimination under the ADEA, it
determined that the rehire policy resulted in a disparate impact, reserving for
trial the determination on whether the Company had reasonable factors other
than age to support the rehire policy.
In June 2008, the Eighth Circuit Court of Appeals affirmed summary
judgment in the EEOCs favor. The
Company filed a petition for rehearing
en banc
.
·
The Company is also defending a certified class action filed by former
employee agents who terminated their employment prior to the agency program
reorganization. Plaintiffs allege that
they were constructively discharged so that Allstate could avoid paying ERISA
and other benefits offered under the reorganization. They claim that the constructive discharge
resulted from the implementation of agency standards, including mandatory
office hours and a requirement to have licensed staff available during business
hours. The court approved the form of
class notice which was sent to approximately 1,800 potential class members in November 2007. Fifteen individuals opted out. The Companys motions for judgment on the
pleadings were partially granted. In May 2008,
the Court granted summary judgment in Allstates favor on all class
claims. Plaintiffs moved for
reconsideration and in the alternative to decertify the class. Allstate opposed this motion and filed a
motion for summary judgment with respect to the remaining nonclass claim.
·
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 Allstates 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 Court along with the merits of the appeal.
In all of these various 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.
20
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Allstate is defending a certified 13state
class action challenging the method by which Allstate discloses installment
fees. The plaintiffs contend that
installment fees must be disclosed on the insurance policy itself, which would
include the declarations page, because the fees allegedly meet the legal
definition of premium. Plaintiffs seek
repayment of installment fees since October 1996. The New Mexico trial court had initially
certified the 13state class in 2005. In 2007, the class, except for New Mexico,
was set aside on appeal. In June 2008,
the New Mexico Supreme Court reinstated the 13state
class of Allstate policyholders who paid installment fees from October 1996
to present. The Court has denied the
Companys motion for reconsideration.
The Company is vigorously defending
its auto and homeowners insurance rates in administrative actions filed by the
Texas and California Departments of Insurance.
The Departments are focusing on the reasonableness of the Companys
rates for the risks to which they apply.
·
In 2004, the Company made a homeowners rate filing in Texas requesting
to reduce its rates by approximately 1.5%.
In December 2004, the Texas Commissioner of Insurance disapproved
that filing and began proceedings to disapprove the Companys then current
rates. Following an administrative
hearing process, in 2006, the Commissioner ordered the Company to reduce its
then current homeowners rates by 5% and to pay refunds on the difference plus
interest back to December 30, 2004, for which the Company has been
accruing. The Company implemented a 5%
rate decrease occurring in two stages, but challenged this 2006 refund order in
the Travis County, Texas district court.
In March 2007, the district court affirmed in whole the Texas
Commissioners rate refund order. In April 2007,
the Company appealed the judgment of the district court to the Third Court of
Appeals, Austin, Texas. In May 2008,
the Company resolved the dispute with the Commissioner. The Company has agreed to dismiss its appeal
and the Commissioner has agreed to amend his order. Instead, the Company will be required to pay
refunds in the total amount of principal and interest of $36.8 million for the
period of December 1, 2004 through April 23, 2006.
·
Allstate filed and implemented an 8% homeowners rate increase in August 2007
and immediately received an order from the Texas Commissioner of Insurance
disapproving the rate change. In
addition, in October 2007 the Commissioner ordered the Company to pay
refunds of its homeowners rates amounting to approximately 6.5% for the period
between August 20, 2007 and October 5, 2007, and refunds of
approximately 18.5% for the period following October 5, 2007, plus
interest. In May 2008, the Company
resolved this dispute with the Commissioner.
The Commissioner has agreed to vacate his refund order and vacate his disapproval
of the Companys August 2007 rate increase. The Company has agreed to provide credits or
refunds of 3% to certain policyholders for the period between August 20,
2007 and June 1, 2008, and to also reduce its current rate level by an
average of 3%, effective June 1, 2008.
·
In 2006, the Company made an automobile rate filing in California. Following a rate hearing, the California
Department of Insurance (CDI) issued an order in March 2008 directing
the Company to reduce its rates by 15.9%.
The Company implemented the rate reduction effective April 28,
2008. The Company has withdrawn its
appeal of the order.
·
In 2006, the Company made a homeowners rate filing in California. Following a rate hearing, the CDI issued an
order in July 2008 directing the Company to reduce its rates by 28.5%. The Company is complying with this order. Additionally, in May 2007, the CDI issued
an Order to Show Cause and commenced an administrative hearing seeking an order
directing Allstate to issue refunds to its California homeowners customers for
rates dating to May 2007 based upon the allegation that Allstates current
rates are excessive. The CDI has made
the decision to withdraw the Order to Show Cause.
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
amounts. These actions are based on a
variety of issues and target a range of the Companys practices. The outcome of these disputes is currently
unpredictable.
21
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
One or more of these matters could have an
adverse effect on the Companys 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, 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.
Shareholder Derivative Suit
In January 2008, a shareholder derivative action was filed,
purportedly on behalf of The Allstate Corporation, against the members of its
Board of Directors, in the United States District Court for the Northern
District of Illinois, Eastern Division.
This derivative action alleges breaches of fiduciary duties, abuse of
control, gross mismanagement, and waste of corporate assets in connection with
Allstates actions to protect certain documents from public disclosure in
litigation and regulatory proceedings.
The complaint further alleges wrongdoing with respect to Allstates
claim handling. According to the
allegations, the director defendants conspired to approve or permit these
alleged wrongs to occur and participated in efforts to conceal them from
Allstates stockholders. Plaintiff
alleges that these actions have resulted in a variety of sanctions and adverse
orders being entered against Allstate by various courts and the Florida Office
of Insurance Regulation. The complaint
seeks an unspecified amount of damages.
The defendants have moved to dismiss the complaint.
Asbestos and environmental
Allstates reserves for asbestos claims were $1.25 billion and $1.30
billion, net of reinsurance recoverables of $724 million and $752 million, at June 30,
2008 and December 31, 2007, respectively.
Reserves for environmental claims were $223 million and $232 million,
net of reinsurance recoverables of $103 million and $107 million, at June 30,
2008 and December 31, 2007, respectively.
Approximately 63% of the total net asbestos and environmental reserves
at June 30, 2008 and December 31, 2007 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 greater than those presented by other types of claims.
The ultimate cost of losses may vary materially from recorded amounts, which
are based on managements 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 collectibility of recoveries from reinsurance, retrospectively
determined premiums and other contractual agreements; and estimating the extent
and timing of any contractual liability, 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
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 cleanup costs represent insured property damage.
Management believes these issues are not likely to be resolved in the near
future, and the ultimate cost may vary materially from the amounts currently
recorded resulting in an increase 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.
22
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9.
Income Taxes
During the second quarter of 2008, the Company settled a case involving
its 2003 and 2004 federal income tax returns at the Internal Revenue Service
Appeals Office. Settlement of the
examination of these tax years resulted in a $57 million decrease to the
liability for unrecognized tax benefits, resulting in a liability balance of
$19 million at June 30, 2008.
The Company believes it is reasonably possible that the liability
balance will not significantly increase or decrease within the next twelve
months. Because of the impact of
deferred tax accounting, recognition of previously unrecognized tax benefits is
not expected to impact the effective tax rate.
The Company recognizes interest accrued related to unrecognized tax
benefits in income tax expense. During
the six months ended June 30, 2008, the balance of interest expense
accrued with respect to unrecognized tax benefits decreased to $1 million from
$7 million at January 1, 2008 due to the Appeals settlement for 2003 and
2004. $4 million of this reduction was
recognized in tax expense in the second quarter of 2008. No amounts have been accrued for penalties.
10.
Components of Net Periodic Pension and Postretirement Benefit Costs
The components of net periodic cost for the Companys pension and postretirement
benefit plans are as follows:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
37
|
|
$
|
40
|
|
$
|
73
|
|
$
|
80
|
|
Interest cost
|
|
79
|
|
77
|
|
157
|
|
155
|
|
Expected return on plan assets
|
|
(100
|
)
|
(88
|
)
|
(200
|
)
|
(176
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
Prior service costs
|
|
(1
|
)
|
|
|
(1
|
)
|
(1
|
)
|
Net loss
|
|
9
|
|
29
|
|
18
|
|
58
|
|
Settlement loss
|
|
11
|
|
11
|
|
22
|
|
22
|
|
Net periodic pension benefit cost
|
|
$
|
35
|
|
$
|
69
|
|
$
|
69
|
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefits
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
4
|
|
$
|
6
|
|
$
|
9
|
|
$
|
12
|
|
Interest cost
|
|
15
|
|
17
|
|
29
|
|
33
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
Prior service costs
|
|
1
|
|
(1
|
)
|
1
|
|
(1
|
)
|
Net (gain)
|
|
(6
|
)
|
|
|
(12
|
)
|
|
|
Net periodic postretirement benefit cost
|
|
$
|
14
|
|
$
|
22
|
|
$
|
27
|
|
$
|
44
|
|
23
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Business
Segments
Summarized
revenue data for each of the Companys business segments are as follows:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
PropertyLiability
|
|
|
|
|
|
|
|
|
|
Propertyliability insurance premiums
earned
|
|
|
|
|
|
|
|
|
|
Standard auto
|
|
$
|
4,292
|
|
$
|
4,269
|
|
$
|
8,583
|
|
$
|
8,504
|
|
Nonstandard auto
|
|
282
|
|
336
|
|
574
|
|
680
|
|
Homeowners
|
|
1,549
|
|
1,576
|
|
3,108
|
|
3,156
|
|
Other personal lines
|
|
627
|
|
641
|
|
1,249
|
|
1,288
|
|
Allstate Protection
|
|
6,750
|
|
6,822
|
|
13,514
|
|
13,628
|
|
Discontinued Lines and Coverages
|
|
|
|
|
|
|
|
|
|
Total propertyliability insurance premiums
earned
|
|
6,750
|
|
6,822
|
|
13,514
|
|
13,628
|
|
Net investment income
|
|
431
|
|
517
|
|
901
|
|
1,008
|
|
Realized capital gains and losses
|
|
(238
|
)
|
437
|
|
(432
|
)
|
881
|
|
Total PropertyLiability
|
|
6,943
|
|
7,776
|
|
13,983
|
|
15,517
|
|
|
|
|
|
|
|
|
|
|
|
Allstate Financial
|
|
|
|
|
|
|
|
|
|
Life and annuity premiums and contract
charges
|
|
|
|
|
|
|
|
|
|
Traditional life insurance
|
|
76
|
|
66
|
|
141
|
|
140
|
|
Immediate annuities with life contingencies
|
|
36
|
|
52
|
|
66
|
|
129
|
|
Accident, health and other
|
|
99
|
|
92
|
|
202
|
|
183
|
|
Total life and annuity premiums
|
|
211
|
|
210
|
|
409
|
|
452
|
|
Interestsensitive life insurance
|
|
246
|
|
224
|
|
487
|
|
447
|
|
Fixed annuities
|
|
13
|
|
19
|
|
26
|
|
37
|
|
Variable annuities
|
|
1
|
|
1
|
|
1
|
|
1
|
|
Total contract charges
|
|
260
|
|
244
|
|
514
|
|
485
|
|
Total life and annuity premiums and
contract charges
|
|
471
|
|
454
|
|
923
|
|
937
|
|
Net investment income
|
|
943
|
|
1,076
|
|
1,958
|
|
2,126
|
|
Realized capital gains and losses
|
|
(965
|
)
|
104
|
|
(1,397
|
)
|
127
|
|
Total Allstate Financial
|
|
449
|
|
1,634
|
|
1,484
|
|
3,190
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other
|
|
|
|
|
|
|
|
|
|
Service fees
|
|
3
|
|
2
|
|
5
|
|
5
|
|
Net investment income
|
|
38
|
|
41
|
|
79
|
|
71
|
|
Realized capital gains and losses
|
|
(12
|
)
|
4
|
|
(41
|
)
|
8
|
|
Total Corporate and Other before
reclassification of service fees
|
|
29
|
|
47
|
|
43
|
|
84
|
|
Reclassification of service fees (1)
|
|
(3
|
)
|
(2
|
)
|
(5
|
)
|
(5
|
)
|
Total Corporate and Other
|
|
26
|
|
45
|
|
38
|
|
79
|
|
Consolidated Revenues
|
|
$
|
7,418
|
|
$
|
9,455
|
|
$
|
15,505
|
|
$
|
18,786
|
|
(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.
24
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summarized
financial performance data for each of the Companys reportable segments are as
follows:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net income
|
|
|
|
|
|
|
|
|
|
PropertyLiability
|
|
|
|
|
|
|
|
|
|
Underwriting income
|
|
|
|
|
|
|
|
|
|
Allstate Protection
|
|
$
|
381
|
|
$
|
850
|
|
$
|
796
|
|
$
|
1,856
|
|
Discontinued Lines and Coverages
|
|
(3
|
)
|
(5
|
)
|
(10
|
)
|
35
|
|
Total underwriting income
|
|
378
|
|
845
|
|
786
|
|
1,891
|
|
Net investment income
|
|
431
|
|
517
|
|
901
|
|
1,008
|
|
Income tax expense on operations
|
|
(217
|
)
|
(415
|
)
|
(467
|
)
|
(890
|
)
|
Realized capital gains and losses, aftertax
|
|
(153
|
)
|
283
|
|
(278
|
)
|
570
|
|
PropertyLiability net income
|
|
439
|
|
1,230
|
|
942
|
|
2,579
|
|
|
|
|
|
|
|
|
|
|
|
Allstate Financial
|
|
|
|
|
|
|
|
|
|
Life and annuity premiums and contract charges
|
|
471
|
|
454
|
|
923
|
|
937
|
|
Net investment income
|
|
943
|
|
1,076
|
|
1,958
|
|
2,126
|
|
Periodic settlements and accruals on nonhedge derivative financial
instruments
|
|
7
|
|
12
|
|
16
|
|
24
|
|
Contract benefits and interest credited to contractholder funds
|
|
(994
|
)
|
(1,056
|
)
|
(2,021
|
)
|
(2,133
|
)
|
Operating costs and expenses and amortization of deferred policy
acquisition costs
|
|
(255
|
)
|
(259
|
)
|
(490
|
)
|
(493
|
)
|
Restructuring and related charges
|
|
|
|
1
|
|
|
|
1
|
|
Income tax expense on operations
|
|
(54
|
)
|
(74
|
)
|
(125
|
)
|
(152
|
)
|
Operating income
|
|
118
|
|
154
|
|
261
|
|
310
|
|
Realized capital gains and losses, aftertax
|
|
(627
|
)
|
67
|
|
(908
|
)
|
82
|
|
Deferred policy acquisition costs and deferred sales inducements
amortization relating to realized capital gains and losses, aftertax
|
|
134
|
|
(15
|
)
|
173
|
|
(15
|
)
|
Reclassification of periodic settlements and accruals on nonhedge
financial instruments, aftertax
|
|
(4
|
)
|
(7
|
)
|
(10
|
)
|
(15
|
)
|
Gain (loss) on disposition of operations, aftertax
|
|
|
|
1
|
|
(6
|
)
|
2
|
|
Allstate Financial net (loss) income
|
|
(379
|
)
|
200
|
|
(490
|
)
|
364
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other
|
|
|
|
|
|
|
|
|
|
Service fees
(1)
|
|
3
|
|
2
|
|
5
|
|
5
|
|
Net investment income
|
|
38
|
|
41
|
|
79
|
|
71
|
|
Operating costs and expenses
|
|
(93
|
)
|
(101
|
)
|
(187
|
)
|
(178
|
)
|
Income tax benefit on operations
|
|
25
|
|
29
|
|
51
|
|
52
|
|
Operating loss
|
|
(27
|
)
|
(29
|
)
|
(52
|
)
|
(50
|
)
|
Realized capital gains and losses, aftertax
|
|
(8
|
)
|
2
|
|
(27
|
)
|
5
|
|
Corporate and Other net loss
|
|
(35
|
)
|
(27
|
)
|
(79
|
)
|
(45
|
)
|
Consolidated net income
|
|
$
|
25
|
|
$
|
1,403
|
|
$
|
373
|
|
$
|
2,898
|
|
(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.
25
THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. Other
Comprehensive Income
The components of other comprehensive (loss) income
on a pre-tax and aftertax basis are as follows:
|
|
Three months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
($ in millions)
|
|
Pretax
|
|
Tax
|
|
After
tax
|
|
Pretax
|
|
Tax
|
|
After
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net holding (losses) gains arising during the period, net
of related offsets
|
|
$
|
(1,248
|
)
|
$
|
432
|
|
$
|
(816
|
)
|
$
|
(598
|
)
|
$
|
210
|
|
$
|
(388
|
)
|
Less: reclassification adjustment of realized capital gains and
losses
|
|
(1,264
|
)
|
442
|
|
(822
|
)
|
369
|
|
(129
|
)
|
240
|
|
Unrealized net capital gains and losses
|
|
16
|
|
(10
|
)
|
6
|
|
(967
|
)
|
339
|
|
(628
|
)
|
Unrealized foreign currency translation adjustments
|
|
3
|
|
(1
|
)
|
2
|
|
35
|
|
(12
|
)
|
23
|
|
Net funded status of pension and other postretirement benefit
obligation
|
|
2
|
|
(1
|
)
|
1
|
|
21
|
|
(7
|
)
|
14
|
|
Other comprehensive (loss) income
|
|
$
|
21
|
|
$
|
(12
|
)
|
9
|
|
$
|
(911
|
)
|
$
|
320
|
|
(591
|
)
|
Net income
|
|
|
|
|
|
25
|
|
|
|
|
|
1,403
|
|
Comprehensive (loss) income
|
|
|
|
|
|
$
|
34
|
|
|
|
|
|
$
|
812
|
|
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
($ in millions)
|
|
Pretax
|
|
Tax
|
|
After
tax
|
|
Pretax
|
|
Tax
|
|
After
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net holding (losses) gains arising during the period, net
of related offsets
|
|
$
|
(3,440
|
)
|
$
|
1,204
|
|
$
|
(2,236
|
)
|
$
|
(170
|
)
|
$
|
60
|
|
$
|
(110
|
)
|
Less: reclassification adjustment of realized capital gains and
losses
|
|
(1,652
|
)
|
578
|
|
(1,074
|
)
|
821
|
|
(287
|
)
|
534
|
|
Unrealized net capital gains and losses
|
|
(1,788
|
)
|
626
|
|
(1,162
|
)
|
(991
|
)
|
347
|
|
(644
|
)
|
Unrealized foreign currency translation adjustments
|
|
(22
|
)
|
8
|
|
(14
|
)
|
38
|
|
(13
|
)
|
25
|
|
Net funded status of pension and other postretirement benefit
obligation
|
|
(111
|
)
|
36
|
|
(75
|
)
|
50
|
|
5
|
|
55
|
|
Other comprehensive (loss) income
|
|
$
|
(1,921
|
)
|
$
|
670
|
|
(1,251
|
)
|
$
|
(903
|
)
|
$
|
339
|
|
(564
|
)
|
Net income
|
|
|
|
|
|
373
|
|
|
|
|
|
2,898
|
|
Comprehensive (loss) income
|
|
|
|
|
|
$
|
(878
|
)
|
|
|
|
|
$
|
2,334
|
|
26
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 statements of financial
position of The Allstate Corporation and subsidiaries (the Company) as of June 30,
2008, and the related condensed consolidated statements of operations for the
three-month and six-month periods ended June 30, 2008 and 2007, and of
cash flows for the six-month periods ended June 30, 2008 and 2007. These interim financial statements are the
responsibility of the Companys 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, 2007, 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 26, 2008, which report includes
an explanatory paragraph relating to a change in the Companys method of
accounting for uncertainty in income taxes and accounting for deferred
acquisition costs associated with internal replacements in 2007 and defined
pension and other postretirement plans in 2006, 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,
2007 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
August 5,
2008
27
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH
PERIODS ENDED JUNE 30, 2008 AND 2007
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 2007. 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 Managements 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.
Allstates goal is to reinvent protection and
retirement for the consumer. To achieve
this goal, Allstate is focused on the following operating priorities: consumer focus, operational excellence,
enterprise risk and return, and capital management.
HIGHLIGHTS
·
Net income decreased $1.38 billion to $25 million in the second quarter
of 2008 from $1.40 billion in the second quarter of 2007, and $2.53 billion to
$373 million in the first six months of 2008 from $2.90 billion in the first
six months of 2007. Net income per
diluted share decreased $2.25 to $0.05 in the second quarter of 2008 from $2.30
in the second quarter of 2007, and $4.04 to $0.67 in the first six months of
2008 from $4.71 in the first six months of 2007.
·
The Property-Liability combined ratio was 94.4 in the second quarter of
2008 compared to 87.6 in the second quarter of 2007 and 94.2 in the first six
months of 2008 compared to 86.1 in the first six months of 2007.
·
Allstate Financial had a
net loss of $379 million in the second quarter of 2008 compared to net income
of $200 million in the second quarter of 2007, and a net loss of $490 million
in the first six months of 2008 compared to net income of $364 million in the
first six months of 2007.
·
Total revenues decreased 21.5% to $7.42 billion in the second quarter of
2008 from $9.46 billion in the second quarter of 2007, and 17.5% to $15.51
billion in the first six months of 2008 from $18.79 billion in the first six
months of 2007.
·
Property-Liability premiums earned decreased 1.1% to $6.75 billion in the
second quarter of 2008 from $6.82 billion in the second quarter of 2007, and
0.8% to $13.51 billion in the first six months of 2008 from $13.63 billion in
the first six months of 2007.
·
Realized capital losses were $1.22 billion and $1.87 billion in the
second quarter and first six months of 2008, respectively, compared to realized
capital gains of $545 million and $1.02 billion in the second quarter and first
six months of 2007, respectively.
·
Investments
as of June 30, 2008 decreased 4.5% from December 31, 2007 and net
investment income decreased 13.6% and 8.3% in the second quarter and first six
months of 2008, respectively, compared to the same periods of 2007.
·
Book value per
diluted share decreased 1.3% to $35.93 as of June 30, 2008 from $36.39 as
of June 30, 2007 and decreased 6.9% from $38.58 as of December 31,
2007.
·
For the twelve
months ended June 30, 2008, return on the average of beginning and ending
period shareholders equity decreased 14.8 points to 10.2% from 25.0% for the twelve months ended June 30,
2007.
·
Stock
repurchases totaled $434 million and $858 million for the three months and six
months ended June 30, 2008, respectively.
In the first six months of 2008, we completed o
ur $4.00 billion share repurchase program
that commenced in November 2006, and commenced a $2.00 billion share
repurchase program that is expected to be completed by March 31, 2009.
28
CONSOLIDATED NET INCOME
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Property-liability insurance premiums earned
|
|
$
|
6,750
|
|
$
|
6,822
|
|
$
|
13,514
|
|
$
|
13,628
|
|
Life and annuity premiums and contract charges
|
|
471
|
|
454
|
|
923
|
|
937
|
|
Net investment income
|
|
1,412
|
|
1,634
|
|
2,938
|
|
3,205
|
|
Realized capital gains and losses
|
|
(1,215
|
)
|
545
|
|
(1,870
|
)
|
1,016
|
|
Total revenues
|
|
7,418
|
|
9,455
|
|
15,505
|
|
18,786
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
Property-liability insurance claims and claims expense
|
|
(4,776
|
)
|
(4,317
|
)
|
(9,452
|
)
|
(8,434
|
)
|
Life and annuity contract benefits
|
|
(395
|
)
|
(386
|
)
|
(792
|
)
|
(814
|
)
|
Interest credited to contractholder funds
|
|
(563
|
)
|
(673
|
)
|
(1,187
|
)
|
(1,322
|
)
|
Amortization of deferred policy acquisition costs
|
|
(959
|
)
|
(1,216
|
)
|
(2,034
|
)
|
(2,369
|
)
|
Operating costs and expenses
|
|
(728
|
)
|
(734
|
)
|
(1,520
|
)
|
(1,461
|
)
|
Restructuring and related charges
|
|
5
|
|
(4
|
)
|
6
|
|
(3
|
)
|
Interest expense
|
|
(88
|
)
|
(83
|
)
|
(176
|
)
|
(155
|
)
|
Total costs and expenses
|
|
(7,504
|
)
|
(7,413
|
)
|
(15,155
|
)
|
(14,558
|
)
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposition of operations
|
|
|
|
2
|
|
(9
|
)
|
2
|
|
Income tax benefit (expense)
|
|
111
|
|
(641
|
)
|
32
|
|
(1,332
|
)
|
Net income
|
|
$
|
25
|
|
$
|
1,403
|
|
$
|
373
|
|
$
|
2,898
|
|
|
|
|
|
|
|
|
|
|
|
Property-Liability
|
|
$
|
439
|
|
$
|
1,230
|
|
$
|
942
|
|
$
|
2,579
|
|
Allstate
Financial
|
|
(379
|
)
|
200
|
|
(490
|
)
|
364
|
|
Corporate
and Other
|
|
(35
|
)
|
(27
|
)
|
(79
|
)
|
(45
|
)
|
Net
income
|
|
$
|
25
|
|
$
|
1,403
|
|
$
|
373
|
|
$
|
2,898
|
|
PROPERTY-LIABILITY HIGHLIGHTS
·
Premiums
written, an operating measure that is defined and reconciled to premiums earned
on page 33, decreased 2.0% to $6.80 billion in the second quarter of 2008
from $6.94 billion in the second quarter of 2007, and 1.7% to $13.32 billion in
the first six months of 2008 from $13.55 billion in the first six months of
2007. Allstate brand standard auto
premiums written in the second quarter of 2008 were comparable to the second
quarter of 2007. Allstate brand standard
auto premiums written increased 0.3% to $8.03 billion in the first six months
of 2008 from $8.01 billion in the first six months of 2007. Allstate brand homeowners premiums written
decreased 0.8% to $1.53 billion in the second quarter of 2008 from $1.54
billion in the second quarter of 2007, and 1.5% to $2.72 billion in the first
six months of 2008 from $2.76 billion in the first six months of 2007.
·
Premium operating measures and statistics
contributing to the overall Allstate brand standard auto premiums written
growth were the following:
·
0.8% decrease
in policies in force (PIF) as of June 30, 2008 compared to June 30,
2007
·
0.8 point
decline in the six month renewal ratio to 89.1% in the second quarter of 2008
compared to 89.9% in the second quarter of 2007, and 0.8 point decline in the
six month renewal ratio to 89.0% in the first six months of 2008 compared to
89.8% in the first six months of 2007
·
1.4% increase
in the six month policy term average gross premium before reinsurance to $427
in the second quarter of 2008 from $421 in the second quarter of 2007, and 1.7%
increase in the six month policy
29
term
average gross premium before reinsurance to $427 in the first six months of
2008 from $420 in the first six months of 2007
·
6.7% and 10.3%
decrease in new issued applications in the second quarter and first six months
of 2008, respectively, compared to the same periods of 2007
·
Premium operating measures and statistics
contributing to the overall Allstate brand homeowners premiums written decline
were the following:
·
4.0% decrease
in PIF as of June 30, 2008 compared to June 30, 2007
·
1.0 point
decline in the twelve month renewal ratio to 86.3% in the second quarter of
2008 compared to 87.3% in the second quarter of 2007, and 0.5 point decline in
the twelve month renewal ratio to 86.4% in the first six months of 2008
compared to 86.9% in the first six months of 2007
·
1.9% increase
in the twelve month policy term average gross premium before reinsurance to
$867 in the second quarter of 2008 from $851 in the second quarter of 2007, and
2.1% increase in the twelve month policy term average gross premium before
reinsurance to $867 in the first six months of 2008 from $849 in the first six
months of 2007
·
26.1% and 27.1%
decrease in new issued applications in the second quarter and first six months
of 2008, respectively, compared to the same periods of 2007
·
The Allstate brand standard auto loss ratio increased 3.6 points to 67.1
in the second quarter of 2008 from 63.5 in the second quarter of 2007, and 2.7
points to 66.3 in the first six months of 2008 from 63.6 in the first six
months of 2007. Standard auto property damage
gross claim frequency (rate of claim occurrence per policy in force) decreased
4.2% and 3.3% in the second quarter and first six months of 2008, respectively,
from the same periods of 2007, and bodily injury gross claim frequency
decreased 7.6% and 7.0% in the second quarter and first six months of 2008,
respectively, from the same periods of 2007.
Auto property damage and bodily injury paid severities (average cost per
claim) increased 2.6% and 7.1%, respectively, in the second quarter of 2008,
and 3.4% and 7.8%, respectively, in the first six months of 2008 from the same
periods of 2007.
·
The Allstate
brand homeowners loss ratio, which includes catastrophes, increased 18.8 points
to 86.5 in the second quarter of 2008 from 67.7 in the second quarter of 2007,
and 21.9 points to 83.3 in the first six months of 2008 from 61.4 in the first
six months of 2007. Homeowner gross
claim frequency, excluding catastrophes, increased 13.7% and 7.7% in the second
quarter and first six months of 2008, respectively, from the same periods of
2007. Homeowners paid severity,
excluding catastrophes, increased 0.3% and 1.7% in the second quarter and first
six months of 2008, respectively, from the same periods of 2007.
·
Catastrophe losses
in the second quarter of 2008 totaled $698
million compared to $433 million in the second quarter of 2007 and $1.27
billion in the first six months of 2008 compared to $594 million in the first
six months of 2007. Impact of prior year
reserve reestimates on catastrophe losses was $11 million and $128 million
unfavorable in the second quarter and first six months of 2008, respectively,
compared to an unfavorable impact of $50 million and $44 million in the second
quarter and first six months of 2007, respectively.
·
Prior year
reserve reestimates totaled $9 million unfavorable, including $11 million
related to catastrophes, in the second quarter of 2008 compared to $143 million
favorable, including $50 million unfavorable related to catastrophes, in the
same period of 2007, and $110 million unfavorable, including $128 million
related to catastrophes, in the first six months of 2008 compared to $272
million favorable, including $44 million unfavorable related to catastrophes,
in the same period of 2007.
·
Underwriting income for
Property-Liability was $378 million in the second quarter of 2008 compared to
$845 million in the second quarter of 2007, and $786 million in the first six
months of 2008 compared to $1.89 billion in the first six months of 2007.
The combined ratio was 94.4 in the second quarter of 2008 compared to
87.6 in the second quarter of 2007, and 94.2 in the first six months of 2008
compared to 86.1 in the first six months of 2007. Underwriting
income, a measure not based on
accounting principles generally accepted in the United
States of America (GAAP), is defined below.
·
Investments as
of June 30, 2008 decreased 9.8% from December 31, 2007 and net
investment income decreased 16.6% and 10.6% in the second quarter and first six
months of 2008, respectively, compared to the same periods of 2007.
·
Realized capital losses were $238 million in the second quarter of 2008
compared to realized capital gains of $437 million in the second quarter of
2007, and realized capital losses were $432 million in the first six months of
2008 compared to realized capital gains of $881 million in the first six months
of 2007.
30
PROPERTY-LIABILITY OPERATIONS
Overview
Our
Property-Liability operations consist of two business segments: Allstate
Protection and Discontinued Lines and Coverages. Allstate Protection is comprised of 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 (loss), a measure that is
not based on GAAP and is reconciled to net income on page 32,
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 (loss). Underwriting income (loss) 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 investors 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
(loss) as a percentage of premiums earned.
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 p
rior 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 p
rior 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.
31
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.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions, except ratios)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written
|
|
$
|
6,803
|
|
$
|
6,939
|
|
$
|
13,317
|
|
$
|
13,548
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
6,750
|
|
$
|
6,822
|
|
$
|
13,514
|
|
$
|
13,628
|
|
Net investment income
|
|
431
|
|
517
|
|
901
|
|
1,008
|
|
Realized capital gains and losses
|
|
(238
|
)
|
437
|
|
(432
|
)
|
881
|
|
Total revenues
|
|
6,943
|
|
7,776
|
|
13,983
|
|
15,517
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
Claims and claims expense
|
|
(4,776
|
)
|
(4,317
|
)
|
(9,452
|
)
|
(8,434
|
)
|
Amortization of DAC
|
|
(1,000
|
)
|
(1,032
|
)
|
(2,011
|
)
|
(2,056
|
)
|
Operating costs and expenses
|
|
(601
|
)
|
(623
|
)
|
(1,271
|
)
|
(1,243
|
)
|
Restructuring and related charges
|
|
5
|
|
(5
|
)
|
6
|
|
(4
|
)
|
Total costs and expenses
|
|
(6,372
|
)
|
(5,977
|
)
|
(12,728
|
)
|
(11,737
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
(132
|
)
|
(569
|
)
|
(313
|
)
|
(1,201
|
)
|
Net income
|
|
$
|
439
|
|
$
|
1,230
|
|
$
|
942
|
|
$
|
2,579
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income
|
|
$
|
378
|
|
$
|
845
|
|
$
|
786
|
|
$
|
1,891
|
|
Net investment income
|
|
431
|
|
517
|
|
901
|
|
1,008
|
|
Income tax expense on operations
|
|
(217
|
)
|
(415
|
)
|
(467
|
)
|
(890
|
)
|
Realized capital gains and losses, after-tax
|
|
(153
|
)
|
283
|
|
(278
|
)
|
570
|
|
Net income
|
|
$
|
439
|
|
$
|
1,230
|
|
$
|
942
|
|
$
|
2,579
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe losses (1)
|
|
$
|
698
|
|
$
|
433
|
|
$
|
1,266
|
|
$
|
594
|
|
|
|
|
|
|
|
|
|
|
|
GAAP operating ratios
|
|
|
|
|
|
|
|
|
|
Claims and claims expense ratio
|
|
70.8
|
|
63.3
|
|
70.0
|
|
61.9
|
|
Expense ratio
|
|
23.6
|
|
24.3
|
|
24.2
|
|
24.2
|
|
Combined ratio
|
|
94.4
|
|
87.6
|
|
94.2
|
|
86.1
|
|
Effect of catastrophe losses on combined ratio
|
|
10.3
|
|
6.3
|
|
9.4
|
|
4.4
|
|
Effect of prior year reserve reestimates on combined ratio
|
|
0.1
|
|
(2.1
|
)
|
0.8
|
|
(2.0
|
)
|
Effect of restructuring and related charges on combined ratio
|
|
(0.1
|
)
|
0.1
|
|
|
|
|
|
Effect of Discontinued Lines and Coverages on combined ratio
|
|
|
|
0.1
|
|
0.1
|
|
(0.3
|
)
|
(1)
Unfavorable
reserve reestimates included in catastrophe losses totaled $11 million and $128
million in the three months and six months ended June 30, 2008,
respectively, compared to $50 million and $44 million unfavorable in the three
months and six months ended June 30, 2007
, respectively
.
32
Premiums written
,
an operating measure, is the amount of premiums charged for policies issued
during a fiscal period. Premiums earned
is a GAAP measure. Premiums are
considered earned and are included in the financial results on a pro-rata basis
over the policy period. The portion of
premiums written applicable to the unexpired terms of the policies is recorded
as unearned premiums on our Condensed Consolidated Statements of Financial
Position. A reconciliation of premiums
written to premiums earned is presented in the following table.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
Allstate Protection
|
|
$
|
6,803
|
|
$
|
6,939
|
|
13,317
|
|
13,548
|
|
Discontinued Lines and Coverages
|
|
|
|
|
|
|
|
|
|
Property-Liability premiums written
|
|
6,803
|
|
6,939
|
|
13,317
|
|
13,548
|
|
(Increase) decrease in unearned premiums (1)
|
|
(154
|
)
|
(125
|
)
|
140
|
|
78
|
|
Other (1)
|
|
101
|
|
8
|
|
57
|
|
2
|
|
Property-Liability premiums earned
|
|
$
|
6,750
|
|
$
|
6,822
|
|
13,514
|
|
13,628
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
Allstate Protection
|
|
$
|
6,750
|
|
$
|
6,822
|
|
13,514
|
|
13,628
|
|
Discontinued Lines and Coverages
|
|
|
|
|
|
|
|
|
|
Property-Liability
|
|
$
|
6,750
|
|
$
|
6,822
|
|
13,514
|
|
13,628
|
|
(1)
The three month and six month ended June 30, 2008 includes $49
million in unearned premiums related to June 27, 2008 acquisition of
Partnership Marketing Group.
ALLSTATE PROTECTION SEGMENT
Premiums written by brand
are shown in the following table.
|
|
Three Months Ended June 30,
|
|
|
|
Allstate brand
|
|
Encompass brand
|
|
Allstate
Protection
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Standard auto
|
|
$
|
3,957
|
|
$
|
3,956
|
|
$
|
272
|
|
$
|
297
|
|
$
|
4,229
|
|
$
|
4,253
|
|
Non-standard auto
|
|
261
|
|
300
|
|
11
|
|
18
|
|
272
|
|
318
|
|
Homeowners
|
|
1,531
|
|
1,543
|
|
129
|
|
147
|
|
1,660
|
|
1,690
|
|
Other personal lines
(1)
|
|
613
|
|
643
|
|
29
|
|
35
|
|
642
|
|
678
|
|
Total
|
|
$
|
6,362
|
|
$
|
6,442
|
|
$
|
441
|
|
$
|
497
|
|
$
|
6,803
|
|
$
|
6,939
|
|
|
|
Six Months Ended June 30,
|
|
|
|
Allstate brand
|
|
Encompass brand
|
|
Allstate
Protection
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Standard auto
|
|
$
|
8,034
|
|
$
|
8,007
|
|
$
|
542
|
|
$
|
563
|
|
$
|
8,576
|
|
$
|
8,570
|
|
Non-standard auto
|
|
535
|
|
621
|
|
23
|
|
39
|
|
558
|
|
660
|
|
Homeowners
|
|
2,716
|
|
2,756
|
|
242
|
|
270
|
|
2,958
|
|
3,026
|
|
Other personal lines
(1)
|
|
1,167
|
|
1,224
|
|
58
|
|
68
|
|
1,225
|
|
1,292
|
|
Total
|
|
$
|
12,452
|
|
$
|
12,608
|
|
$
|
865
|
|
$
|
940
|
|
$
|
13,317
|
|
$
|
13,548
|
|
(1) Other personal lines include commercial lines, condominium,
renters, involuntary auto and other personal lines.
33
Premiums earned by brand are shown in the following table.
|
|
Three Months Ended June 30,
|
|
|
|
Allstate brand
|
|
Encompass brand
|
|
Allstate
Protection
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Standard auto
|
|
$
|
4,014
|
|
$
|
3,986
|
|
$
|
278
|
|
$
|
283
|
|
$
|
4,292
|
|
$
|
4,269
|
|
Non-standard auto
|
|
270
|
|
316
|
|
12
|
|
20
|
|
282
|
|
336
|
|
Homeowners
|
|
1,420
|
|
1,437
|
|
129
|
|
139
|
|
1,549
|
|
1,576
|
|
Other personal lines
|
|
593
|
|
606
|
|
34
|
|
35
|
|
627
|
|
641
|
|
Total
|
|
$
|
6,297
|
|
$
|
6,345
|
|
$
|
453
|
|
$
|
477
|
|
$
|
6,750
|
|
$
|
6,822
|
|
|
|
Six Months Ended June 30,
|
|
|
|
Allstate brand
|
|
Encompass brand
|
|
Allstate
Protection
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Standard auto
|
|
$
|
8,025
|
|
$
|
7,937
|
|
$
|
558
|
|
$
|
567
|
|
$
|
8,583
|
|
$
|
8,504
|
|
Non-standard auto
|
|
548
|
|
638
|
|
26
|
|
42
|
|
574
|
|
680
|
|
Homeowners
|
|
2,846
|
|
2,875
|
|
262
|
|
281
|
|
3,108
|
|
3,156
|
|
Other personal lines
|
|
1,185
|
|
1,217
|
|
64
|
|
71
|
|
1,249
|
|
1,288
|
|
Total
|
|
$
|
12,604
|
|
$
|
12,667
|
|
$
|
910
|
|
$
|
961
|
|
$
|
13,514
|
|
$
|
13,628
|
|
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 do not
include the impacts from mid-term premium adjustments, ceded reinsurance
premiums, or 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.
34
Allstate
Protection
standard auto premiums
written
decreased 0.6% to $4.23 billion in the three months ended June 30,
2008 from $4.25 billion in the same period of 2007 and increased 0.1% to $8.58
billion during the first six months of 2008 from $8.57 billion in the first six
months of 2007.
|
|
Allstate brand
|
|
Encompass brand(2)
|
|
Standard Auto
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
PIF (thousands)
|
|
18,124
|
|
18,271
|
|
1,119
|
|
1,103
|
|
Average premium- gross written (1)
|
|
$
|
427
|
|
$
|
421
|
|
$
|
962
|
|
$
|
969
|
|
Renewal ratio (%)(1)
|
|
89.1
|
|
89.9
|
|
74.1
|
|
73.8
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
PIF (thousands)
|
|
18,124
|
|
18,271
|
|
1,119
|
|
1,103
|
|
Average premium- gross written (1)
|
|
$
|
427
|
|
$
|
420
|
|
$
|
962
|
|
$
|
972
|
|
Renewal ratio (%)(1)
|
|
89.0
|
|
89.8
|
|
74.5
|
|
74.6
|
|
(1) Policy term is six months for Allstate brand
and twelve months for Encompass brand.
(2) Premium operating
measures and statistics exclude the discontinuation of a large national broker
arrangement.
Allstate brand standard auto premiums written in the three months ended
June 30, 2008 were comparable to the same period of 2007 and increased
0.3% to $8.03 billion during the first six months of 2008 from $8.01 billion in
the first six months of 2007 due to increases in average gross premium,
partially offset by declines in PIF. The
0.8% decrease in Allstate brand standard auto PIF as of June 30, 2008
compared to June 30, 2007 was due to a lower renewal ratio and lower new
business production. New issued
applications decreased 6.7% on a countrywide basis to 447 thousand in the
second quarter of 2008 from 479 thousand in the second quarter of 2007 and
10.3% to 901 thousand during the first six months of 2008 from 1 million in the
first six months of 2007. Allstate brand
standard auto average gross premium increased 1.4% for the three months ended June 30,
2008 and 1.7% in the first six months of 2008 compared to same periods of 2007,
primarily due to
rate
changes, including a 15.9% rate reduction in California related to an order
effective in April 2008
. The
Allstate brand standard auto renewal ratio declined 0.8 points in the second
quarter of 2008 and first six months of 2008 compared to the same periods of
2007 due to competitive conditions.
Encompass brand standard auto premiums written decreased 8.4% to $272
million in the three months ended June 30, 2008 from $297 million in the
same period of 2007 and 3.7% to $542 million during the first six months of
2008 from $563 million in the first six months of 2007 due to the
discontinuation of a large national broker arrangement. Encompass brand
standard auto premiums written excluding the terminated national brokers
business increased 0.4% to $272 million in the three months ended June 30,
2008 from $271 million in the same period of 2007 and 0.8% to $525 million
during the first six months of 2008 from $521 million in the first six months
of 2007. The
1.5% increase in Encompass brand standard
auto PIF as of June 30, 2008 compared to June 30, 2007 was due to
higher new business production, primarily driven by the rollout of the
Encompass Edge
SM
product. Encompass brand standard auto average gross
premium decreased 0.7% for the three months ended June 30, 2008 and 1.0%
in the first six months of 2008 compared to the same periods of 2007 due to
rate changes and a shift in the mix of business toward policies with basic
coverages and fewer features.
35
Rate increases
that are indicated based on loss trend analysis to achieve a targeted return
will continue to be pursued.
The following
table shows the net rate changes that were approved for standard auto during
the three-month and six-month periods ended June 30, 2008 and 2007. These rate changes do not reflect initial
rates filed for insurance subsidiaries initially writing new business in a
state.
|
|
Three Months Ended June 30,
|
|
|
|
# of States
|
|
Countrywide (%) (1)
|
|
State Specific (%) (2) (3)
|
|
Standard
Auto
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allstate brand (4)
|
|
15
|
|
9
|
|
(0.4
|
)
|
0.4
|
|
(1.2
|
)
|
5.9
|
|
Encompass brand
|
|
9
|
|
6
|
|
0.8
|
|
(0.2
|
)
|
3.4
|
|
(0.8
|
)
|
|
|
Six Months Ended June 30,
|
|
|
|
# of States
|
|
Countrywide (%) (1)
|
|
State Specific (%) (2) (3)
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Allstate brand (4)
|
|
23
|
|
15
|
|
0.4
|
|
0.8
|
|
0.9
|
|
3.8
|
|
Encompass brand
|
|
24
|
|
9
|
|
1.1
|
|
0.1
|
|
2.5
|
|
0.2
|
|
(1)
Represents
the impact in the states where rate changes were approved during the three
months and six months ended June 30, 2008 and 2007, respectively, as a
percentage of total countrywide prior year-end premiums written.
(2)
Represents
the impact in the states where rate changes were approved during the three
months and six months ended June 30, 2008 and 2007, respectively, as a
percentage of total prior year-end premiums written in those states.
(3)
Based on historical premiums
written in those states, rate changes approved for standard auto totaled $(56)
million and $80 million for the three months and six months ended June 30,
2008, respectively, compared to $61 million and $117 million for the three
months and six months ended June 30, 2007, respectively.
(4)
Excluding
the impact of a 15.9% rate reduction in California related to an order
effective in April 2008, the Allstate brand standard auto rate change is
5.5% on a state specific basis and 1.3% on a countrywide basis for the three
months ended June 30, 2008 and 5.4% on a state specific basis and 2.2% on
a countrywide basis for the six months ended June 30, 2008. We estimate that this rate decrease will have
an impact of $135 million on premiums written and $85 million on underwriting
income during the remainder of 2008.
Allstate
Protection non
-s
tandard
auto premiums written
decreased 14.5% to $272 million in the three
months ended June 30, 2008 from $318 million in the same period of 2007
and 15.5% to $558 million during the first six months of 2008 from $660 million
during the first six months of 2007.
|
|
Allstate brand
|
|
Encompass brand
|
|
Non-Standard Auto
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
PIF (thousands)
|
|
790
|
|
896
|
|
48
|
|
75
|
|
Average premium- gross written
|
|
$
|
624
|
|
$
|
613
|
|
$
|
498
|
|
$
|
523
|
|
Renewal ratio (%)
|
|
74.1
|
|
77.3
|
|
68.5
|
|
66.7
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
PIF (thousands)
|
|
790
|
|
896
|
|
48
|
|
75
|
|
Average premium- gross written
|
|
$
|
626
|
|
$
|
613
|
|
$
|
502
|
|
$
|
522
|
|
Renewal ratio (%)
|
|
74.3
|
|
76.9
|
|
66.8
|
|
66.2
|
|
Allstate brand non-standard auto premiums written
decreased 13.0% to $261 million in the three months ended June 30, 2008
from $300 million in the same period of 2007 and 13.8% to $535 million during
the first six months of 2008 from $621 million in the first six months of 2007
due to declines in PIF, partially offset by increases in average gross premium. PIF decreased 11.8% as of June 30, 2008
compared to June 30, 2007 as new business production was insufficient to
offset the decline in polices available to renew. Allstate brand non-standard auto new issued
applications increased 9.9% on a countrywide basis to 78 thousand in the second
quarter of 2008 from 71 thousand in the second quarter of 2007 and 10.8% to 164
thousand during the first six months of 2008 from 148 thousand in the first six
months of 2007. Both increases were due
to the continued rollout of our Allstate Blue
SM
product.
The renewal ratio decreased 3.2 points in the second quarter of 2008 and
2.6 points in the first six months of 2008 compared to the same periods of 2007
due to competitive pressures and rate changes.
The Allstate brand non-standard auto average gross premium increased
1.8% for the three months ended June 30, 2008 and 2.1% in the first
36
six months of 2008
compared to the same periods of 2007 due to changes in customer mix from the
rollout of Allstate Blue and rate changes.
Encompass brand non-standard auto premiums written
decreased 38.9% to $11 million in the three months ended June 30, 2008
from $18 million in the same period of 2007 and 41.0% to $23 million during the
first six months of 2008 from $39 million in the first six months of 2007 due
to declines in PIF, driven by new business production that was insufficient to
offset the decline in policies available to renew, and lower average gross
premium due to geographic shifts in the mix of business.
Rate increases that are indicated based on loss trend
analysis to achieve a targeted return will continue to be pursued. The following table shows the net rate
changes that were approved for non-standard auto during the three-month and
six-month periods ended June 30, 2008 and 2007. These rate changes do not reflect initial
rates filed for insurance subsidiaries initially writing new business in a
state.
|
|
Three Months Ended June 30,
|
|
|
|
# of States
|
|
Countrywide (%) (1)
|
|
State Specific (%) (2) (3)
|
|
Non-Standard Auto
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Allstate brand (4)
|
|
5
|
|
1
|
|
(0.2
|
)
|
|
|
(7.7
|
)
|
|
|
Encompass brand
|
|
|
|
7
|
|
|
|
8.1
|
|
|
|
14.6
|
|
|
|
Six Months Ended June 30,
|
|
|
|
# of States
|
|
Countrywide (%) (1)
|
|
State Specific (%) (2) (3)
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Allstate brand (4)
|
|
7
|
|
4
|
|
|
|
1.3
|
|
0.4
|
|
8.7
|
|
Encompass brand
|
|
|
|
7
|
|
|
|
8.1
|
|
|
|
14.6
|
|
(1)
Represents
the impact in the states where rate changes were approved during the three months
and six months ended June 30, 2008 and 2007, respectively, as a percentage
of total countrywide prior year-end premiums written.
(2)
Represents
the impact in the states where rate changes were approved during the three
months and six months ended June 30, 2008 and 2007, respectively, as a
percentage of total prior year-end premiums written in those states.
(3)
Based on historical premiums
written in those states, rate changes approved for non-standard auto totaled $(2) million
for the three months ended June 30, 2008 compared to $8 million and $25
million for the three months and six months ended June 30, 2007,
respectively.
(4)
Includes
Washington D.C.
Allstate Protection homeowners premiums written
decreased 1.8% to $1.66 billion in the three months ended June 30, 2008
from $1.69 billion in the same period of 2007 and 2.2% to $2.96 billion during
the first six months of 2008 from $3.03 billion in the first six months of
2007.
Homeowners
|
|
Allstate brand
|
|
Encompass brand (1)
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
PIF (thousands)
|
|
7,418
|
|
7,730
|
|
466
|
|
506
|
|
Average premium- gross written (12 months)
|
|
$
|
867
|
|
$
|
851
|
|
$
|
1,193
|
|
$
|
1,180
|
|
Renewal ratio (%)
|
|
86.3
|
|
87.3
|
|
80.5
|
|
79.3
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
PIF (thousands)
|
|
7,418
|
|
7,730
|
|
466
|
|
506
|
|
Average premium- gross written (12 months)
|
|
$
|
867
|
|
$
|
849
|
|
$
|
1,194
|
|
$
|
1,175
|
|
Renewal ratio (%)
|
|
86.4
|
|
86.9
|
|
80.6
|
|
80.0
|
|
(1) Premium operating
measures and statistics exclude the discontinuation of a large national broker
arrangement.
37
Allstate brand homeowners
premiums written decreased 0.8% to
$1.53 billion in the three months ended June 30, 2008 from $1.54 billion
in the same period of 2007 and 1.5% to $2.72 billion during the first six
months of 2008 from $2.76 billion in the first six months of 2007. The decreases in both periods were due to
a 4.0% decline in PIF, due to lower new issued applications and renewals,
partially offset by increases in average gross premium, reflecting rate
changes, including those taken for our net cost of reinsurance. New issued applications decreased 26.1% on a
countrywide basis to 164 thousand in the second quarter of 2008 from 222
thousand in the second quarter of 2007 and 27.1% to 314 thousand during the
first six months of 2008 from 431 thousand in the first six months of
2007. The Allstate brand homeowners
average gross premium increased 1.9% for the three months ended June 30,
2008 and 2.1% in the first six months of 2008 compared to the same periods of
2007, primarily due to higher average renewal premiums related to increases in
insured value and approved rate changes, including those taken for our net cost
of reinsurance, partially offset by a shift in geographic mix as our
catastrophe management actions reduce premiums written in areas with generally
higher average gross premiums. The
Allstate brand homeowners renewal ratio decreased 1.0 points in the second
quarter of 2008 and 0.5 points in the first six months of 2008 compared to the
same periods of 2007 due in part to our catastrophe management actions.
PIF and the renewal ratio will continue to be
negatively impacted by our catastrophe management actions such as our decision
to discontinue offering coverage by Allstate Floridian Insurance Company and
its subsidiaries (Allstate Floridian) on approximately 120,000 property
policies as part of a renewal rights and reinsurance arrangement with Royal
Palm Insurance Company (Royal Palm) entered into in 2006 (Royal Palm 1),
and separately, an additional 106,000 property policies under a renewal rights
agreement with Royal Palm entered into in 2007 (Royal Palm 2). Allstate Floridian no longer offers coverage
on the policies involved in Royal Palm 1 and Royal Palm 2 when they expire, at
which time Royal Palm may offer coverage to these policyholders. The policies involved in Royal Palm 1 and
Royal Palm 2 expired at a rate of 4% in the fourth quarter of 2006, 5% in the
first quarter of 2007, 27% in the second quarter of 2007, 27% in the third
quarter of 2007, 22% in the fourth quarter of 2007, and 14% in the first
quarter of 2008. The remaining policies
are expected to expire during 2008.
Encompass brand homeowners premiums written decreased 12.2% to $129
million in the three months ended June 30, 2008 from $147 million in the
same period of 2007 and 10.4% to $242 million during the first six months of
2008 from $270 million in the first six months of 2007 due to a decline in PIF,
and the discontinuation of a large national broker arrangement, partially
offset by increases in average gross premium.
Encompass brand homeowners premiums written excluding the terminated
national brokers business decreased 5.8% to $129 million in the three months
ended June 30, 2008 from $137 million in the same period of 2007 and 7.5%
to $235 million during the first six months of 2008 from $254 million in the
first six months of 2007.
The 7.9% decline in Encompass brand
homeowners PIF as of June 30, 2008 compared to June 30, 2007
was primarily due to our catastrophe management actions in certain markets. The
Encompass brand homeowners average gross premium increased 1.1% for the three
months ended June 30, 2008 and 1.6% in the first six months of 2008
compared to the same periods of 2007 due to rate actions including those taken
for our net cost of reinsurance.
38
Rate
increases that are indicated based on loss trend analysis to achieve a targeted
return will continue to be pursued. The
following table shows the net rate changes that were approved for homeowners
during the three-month and six-month periods ended June 30, 2008 and 2007,
including rate changes approved based on our net cost of reinsurance.
Homeowners
|
|
Three Months Ended June 30,
|
|
|
|
# of States
|
|
Countrywide (%) (1)
|
|
State Specific (%) (2) (3) (4)
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
(7)
|
|
Allstate brand (5)
|
|
16
|
|
20
|
|
0.7
|
|
1.3
|
|
2.3
|
|
3.2
|
|
Encompass brand (6)
|
|
13
|
|
17
|
|
0.9
|
|
(0.1
|
)
|
4.5
|
|
(0.4
|
)
|
|
|
Six Months Ended June 30,
|
|
|
|
# of States
|
|
Countrywide (%) (1)
|
|
State Specific (%) (2) (3) (4)
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
(7)
|
|
Allstate brand (5)
|
|
23
|
|
21
|
|
2.0
|
|
2.8
|
|
4.9
|
|
5.8
|
|
Encompass brand (6)
|
|
17
|
|
21
|
|
1.4
|
|
1.8
|
|
6.6
|
|
4.3
|
|
(1)
Represents
the impact in the states where rate changes were approved during the three
months and six months ended June 30, 2008 and 2007, respectively, as a
percentage of total countrywide prior year-end premiums written.
(2)
Represents
the impact in the states where rate changes were approved during the three
months and six months ended June 30, 2008 and 2007, respectively, as a
percentage of total prior year-end premiums written in those states.
(3)
Based
on historical premiums written in those states, rate changes approved for
homeowners totaled $48 million and $132 million for the three months and six
months ended June 30, 2008, respectively, compared to $81 million and $189
million for the three months and six months ended June 30, 2007,
respectively.
(4)
During July 2008,
we received an order to reduce Allstate brand homeowners rates in the state of
California by 28.5%. We estimate that this
rate decrease will have an impact of $88 million on premiums written and $15
million on underwriting income during the remainder of 2008.
(5)
Excluding
the impact of a 3.0% rate reduction in Texas related to a resolution reached in
the second quarter of 2008, the Allstate brand homeowners rate change is 3.3%
on a state specific basis and 1.0% on a countrywide basis for the three months
ended June 30, 2008 and 5.7% on a state specific basis and 2.3% on a
countrywide basis for the six months ended June 30, 2008. We estimate that this rate decrease will have
an impact of $7 million on premiums written and $1 million on underwriting
income during the remainder of 2008.
(6)
Includes
Washington D.C.
(7)
The
prior period has been restated to conform to the current period presentation.
39
Underwriting results
are
shown in the following table.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written
|
|
$
|
6,803
|
|
$
|
6,939
|
|
$
|
13,317
|
|
$
|
13,548
|
|
Premiums earned
|
|
6,750
|
|
6,822
|
|
13,514
|
|
13,628
|
|
Claims and claims expense
|
|
(4,774
|
)
|
(4,314
|
)
|
(9,445
|
)
|
(8,473
|
)
|
Amortization of DAC
|
|
(1,000
|
)
|
(1,032
|
)
|
(2,011
|
)
|
(2,056
|
)
|
Other costs and expenses
|
|
(600
|
)
|
(621
|
)
|
(1,268
|
)
|
(1,239
|
)
|
Restructuring and related charges
|
|
5
|
|
(5
|
)
|
6
|
|
(4
|
)
|
Underwriting income
|
|
$
|
381
|
|
$
|
850
|
|
$
|
796
|
|
$
|
1,856
|
|
Catastrophe losses
|
|
$
|
698
|
|
$
|
433
|
|
$
|
1,266
|
|
$
|
594
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income by line of business
|
|
|
|
|
|
|
|
|
|
Standard auto (1)
|
|
$
|
395
|
|
$
|
537
|
|
$
|
874
|
|
$
|
1,074
|
|
Non-standard auto
|
|
46
|
|
53
|
|
76
|
|
111
|
|
Homeowners
|
|
(115
|
)
|
150
|
|
(178
|
)
|
468
|
|
Other personal lines (1)
|
|
55
|
|
110
|
|
24
|
|
203
|
|
Underwriting income
|
|
$
|
381
|
|
$
|
850
|
|
$
|
796
|
|
$
|
1,856
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income by brand
|
|
|
|
|
|
|
|
|
|
Allstate brand
|
|
$
|
375
|
|
$
|
782
|
|
$
|
768
|
|
$
|
1,724
|
|
Encompass brand
|
|
6
|
|
68
|
|
28
|
|
132
|
|
Underwriting income
|
|
$
|
381
|
|
$
|
850
|
|
$
|
796
|
|
$
|
1,856
|
|
(1)
During the first quarter
of 2008, $45 million of incurred but not reported (IBNR) losses were
reclassified from standard auto to other personal lines to be consistent with
the recording of excess liability policies premiums and losses.
Allstate Protection generated underwriting income of
$381 million during the three months ended June 30, 2008 compared to $850
million in the same period of 2007. For
the six months ended June 30, 2008, Allstate Protections underwriting
income was $796 million compared to $1.86 billion for the first six months of 2007. The decrease in both periods was primarily
due to higher catastrophe losses and the absence of favorable prior year
reserve reestimates.
40
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 on page 31.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
Effect of
Catastrophe Losses
on the Loss Ratio
|
|
|
|
|
|
Effect of
Catastrophe Losses
on the Loss Ratio
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Allstate brand loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard auto
|
|
67.1
|
|
63.5
|
|
2.1
|
|
1.3
|
|
66.3
|
|
63.6
|
|
1.7
|
|
0.8
|
|
Non-standard auto
|
|
60.0
|
|
59.2
|
|
1.1
|
|
0.6
|
|
62.6
|
|
59.7
|
|
0.9
|
|
0.3
|
|
Homeowners
|
|
86.5
|
|
67.7
|
|
38.0
|
|
21.6
|
|
83.3
|
|
61.4
|
|
33.8
|
|
15.0
|
|
Other personal lines
|
|
63.1
|
|
57.4
|
|
5.9
|
|
6.6
|
|
66.4
|
|
58.7
|
|
7.9
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Allstate brand loss ratio
|
|
70.8
|
|
63.6
|
|
10.5
|
|
6.4
|
|
70.0
|
|
62.4
|
|
9.5
|
|
4.4
|
|
Allstate brand expense ratio
|
|
23.2
|
|
24.1
|
|
|
|
|
|
23.9
|
|
24.0
|
|
|
|
|
|
Allstate brand combined ratio
|
|
94.0
|
|
87.7
|
|
|
|
|
|
93.9
|
|
86.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Encompass brand loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard auto (1)
|
|
65.8
|
|
57.2
|
|
1.8
|
|
0.7
|
|
58.4
|
|
61.0
|
|
1.1
|
|
0.5
|
|
Non-standard auto
|
|
83.3
|
|
80.0
|
|
|
|
|
|
76.9
|
|
78.6
|
|
|
|
|
|
Homeowners
|
|
72.9
|
|
55.4
|
|
23.3
|
|
16.5
|
|
69.1
|
|
52.3
|
|
21.0
|
|
10.7
|
|
Other personal lines (1)
|
|
88.2
|
|
62.9
|
|
5.9
|
|
5.7
|
|
150.0
|
|
57.7
|
|
6.3
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Encompass brand loss ratio
|
|
70.0
|
|
58.0
|
|
8.2
|
|
5.7
|
|
68.4
|
|
59.0
|
|
7.1
|
|
3.7
|
|
Encompass brand expense ratio
|
|
28.7
|
|
27.7
|
|
|
|
|
|
28.5
|
|
27.3
|
|
|
|
|
|
Encompass brand combined ratio
|
|
98.7
|
|
85.7
|
|
|
|
|
|
96.9
|
|
86.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allstate Protection loss ratio
|
|
70.7
|
|
63.2
|
|
10.3
|
|
6.3
|
|
69.9
|
|
62.2
|
|
9.4
|
|
4.4
|
|
Allstate Protection expense ratio
|
|
23.7
|
|
24.3
|
|
|
|
|
|
24.2
|
|
24.2
|
|
|
|
|
|
Allstate Protection combined ratio
|
|
94.4
|
|
87.5
|
|
|
|
|
|
94.1
|
|
86.4
|
|
|
|
|
|
(1)
During the first quarter of 2008, $45 million of IBNR losses were
reclassified from standard auto to other personal lines to be consistent with
the recording of excess liability policies premiums and losses.
The
following table presents the type and number of catastrophe losses
.
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
($ in millions)
|
|
2008
|
|
#
Events
|
|
2007
|
|
#
Events
|
|
2008
|
|
#
Events
|
|
2007
|
|
#
Events
|
|
Tornadoes
|
|
$
|
302
|
|
13
|
|
$
|
93
|
|
5
|
|
$
|
478
|
|
17
|
|
$
|
140
|
|
10
|
|
Wind/Hail
|
|
382
|
|
27
|
|
248
|
|
28
|
|
597
|
|
45
|
|
294
|
|
36
|
|
Other, including prior year reserve
reestimates
|
|
14
|
|
3
|
|
92
|
|
1
|
|
191
|
|
8
|
|
160
|
|
6
|
|
Total Catastrophe losses
|
|
$
|
698
|
|
43
|
|
$
|
433
|
|
34
|
|
$
|
1,266
|
|
70
|
|
$
|
594
|
|
52
|
|
Standard auto loss ratio
increased 3.6 points for the Allstate brand in the three months ended June 30,
2008 and 2.7 points during the first six months of 2008 compared to the same
periods of 2007 due to lower favorable reserve reestimates related to prior
years and increased catastrophe losses. Standard auto loss ratio for the
Encompass brand increased 8.6 points in the three months ended June 30,
2008 compared to the same period of 2007 due to reserve reestimates that were
unfavorable in the current year and favorable in the prior years. Standard auto loss ratio for the Encompass
brand decreased 2.6 points during the first six months of 2008 compared to the
same period of 2007 due to higher favorable reserve reestimates.
41
Non-standard auto loss ratio
increased 0.8 points for the Allstate brand in the three months ended June 30,
2008 and 2.9 points during the first six months of 2008 compared to the same
periods of 2007 due to lower favorable reserve reestimates related to prior
years. Non-standard auto loss ratio for
the Encompass brand increased 3.3 points in the three months ended June 30,
2008 compared to the same period of 2007.
Non-standard auto loss ratio for the Encompass brand decreased 1.7
points during the first six months of 2008 compared to the same period of 2007.
Homeowners loss ratio
for the Allstate brand
increased 18.8 points in the three months ended June 30, 2008 and 21.9
points during the first six months of 2008 compared to the same periods of 2007
largely attributable to
higher
catastrophe losses.
Homeowners loss ratio for the
Encompass brand increased 17.5 points in the first three months of June 30,
2008 and 16.8 points during the first six months of 2008 compared to the same
periods of 2007 primarily due to higher catastrophe losses.
Expense ratio
for
Allstate Protection decreased 0.6 points in the three months ended June 30,
2008 compared to the same period of 2007 primarily due to lower employee
related costs, including pension, and amortization of DAC. Expense ratio for Allstate Protection during
the first six months of 2008 was comparable to the same period of 2007.
The expense ratio for Encompass brand increased 1.0 points in the three
months ended June 30, 2008 and 1.2 points during the first six months of
2008 compared to the same periods of 2007 primarily due to lower earned
premiums as well as increased state fund assessments.
The impact of specific costs and expenses on
the expense ratio are included in the following table.
|
|
Three Months Ended
June 30,
|
|
|
|
Allstate brand
|
|
Encompass brand
|
|
Allstate
Protection
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of DAC
|
|
14.4
|
|
14.8
|
|
20.0
|
|
20.0
|
|
14.9
|
|
15.1
|
|
Other costs and expenses
|
|
8.9
|
|
9.2
|
|
8.7
|
|
7.7
|
|
8.9
|
|
9.1
|
|
Restructuring and related charges
|
|
(0.1
|
)
|
0.1
|
|
|
|
|
|
(0.1
|
)
|
0.1
|
|
Total expense ratio
|
|
23.2
|
|
24.1
|
|
28.7
|
|
27.7
|
|
23.7
|
|
24.3
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
Allstate brand
|
|
Encompass brand
|
|
Allstate
Protection
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of DAC
|
|
14.5
|
|
14.7
|
|
20.2
|
|
19.9
|
|
14.8
|
|
15.1
|
|
Other costs and expenses
|
|
9.4
|
|
9.3
|
|
8.4
|
|
7.4
|
|
9.4
|
|
9.1
|
|
Restructuring and related charges
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
Total expense ratio
|
|
23.9
|
|
24.0
|
|
28.5
|
|
27.3
|
|
24.2
|
|
24.2
|
|
Allstate Protection Reinsurance
During the second quarter of 2008, we completed our 2008 catastrophe
reinsurance program by placing a Florida component and additional coverage in
the state of Texas. 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.
The
Texas agreement provides coverage for Allstate Protection personal property
excess catastrophe losses in Texas for hurricane catastrophe losses. This agreement was placed with a Cayman
Island insurance company, Willow Re Ltd., which completed an offering to
unrelated investors for principal at risk, variable market rate notes of $250
million to collateralize hurricane catastrophe losses covered by this
agreement. Amounts payable under the
reinsurance agreement will be based on an index created by applying
predetermined percentages representing our market share to insured personal
property industry losses in Texas as reported by Property Claim Services (PCS),
a division of Insurance Services Offices, Inc., limited to our actual
losses. The limits on our Texas
agreement are
42
designed
to replicate as close as possible 100% of $250 million, our estimated market
share of estimated modified personal property industry catastrophe losses
between $12.5 billion and $15.8 billion, or 100% of our catastrophe losses
between $950 million (retention) and $1.2 billion (exhaustion point).
Four
separate agreements have been entered into by Allstate Floridian for personal
property excess catastrophe losses in Florida, effective June 1, 2008 for
one year. These agreements coordinate coverage
with the Florida Hurricane Catastrophe Fund, including our elected
participation in the optional temporary increase in coverage limit (TICL),
(collectively FHCF). We chose not to participate in the optional temporary
emergency additional coverage option (TEACO) that is below the mandatory FHCF
coverage. The FHCF provides 90%
reimbursement on qualifying Allstate Floridian property losses up to an
estimated maximum of $458 million in excess of a $99 million retention, including
reimbursement of eligible loss adjustment expenses at 5%, for each of the two
largest hurricanes and $33 million for all other hurricanes for the season
beginning June 1, 2008. The four
agreements are listed and described below.
·
FHCF
Retention provides coverage on $59 million of losses in excess of $40 million
and is 100% placed, with one prepaid reinstatement of limit.
·
FHCF
Sliver provides coverage on 10% co-participation of the FHCF payout, or $46
million and is 100% placed, with one prepaid reinstatement of limit.
·
FHCF
Back-up provides coverage after the exhaustion of an amount equivalent to the
anticipated FHCF reimbursement protection on $458 million of losses in excess
of $99 million and is 90% placed.
·
FHCF
Excess provides coverage on $99 million of losses in excess of the FHCF
Retention, FHCF and the FHCF Back-up agreements and is 100% placed, with one
prepaid reinstatement of limit.
The
terms, retentions and limits for Allstates additional catastrophe management
reinsurance agreements, Texas and Allstate Floridian, as of June 1, 2008
are listed in the following table.
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
% Placed
|
|
|
|
|
|
Occurrence
|
|
(in millions)
|
|
Effective Date
|
|
Yr 1
|
|
Yr 2
|
|
Yr 3
|
|
Reinstatements
|
|
Retention
|
|
Limit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas(1)
|
|
6/18/2008
|
|
100
|
|
100
|
|
100
|
|
None
|
|
950
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHCF
Retention(2)
|
|
6/1/2008
|
|
100
|
|
N/A
|
|
N/A
|
|
2 limits over
1-year term,
prepaid
|
|
40
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHCF(3)
|
|
6/1/2008
|
|
90
|
|
N/A
|
|
N/A
|
|
Annual remeasurements with a first and second season coverage
provision
|
|
99 for the
2
largest storms, 33 for all
other storms
|
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHCF
Sliver(4)
|
|
6/1/2008
|
|
100
|
|
N/A
|
|
N/A
|
|
2 limits over
1-year term,
prepaid
|
|
99
|
|
10% co-participation of the FHCF recoveries estimated at $458, up to a
limit of $46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHCF
Back-up(5)
|
|
6/1/2008
|
|
90
|
|
N/A
|
|
N/A
|
|
1 limit over
1-year term
|
|
Back-up for FHCF
|
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHCF
Excess(6)
|
|
6/1/2008
|
|
100
|
|
N/A
|
|
N/A
|
|
2 limits over
1-year term,
prepaid
|
|
In excess of the FHCF and FHCF Back-up agreements
|
|
99
|
|
43
(1)
Texas This agreement is effective 6/18/2008 to 6/17/2011 and covers
Allstate Protection personal property excess catastrophe losses for
hurricanes. This agreement provides
coverage for 100% of $250 million, our estimated market share of estimated
modified personal property industry catastrophe losses between $12.5 billion
and $15.8 billion, or 100% of our catastrophe losses between $950 million
(retention) and $1.2 billion (exhaustion point). Qualifying losses under this agreement are
also eligible to be ceded under the Texas multi-peril and aggregate excess
agreement.
(2)
FHCF Retention - provides coverage beginning 6/1/2008 for 1 year
covering personal property excess catastrophe losses on policies written by
Allstate Floridian. The preliminary
reinsurance premium is subject to redetermination for exposure changes.
(3)
FHCF provides 90% reimbursement on qualifying personal property losses
up to an estimated maximum per hurricane season. Estimated limits and retentions are
calculated for Allstate Floridian Insurance Company and each of its
subsidiaries independently, and are subject to annual remeasurements based on
6/30 exposure data. Provisional
retentions are initial estimates subject to adjustment upward or downward to
the actual retention which is determined based on the submitted exposures of
all FHCF participants. As of 6/1/2008,
the limits provided are an estimated $309 million for Allstate Floridian Insurance
Company, $94 million for Allstate Floridian Indemnity Company, $40 million for
Encompass Floridian Insurance Company, and $15 million for Encompass Floridian
Indemnity Company for a total of $458 million.
Provisional retentions for each of the Floridian companies are an
estimated $67 million for Allstate Floridian Insurance Company, $21 million for
Allstate Floridian Indemnity Company, $8 million for Encompass Floridian
Insurance Company, and $3 million for Encompass Floridian Indemnity Company for
a total of $99 million.
(4)
FHCF Sliver - provides coverage beginning 6/1/2008 for 1 year covering
primarily excess catastrophe losses not reimbursed by the FHCF. The provisional retention is $99 million and
is subject to adjustment upward or downward to an actual retention that will
equal the FHCF retention as respects business covered by this contract. The
preliminary reinsurance premium is subject to redetermination for exposure
changes. Estimated limits and retentions are calculated for Allstate Floridian
Insurance Company and each of its subsidiaries independently. As of 6/1/2008, the limits provided are an
estimated $31 million for Allstate Floridian Insurance Company, $9 million for
Allstate Floridian Indemnity Company, $4 million for Encompass Floridian
Insurance Company, and $2 million for Encompass Floridian Indemnity Company for
a total of $46 million. Retentions for
each of the Floridian companies are an estimated $67 million for Allstate
Floridian Insurance Company, $21 million for Allstate Floridian Indemnity
Company, $8 million for Encompass Floridian Insurance Company, and $3 million
for Encompass Floridian Indemnity Company for a total of $99 million.
(5)
FHCF Back-up provides coverage beginning 6/1/2008 for 1 year covering
personal property excess catastrophe losses and is contiguous to the FHCF
payout. As the FHCF capacity is paid
out, the retention on this agreement automatically adjusts to mirror the amount
of the payout. The preliminary reinsurance
premium is subject to redetermination for exposure changes. Estimated limits
and retentions are calculated for Allstate Floridian Insurance Company and each
of its subsidiaries independently. As of
6/1/2008, the limits provided are an estimated $309 million for Allstate
Floridian Insurance Company, $94 million for Allstate Floridian Indemnity
Company, $40 million for Encompass Floridian Insurance Company, and $15 million
for Encompass Floridian Indemnity Company for a total of $458 million. Retentions for each of the Floridian
companies are an estimated $67 million for Allstate Floridian Insurance
Company, $21 million for Allstate Floridian Indemnity Company, $8 million for
Encompass Floridian Insurance Company, and $3 million for Encompass Floridian
Indemnity Company for a total of $99 million.
(6)
FHCF Excess - provides coverage beginning 6/1/2008 for 1 year covering
excess catastrophe losses. The retention
on this agreement is designed to attach above and contiguous to the FHCF and
FHCF Back-up. As the FHCF and the FHCF Back-up are paid out, the retention
automatically adjusts to mirror the amount of the payout. The preliminary reinsurance premium is
subject to redetermination for exposure changes. The estimated limit is calculated
for Allstate Floridian Insurance Company on a consolidated basis. Estimated retentions are calculated for
Allstate Floridian Insurance Company and each of its subsidiaries
independently. As of 6/1/2008,
retentions are an estimated $67 million for Allstate Floridian Insurance
Company, $21 million for Allstate Floridian Indemnity Company, $8 million for
Encompass Floridian Insurance Company, and $3 million for Encompass Floridian
Indemnity Company for a total of $99 million.
44
Highlights of certain other contract terms and conditions for the Texas
and Allstate Floridian catastrophe management reinsurance agreements are listed
in the following table.
|
|
Texas
|
|
Allstate Floridian
(1)
|
|
|
|
|
|
Business
Reinsured
|
|
Personal
Lines
Property Business
|
|
Personal
Lines
Property Business
|
|
|
|
|
|
Location
(s)
|
|
Texas
|
|
Florida
|
|
|
|
|
|
Covered
Losses
|
|
Hurricanes
|
|
Multi-peril
including hurricanes and earthquakes
|
|
|
|
|
|
Pertinent
Exclusions
|
|
Assessment
exposure to the Texas Windstorm Insurance Association, Automobile, Terrorism,
Commercial
|
|
Automobile,
Terrorism, Commercial, Policies reinsured under 100% quota share agreements with Royal Palm
Insurance Company and Universal Insurance Company of North America
|
|
|
|
|
|
Loss
Occurrence
|
|
Hurricane
event our market share of PCS estimated modified industry catastrophe
losses
|
|
Sum
of all qualifying losses for specific occurrences over 168 hours
Windstorm related occurrences over 96 hours Riot related occurrences over 72 hours
|
|
|
|
|
|
Loss
adjustment expenses included within ultimate net loss
|
|
12.5%
of qualifying losses
|
|
12.5%
of qualifying losses
|
(1) Allstate
Floridian information relates to the FHCF Retention, FHCF Sliver, FHCF Back-up and FHCF Excess
agreements.
The
reinsurance agreements have been placed in the global reinsurance market, with
all limits on our current Florida program and the majority of limits on our
other programs placed with reinsurers who currently have an A.M. Best
insurance financial strength rating of A or better. The remaining limits are placed with
reinsurers who currently have an A.M. Best insurance financial strength
rating no lower than A-, with three exceptions.
Of the three exceptions, one has a Standard & Poors (S&P)
rating of AA, one has an S&P rating of AA- and we have collateral for the
entire contract limit exposure for the reinsurer which is not rated by either
rating agency.
We
estimate that the total annualized cost of all catastrophe reinsurance programs
for the year beginning June 1, 2008 will be approximately $660 million per
year or $165 million per quarter. This
is compared to $920 million per year for our total annualized cost for the year
beginning June 1, 2007, or an estimated annualized cost decrease of $260
million beginning June 1, 2008. The
estimated decrease is due in part to our reduced exposure in Florida following
our non-renewal activities over the past year.
The total cost of our reinsurance programs during 2007 was $216 million
in the first quarter, $231 million in the second quarter, $227 million in the
third quarter and $222 million in the fourth quarter of 2007. The cost during 2008 was $227 million in the
first quarter and $223 million in the second quarter and is estimated to be
$165 million in the third and fourth quarters.
We continue to attempt to capture our reinsurance cost in premium rates
as allowed by state regulatory authorities.
45
Reserve
reestimates
The table below shows net
reserves representing the estimated cost of outstanding claims as they were
recorded at the beginning of years 2008 and 2007, and the effect of reestimates
in each year.
|
|
January 1
Reserves
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
Auto
|
|
$
|
10,175
|
|
$
|
9,995
|
|
Homeowners
|
|
2,279
|
|
2,226
|
|
Other personal lines
|
|
2,131
|
|
2,235
|
|
Allstate Protection
|
|
$
|
14,585
|
|
$
|
14,456
|
|
|
|
|
|
|
|
Allstate brand
|
|
$
|
13,456
|
|
$
|
13,220
|
|
Encompass brand
|
|
1,129
|
|
1,236
|
|
Allstate Protection
|
|
$
|
14,585
|
|
$
|
14,456
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
Reserve
Reestimate
|
|
Effect on
Combined
Ratio
|
|
Reserve
Reestimate
|
|
Effect on
Combined
Ratio
|
|
($ in millions, except ratios)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Auto
(1)
|
|
$
|
(13
|
)
|
$
|
(146
|
)
|
(0.2
|
)
|
(2.2
|
)
|
$
|
(67
|
)
|
$
|
(212
|
)
|
(0.5
|
)
|
(1.6
|
)
|
Homeowners
|
|
18
|
|
25
|
|
0.3
|
|
0.4
|
|
96
|
|
22
|
|
0.7
|
|
0.2
|
|
Other lines
(1)
|
|
2
|
|
(26
|
)
|
|
|
(0.4
|
)
|
74
|
|
(44
|
)
|
0.5
|
|
(0.3
|
)
|
Allstate Protection
(2)
|
|
$
|
7
|
|
$
|
(147
|
)
|
0.1
|
|
(2.2
|
)
|
$
|
103
|
|
$
|
(234
|
)
|
0.7
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allstate brand
|
|
$
|
(2
|
)
|
$
|
(113
|
)
|
|
|
(1.7
|
)
|
$
|
94
|
|
$
|
(192
|
)
|
0.7
|
|
(1.4
|
)
|
Encompass brand
|
|
9
|
|
(34
|
)
|
0.1
|
|
(0.5
|
)
|
9
|
|
(42
|
)
|
|
|
(0.3
|
)
|
Allstate Protection
(2)
|
|
$
|
7
|
|
$
|
(147
|
)
|
0.1
|
|
(2.2
|
)
|
$
|
103
|
|
$
|
(234
|
)
|
0.7
|
|
(1.7
|
)
|
(1)
|
During
the first quarter of 2008, $45 million of IBNR losses were reclassified from
standard auto to other lines to be consistent with the recording of excess
liability policies premiums and losses.
|
|
|
(2)
|
Unfavorable
reserve reestimates included in catastrophe losses totaled $11 million and
$128 million in the three months and six months ended June 30, 2008,
respectively, compared to $50 million and $44 million unfavorable in the
three months and six months ended June 30, 2007
, respectively
.
|
DISCONTINUED LINES AND COVERAGES SEGMENT
Overview
The Discontinued Lines and Coverages segment
includes results from insurance coverage that we no longer write and results
for certain commercial and other businesses in run-off. Our exposure to asbestos, environmental and
other discontinued lines claims is reported in this segment. We have assigned management of this segment
to a designated group of professionals with expertise in claims handling,
policy coverage interpretation, exposure identification and reinsurance
collection. As part of its
responsibilities, this group is also regularly engaged in policy buybacks,
settlements and reinsurance assumed and ceded commutations.
46
Summarized underwriting results are presented in the following table.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Claims and claims expense
|
|
(2
|
)
|
(3
|
)
|
(7
|
)
|
39
|
|
Operating costs and expenses
|
|
(1
|
)
|
(2
|
)
|
(3
|
)
|
(4
|
)
|
Underwriting (loss) income
|
|
$
|
(3
|
)
|
$
|
(5
|
)
|
$
|
(10
|
)
|
$
|
35
|
|
Six months ended June 30, 2007 included a $46 million reduction in
the reinsurance recoverable valuation allowance related to Equitas Limiteds
improved financial position as a result of its reinsurance coverage with
National Indemnity Company.
PROPERTY-LIABILITY INVESTMENT RESULTS
Net investment income
decreased 16.6% in the second quarter of
2008 and 10.6% in the first six months of 2008 compared to the same periods of
2007. These decreases were principally
due to decreased partnership income, lower average asset balances reflecting
dividends paid by Allstate Insurance Company (AIC) to its parent, The
Allstate Corporation, and reduced portfolio yields.
Net realized capital gains and losses, after-tax
are presented in the following table.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Investment write-downs (1)
|
|
$
|
(51
|
)
|
$
|
(4
|
)
|
$
|
(226
|
)
|
$
|
(8
|
)
|
Sales
|
|
24
|
|
380
|
|
199
|
|
796
|
|
Change in intent write-downs
|
|
(324
|
)
|
(28
|
)
|
(375
|
)
|
(33
|
)
|
Valuation of derivative instruments
|
|
32
|
|
64
|
|
(91
|
)
|
72
|
|
Settlements of derivative instruments
|
|
81
|
|
25
|
|
61
|
|
54
|
|
Realized capital gains and losses, pretax
|
|
(238
|
)
|
437
|
|
(432
|
)
|
881
|
|
Income tax benefit (expense)
|
|
85
|
|
(154
|
)
|
154
|
|
(311
|
)
|
Realized capital gains and losses,
after-tax
|
|
$
|
(153
|
)
|
$
|
283
|
|
$
|
(278
|
)
|
$
|
570
|
|
(1) Investment write-downs include other-than-temporary
impairments except for those related to changes in intent to hold.
For a further discussion of net realized capital gains and losses, see
the Investments section of the MD&A.
47
ALLSTATE FINANCIAL HIGHLIGHTS
·
|
Net
loss of $379 million and $490 million in the second quarter and first six
months of 2008, respectively, driven by realized capital losses, compared to
net income of $200 million and $364 million in the second quarter and first
six months of 2007, respectively.
|
|
|
·
|
Net
realized capital losses of $965 million and $1.40 billion in the second
quarter and first six months of 2008, respectively, compared to net realized
capital gains of $104 million and $127 million in the second quarter and
first six months of 2007, respectively.
|
|
|
·
|
Contractholder
fund deposits totaled $4.32 billion and $7.24 billion for the second quarter
and first six months of 2008, respectively, compared to $2.74 billion and
$5.19 billion for the second quarter and first six months of 2007,
respectively.
|
|
|
·
|
Investments
as of June 30, 2008 decreased 2.4% from December 31, 2007 and net
investment income decreased 12.4% and 7.9% in the second quarter and first
six months of 2008, respectively, compared to the same periods of 2007.
|
ALLSTATE FINANCIAL SEGMENT
Summarized financial data is presented in the following table.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Life and annuity premiums and contract
charges
|
|
$
|
471
|
|
$
|
454
|
|
$
|
923
|
|
$
|
937
|
|
Net investment income
|
|
943
|
|
1,076
|
|
1,958
|
|
2,126
|
|
Realized capital gains and losses
|
|
(965
|
)
|
104
|
|
(1,397
|
)
|
127
|
|
Total revenues
|
|
449
|
|
1,634
|
|
1,484
|
|
3,190
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
Life and annuity contract benefits
|
|
(395
|
)
|
(386
|
)
|
(792
|
)
|
(814
|
)
|
Interest credited to contractholder funds
|
|
(563
|
)
|
(673
|
)
|
(1,187
|
)
|
(1,322
|
)
|
Amortization of DAC
|
|
41
|
|
(184
|
)
|
(23
|
)
|
(313
|
)
|
Operating costs and expenses
|
|
(125
|
)
|
(95
|
)
|
(243
|
)
|
(200
|
)
|
Restructuring and related charges
|
|
|
|
1
|
|
|
|
1
|
|
Total costs and expenses
|
|
(1,042
|
)
|
(1,337
|
)
|
(2,245
|
)
|
(2,648
|
)
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposition of operations
|
|
|
|
2
|
|
(9
|
)
|
2
|
|
Income tax benefit (expense)
|
|
214
|
|
(99
|
)
|
280
|
|
(180
|
)
|
Net (loss) income
|
|
$
|
(379
|
)
|
$
|
200
|
|
$
|
(490
|
)
|
$
|
364
|
|
|
|
|
|
|
|
|
|
|
|
Investments at June 30
|
|
|
|
|
|
$
|
72,504
|
|
$
|
77,113
|
|
Net loss
in the second quarter of 2008 of $379 million compared to net income
of $200 million in the same period of 2007, and a net loss of $490 million in
the first six months of 2008 compared to net income of $364 million in the
first six months of 2007. The change was
the result of the recognition of net realized capital losses in 2008 compared
to net realized capital gains in 2007.
Analysis of Revenues
Total revenues decreased 72.5% or $1.19
billion in the second quarter of 2008 and decreased 53.5% or $1.71 billion in
the first six months of 2008, compared to the same periods of 2007, due mostly
to the recognition of net realized capital losses in the current year periods
compared to net realized capital gains in the prior year periods, and, to a
much lesser extent, lower net investment income in the current year periods
compared to the prior year periods. Life
and annuity premiums and contract charges increased in the second quarter of
2008 but declined in the first six months of 2008.
48
Life and annuity premiums and contract charges
Premiums
represent
revenues generated from traditional life insurance, immediate annuities with
life contingencies, and accident, health and other insurance products that have
significant mortality or morbidity risk.
Contract charges are revenues generated from interest-sensitive and
variable life insurance, fixed annuities and institutional products for which
deposits are classified as contractholder funds or separate accounts
liabilities. Contract charges are
assessed against the contractholder account values for maintenance,
administration, cost of insurance and surrender prior to contractually
specified dates. As a result, changes in
contractholder funds are considered in the evaluation of growth and as
indicators of future levels of revenues.
The following table summarizes life and annuity premiums and contract
charges by product.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
|
|
|
|
|
|
|
Traditional life insurance
|
|
$
|
76
|
|
$
|
66
|
|
$
|
141
|
|
$
|
140
|
|
Immediate annuities with life contingencies
|
|
36
|
|
52
|
|
66
|
|
129
|
|
Accident, health and other
|
|
99
|
|
92
|
|
202
|
|
183
|
|
Total premiums
|
|
211
|
|
210
|
|
409
|
|
452
|
|
|
|
|
|
|
|
|
|
|
|
Contract charges
|
|
|
|
|
|
|
|
|
|
Interest-sensitive life insurance
|
|
246
|
|
224
|
|
487
|
|
447
|
|
Fixed annuities
|
|
13
|
|
19
|
|
26
|
|
37
|
|
Variable annuities
|
|
1
|
|
1
|
|
1
|
|
1
|
|
Total contract charges (1)
|
|
260
|
|
244
|
|
514
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
Life and annuity premiums and contract
charges
|
|
$
|
471
|
|
$
|
454
|
|
$
|
923
|
|
$
|
937
|
|
(1)
|
Total
contract charges for the second quarter of 2008 and 2007 include contract
charges related to the cost of insurance of $173 million and $159 million,
respectively. Total contract charges for the first six months of 2008 and
2007 include contract charges related to the cost of insurance of $345
million and $318 million, respectively.
|
Total premiums in the second quarter of 2008 were comparable to the
second quarter of 2007 and decreased 9.5% in the first six months of 2008
compared to the same period of 2007. In
the second quarter of 2008, higher sales of traditional life insurance and
accident and health insurance products sold through the Allstate Workplace
Division were almost entirely offset by a decline in sales of life contingent
immediate annuities due to competitive market conditions. In the first six months of 2008, a decline in
sales of life contingent immediate annuities and higher reinsurance premiums on
life insurance were partially offset by higher sales of accident and health
insurance products.
Contract charges increased 6.6% and 6.0% in the second quarter and
first six months of 2008, respectively, compared to the same periods of 2007
due primarily to higher contract charges on interest-sensitive life insurance
policies resulting from increased contract charge rates and growth in business
in force, partially offset by decreased contract charges on fixed annuities
resulting primarily from lower surrender charges.
Contractholder funds
represent interest-bearing liabilities
arising from the sale of individual and institutional products, such as
interest-sensitive life insurance, fixed annuities, funding agreements and bank
deposits. The balance of contractholder funds is equal to the cumulative
deposits received and interest credited to the contractholder less cumulative
contract maturities, benefits, surrenders, withdrawals and contract charges for
mortality or administrative expenses.
49
The following table shows the changes in contractholder funds.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder funds, beginning balance
|
|
$
|
61,727
|
|
$
|
62,472
|
|
$
|
61,975
|
|
$
|
62,031
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
Fixed annuities
|
|
1,237
|
|
880
|
|
1,923
|
|
1,576
|
|
Institutional products (funding agreements)
|
|
2,498
|
|
1,300
|
|
4,158
|
|
2,500
|
|
Interest-sensitive life insurance
|
|
347
|
|
343
|
|
707
|
|
696
|
|
Bank and other deposits
|
|
242
|
|
214
|
|
453
|
|
417
|
|
Total deposits
|
|
4,324
|
|
2,737
|
|
7,241
|
|
5,189
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited
|
|
599
|
|
674
|
|
1,225
|
|
1,332
|
|
|
|
|
|
|
|
|
|
|
|
Maturities, benefits, withdrawals and other
adjustments
|
|
|
|
|
|
|
|
|
|
Maturities and retirements of institutional
products
|
|
(2,243
|
)
|
(1,243
|
)
|
(4,130
|
)
|
(1,995
|
)
|
Benefits
|
|
(421
|
)
|
(419
|
)
|
(884
|
)
|
(836
|
)
|
Surrenders and partial withdrawals
|
|
(1,318
|
)
|
(1,366
|
)
|
(2,505
|
)
|
(2,587
|
)
|
Contract charges
|
|
(215
|
)
|
(196
|
)
|
(424
|
)
|
(390
|
)
|
Net transfers from separate accounts
|
|
7
|
|
3
|
|
12
|
|
6
|
|
Fair value hedge adjustments for
institutional products
|
|
(67
|
)
|
(17
|
)
|
(1
|
)
|
(34
|
)
|
Other adjustments (1)
|
|
26
|
|
(29
|
)
|
(90
|
)
|
(100
|
)
|
Total maturities, benefits, withdrawals and
other adjustments
|
|
(4,231
|
)
|
(3,267
|
)
|
(8,022
|
)
|
(5,936
|
)
|
Contractholder funds, ending balance
|
|
$
|
62,419
|
|
$
|
62,616
|
|
$
|
62,419
|
|
$
|
62,616
|
|
(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 increased 1.1% in the second quarter of 2008, compared to an increase of
0.2% in the second quarter of 2007, and increased 0.7% in the first six months
of 2008, compared to an increase of 0.9% in the same period in the prior year. Average contractholder funds decreased 0.8%
and 0.2% in the second quarter and first six months of 2008, respectively,
compared to the same periods of 2007.
Contractholder
deposits increased 58.0% and 39.5% in the second quarter and first six months
of 2008, respectively, compared to the same periods of 2007. These increases were primarily due to higher
deposits on institutional products and, to a lesser extent, higher deposits on
fixed annuities. Deposits on
institutional products increased 92.2% and 66.3% in the second quarter and
first six months of 2008, respectively, compared to the same periods of
2007. Sales of our institutional
products vary from period to period based on managements assessment of market
conditions, investor demand and operational priorities. Deposits on fixed annuities increased 40.6%
and 22.0% in the second quarter and first six months of 2008, respectively,
compared to the same periods of 2007, due primarily to an improved sales
environment for fixed annuities relative to competing products resulting from a
steeper interest rate yield curve.
Maturities
and retirements of institutional products increased 80.5% and 107.0% in the
second quarter and first six months of 2008, respectively, compared to the same
periods in the prior year. During the
second quarter and first six months of 2008, we acquired in the secondary
market and retired $1.14 billion and $2.39 billion, respectively, of
institutional market deposits for which investors had elected to non-extend
their maturity. In addition, $986
million have been called and will be retired in July 2008. Total non-extended institutional market
deposits were $3.12 billion as of June 30, 2008, all of which become due
no later than the end of the first quarter of 2009. We have accumulated, and expect to maintain,
short-term investments to retire these obligations.
Surrenders
and partial withdrawals decreased 3.5% and 3.2% in the second quarter and first
six months of 2008, respectively, compared to the same periods of 2007. These declines were mostly due to lower
surrenders and partial withdrawals on fixed annuities, partially offset by
higher surrenders and partial withdrawals on interest-sensitive life insurance
products and, in the second quarter of 2008, increased withdrawals on Allstate
Bank products. The
50
annualized
surrender and partial withdrawal rate on deferred fixed annuities,
interest-sensitive life insurance products and Allstate Bank products, based on
the beginning of period contractholder funds, was 11.5% and 11.7% for the first
six months of 2008 and 2007, respectively.
Net investment income
decreased 12.4% and 7.9% in the second
quarter and first six months of 2008, respectively, compared to the same
periods of 2007. The declines were primarily due to lower investment yields on
floating rate assets, lower yields on increased short-term investment balances
held to offset reduced liquidity in some asset classes and the maturity of
institutional markets funding agreements, and lower investment balances
reflecting dividends paid by Allstate Life Insurance Company (ALIC) in 2007.
Net realized capital gains and losses
are reflected in the following table.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Investment write-downs(1)
|
|
$
|
(199
|
)
|
$
|
(4
|
)
|
$
|
(408
|
)
|
$
|
(5
|
)
|
Sales
|
|
(14
|
)
|
(6
|
)
|
(56
|
)
|
51
|
|
Change in intent write-downs
|
|
(762
|
)
|
(43
|
)
|
(786
|
)
|
(65
|
)
|
Valuation of derivative instruments
|
|
8
|
|
135
|
|
(194
|
)
|
115
|
|
Settlements of derivative instruments
|
|
2
|
|
22
|
|
47
|
|
31
|
|
Realized capital gains and losses, pretax
|
|
(965
|
)
|
104
|
|
(1,397
|
)
|
127
|
|
Income tax benefit (expense)
|
|
338
|
|
(37
|
)
|
489
|
|
(45
|
)
|
Realized capital gains and losses,
after-tax
|
|
$
|
(627
|
)
|
$
|
67
|
|
$
|
(908
|
)
|
$
|
82
|
|
(1) Investment write-downs
include other-than-temporary impairments except for those related to changes in
intent to hold.
For further discussion of realized capital gains and losses, see the
Investments section of MD&A.
Analysis of Costs and Expenses
Total costs and expenses decreased 22.1% and 15.2% in the second
quarter and first six months of 2008, respectively, compared with the same
periods of 2007, due mostly to lower amortization of DAC and interest credited
to contractholder funds partially offset by higher operating costs and
expenses.
Life and annuity contract benefits
increased 2.3% or $9 million in the second
quarter of 2008 compared to the second quarter of 2007 and decreased 2.7% or
$22 million in the first six months of 2008 compared to the same period in
2007. The increase in the second quarter
of 2008 was due to higher contract benefits on life insurance products
resulting primarily from increased insurance in-force and slightly unfavorable
mortality experience, partially offset by lower contract benefits on annuities
due primarily to the impact of lower sales of immediate annuities with life
contingencies on reserve changes partly offset by unfavorable mortality
experience. The decrease in the first
six months of 2008 was due to lower contract benefits on annuities resulting
primarily from the impact of lower sales of immediate annuities with life
contingencies on reserve changes, partially offset by higher contract benefits
on life insurance products due primarily to increased insurance in-force and
slightly unfavorable mortality experience, partially offset by the recognition
in the prior year of litigation related costs in the form of additional policy
benefits.
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 interest on immediate annuities with life
contingencies (benefit spread). This
implied interest totaled $138 million and $139 million in the second quarter of
2008 and 2007, respectively, and totaled $276 million in both the first six
months of 2008 and 2007
.
The benefit spread by product group is
disclosed in the following table.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Life insurance
|
|
$
|
134
|
|
$
|
128
|
|
$
|
263
|
|
$
|
246
|
|
Annuities
|
|
(7
|
)
|
(6
|
)
|
(25
|
)
|
(14
|
)
|
Total benefit spread
|
|
$
|
127
|
|
$
|
122
|
|
$
|
238
|
|
$
|
232
|
|
51
Interest credited to contractholder funds
decreased 16.3% or $110 million in the
second quarter of 2008 compared to the second quarter of 2007 and 10.2% or $135
million in the first six months of 2008 compared to the same period of
2007. These decreases were due primarily
to a decline in average contractholder funds, lower amortization of deferred
sales inducements and lower weighted average interest crediting rates on
institutional products due to declines in market interest rates on floating
rate obligations. Amortization of
deferred sales inducements reflected a credit to income of $24 million and $15
million in the second quarter and first six months of 2008, respectively,
compared to a charge to income of $18 million and $29 million in the second
quarter and first six months of 2007, respectively. The changes of $42 million
and $44 million in the second quarter and first six months of 2008,
respectively, compared to the same periods in the prior year, were predominantly
the result of realized capital losses recorded in the current year periods on
assets that support fixed annuities.
In
order to analyze the impact of net investment income and interest credited to
policyholders on net income, we review the difference between net investment
income and the sum of interest credited to contractholder funds and the implied
interest on immediate annuities with life contingencies, which is included as a
component of life and annuity contract benefits on the Condensed Consolidated Statements
of Operations (investment spread). The
investment spread by product group is shown in the following table.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Annuities
|
|
$
|
132
|
|
$
|
129
|
|
$
|
247
|
|
$
|
258
|
|
Life insurance
|
|
15
|
|
14
|
|
34
|
|
33
|
|
Institutional products
|
|
16
|
|
20
|
|
43
|
|
45
|
|
Bank
|
|
4
|
|
4
|
|
9
|
|
8
|
|
Net investment income on investments
supporting capital
|
|
75
|
|
97
|
|
162
|
|
184
|
|
Total investment spread
|
|
$
|
242
|
|
$
|
264
|
|
$
|
495
|
|
$
|
528
|
|
To further analyze
investment spreads, the following table summarizes the weighted average
investment yield on assets supporting product liabilities and capital, interest
crediting rates on investment type products and investment spreads for the
three months ended June 30.
|
|
Weighted Average
Investment Yield
|
|
Weighted Average
Interest Crediting Rate
|
|
Weighted Average
Investment Spreads
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Interest-sensitive life insurance
|
|
6.0
|
%
|
6.1
|
%
|
4.6
|
%
|
4.7
|
%
|
1.4
|
%
|
1.4
|
%
|
Deferred fixed annuities
|
|
5.5
|
|
5.8
|
|
3.7
|
|
3.7
|
|
1.8
|
|
2.1
|
|
Immediate fixed annuities with and without
life contingencies
|
|
6.9
|
|
7.1
|
|
6.5
|
|
6.6
|
|
0.4
|
|
0.5
|
|
Institutional products
|
|
3.9
|
|
6.0
|
|
3.2
|
|
5.1
|
|
0.7
|
|
0.9
|
|
Investments supporting capital, traditional
life and other products
|
|
5.3
|
|
6.1
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
The following table summarizes the weighted average investment yield on
assets supporting product liabilities and capital, interest crediting rates on
investment type products and investment spreads for the six months ended June 30.
|
|
Weighted Average
Investment Yield
|
|
Weighted Average
Interest Crediting Rate
|
|
Weighted Average
Investment Spreads
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Interest-sensitive life insurance
|
|
6.1
|
%
|
6.1
|
%
|
4.6
|
%
|
4.6
|
%
|
1.5
|
%
|
1.5
|
%
|
Deferred fixed annuities
|
|
5.5
|
|
5.7
|
|
3.7
|
|
3.7
|
|
1.8
|
|
2.0
|
|
Immediate fixed annuities with and without
life contingencies
|
|
6.9
|
|
7.1
|
|
6.5
|
|
6.6
|
|
0.4
|
|
0.5
|
|
Institutional products
|
|
4.5
|
|
6.0
|
|
3.7
|
|
5.1
|
|
0.8
|
|
0.9
|
|
Investments supporting capital, traditional
life and other products
|
|
5.7
|
|
5.8
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
52
The following table summarizes our product liabilities as of June 30
and indicates the account value of those contracts and policies in which an
investment spread is generated.
|
|
As of June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
Immediate fixed annuities with life
contingencies
|
|
$
|
8,333
|
|
$
|
8,247
|
|
Other life contingent contracts and other
|
|
4,632
|
|
4,428
|
|
Reserve for life-contingent contract
benefits
|
|
$
|
12,965
|
|
$
|
12,675
|
|
|
|
|
|
|
|
Interest-sensitive life insurance
|
|
$
|
9,764
|
|
$
|
9,334
|
|
Deferred fixed annuities
|
|
34,082
|
|
35,038
|
|
Immediate fixed annuities without life
contingencies
|
|
3,867
|
|
3,822
|
|
Institutional products
|
|
13,266
|
|
13,301
|
|
Allstate Bank
|
|
850
|
|
737
|
|
Fair value adjustments related to fair
value hedges and other
|
|
590
|
|
384
|
|
Contractholder funds
|
|
$
|
62,419
|
|
$
|
62,616
|
|
Amortization of DAC
reflected a credit to income of $41 million in the second quarter of 2008
compared to a charge to income of $184 million in the second quarter of
2007. For the first six months of 2008
and 2007, amortization of DAC reflected a charge to income of $23 million and
$313 million, respectively. The changes
of $225 million and $290 million in the second quarter and first six months of
2008, respectively, compared to the same periods in the prior year, were
predominantly the result of reduced actual gross profits for fixed annuities
and interest-sensitive life insurance products due to realized capital losses
recorded in the current year periods.
For the six-month period, the change was also impacted by an increase in amortization deceleration
(credit to income) of $11 million due to our annual comprehensive review of DAC
assumptions (commonly referred to as DAC unlocking).
Accretion in the current year periods and
amortization in the prior year periods of DAC related to realized capital gains
and losses increased income by $171 million and $224 million, pretax, in the
second quarter and first six months of 2008, respectively, compared to a
decrease to income of $20 million, pretax, in both the second quarter and first
six months of 2007. 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.
In accordance with our annual comprehensive review of DAC assumptions,
in the first six months of 2008, the Company recognized net amortization
deceleration totaling $25 million, including $17 million for fixed annuities
and $8 million for interest-sensitive life insurance products. In the first six months of 2007, net
amortization deceleration totaled $14 million and included net amortization deceleration
of $18 million for interest-sensitive life insurance products and net
amortization acceleration of $4 million for fixed annuities. The first six months of 2008 net amortization
deceleration of $17 million on fixed annuities was due primarily to higher than
expected investment spreads partially offset by increased expenses. The first six months of 2008 net amortization
deceleration of $8 million on interest-sensitive life insurance products was
due to higher than expected benefit spreads partially offset by increased
expenses.
Operating
costs and expenses
increased 31.6% and 21.5% in the second
quarter and first six months of 2008, respectively, compared to the same
periods of 2007. The following table
summarizes operating costs and expenses.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Non-deferrable acquisition costs
|
|
$
|
36
|
|
$
|
39
|
|
$
|
75
|
|
$
|
81
|
|
Other operating costs and expenses
|
|
89
|
|
56
|
|
168
|
|
119
|
|
Total operating costs and expenses
|
|
$
|
125
|
|
$
|
95
|
|
$
|
243
|
|
$
|
200
|
|
53
Non-deferrable acquisition costs decreased 7.7% or $3 million in the
second quarter and decreased 7.4% or $6 million in the first six months of 2008,
compared to the same periods of 2007, primarily due to lower non-deferrable
commissions. Other operating costs and
expenses increased 58.9% or $33 million in the second quarter and 41.2% or $49
million in the first six months of 2008, compared to the same periods of 2007,
due primarily to increased spending on consumer research, product development,
marketing and technology related to the effort to reinvent retirement for
consumers.
Loss on disposition of operations
for the first six months of 2008 totaled $9 million and was comprised primarily
of losses associated with the anticipated disposition of our direct response
long-term care business that is currently held for sale. In the second quarter and first six months of
2007, a gain on disposition of operations of $2 million was recognized that
primarily included amortization of a deferred reinsurance gain associated with
a prior period disposition.
Income tax benefit
of $214
million and $280 million was recognized for the second quarter and first six
months of 2008, respectively, compared to income tax expense of $99 million and
$180 million in the second quarter and first six months of 2007,
respectively. The change reflects the
shift from net pretax income in the prior year to a net pretax loss in the
current year.
INVESTMENTS
We
developed additional risk mitigation and return optimization programs in the
second quarter of 2008 in response to an altered outlook for continued weakness
in the U.S. financial markets and economy including continued volatility in the
financial markets, continued reduced liquidity in certain asset classes and
further unfavorable economic trends. In
addition, the potential for systemic investment supply and demand imbalances
has remained above normal due to the deteriorating credit strength of financial
institutions. The risk mitigation and
return optimization programs are designed to protect certain portions of our
investment portfolio from significant decreases in value resulting from extreme
adverse movements in risk-free interest rates, credit spreads, and equity
market valuations. They consist of overall portfolio protection (macro-hedging)
and potential future reductions in certain real estate and financial-related
market sectors. These actions will
position us to take advantage of market opportunities and also will help
protect our investment portfolio from the continued turmoil in the financial
markets. These programs augment earlier actions to reduce investments in real
estate and other market sectors as well as to mitigate exposures to risk-free
interest rate spikes. We will monitor
the progress of these programs as market and economic conditions continue to
develop and will adapt our decisions as appropriate.
We
have begun to implement the macro-hedging program using derivatives to
partially mitigate the potential adverse impacts from potential future
increases in risk-free interest rates, increases in credit spreads, and
negative equity market valuations for our Property-Liability portfolio with
plans to introduce a program later this year for Allstate Financial. The interest rate component is being
integrated with the current program, to protect a certain portion of fixed
income securities, if interest rates increase above a targeted maximum level,
for example in excess of 150 basis points.
The equity hedge will be designed to protect the equity portfolio from
significant equity market valuation declines below a targeted level using a
collar whereby we give up returns above a certain level. For example, if equity market valuation
declines fall below 25% the equity hedge protects valuations, and with a collar
we give up returns in excess of 20%.
Another component of the macro-hedging program is less comprehensive
since these derivatives are less effective and efficient and partially
mitigates municipal bond interest rate risk and some general market credit
spread risk.
The
cost of the macro-hedging program for one year is currently estimated to be
approximately $85 million. The
provisions of the macro-hedging program and its estimated cost will be
dependent upon market conditions at the time of entering into the applicable
contracts.
The
risk mitigation and return optimization programs were designed to reduce our
exposure to residential and commercial real estate and financial related
markets by approximately $4 billion of amortized cost, prior to change in
intent write-downs. A comprehensive
review identified specific investments that could be significantly impacted
by continued deterioration in
the economy including certain real estate and financial-related market sectors
that may be sold. This includes a portion of our residential and commercial
real estate securities including securities collateralized by residential and
commercial mortgage loans, mortgage loans and securities issued by financial
institutions. As a result, we have
change in intent write-downs on securities with a fair value of approximately
$3.31 billion at June 30, 2008. Accordingly, approximately $857 million of
realized capital losses were recognized in the second quarter of 2008 net
income related to our change in intent write-downs, with minimal net impact on
54
shareholders
equity as these investments were carried at fair value with unrealized losses
reflected within accumulated other comprehensive income at March 31, 2008.
At
June 30, 2008, our exposure to residential and commercial real estate is
approximately $28.14 billion, comprised primarily of mortgage-backed securities
(MBS), commercial mortgage-backed securities (CMBS), asset-backed
residential mortgage-backed securities (ABS RMBS), asset-backed
collateralized debt obligations (ABS CDO) and mortgage loans. Our exposure to financial-related market
sectors totaled approximately $12 billion at June 30, 2008, and includes
fixed income and equity holdings in banks, brokerages, finance companies and
insurance.
Any
funds raised from the eventual disposition of these securities will be invested
in accordance with our asset-liability management strategies and the initial
stage of our enhanced enterprise-wide asset allocation (EAA) strategy. These
strategies identify risks and return needs across the Corporation and consider
cross-correlation impacts in determining an efficient mix of assets for the
enterprise as a whole. The work
associated with these strategies is ongoing, and implementation will occur as
market opportunities arise. Under conditions
we find favorable, an increase in municipal bond and foreign equity exposures
comprise the initial stage of our EAA strategy. To the extent markets remain
unstable, we will invest in high quality, lower risk investments over the
short-term. Net investment income from
potential reinvested funds may be lower as proceeds invested at current yields
could be lower than the yields on the investments written-down.
An
important component of our financial results is the return on our investment
portfolios. Investment portfolios are
segmented between the Property-Liability, Allstate Financial and Corporate and
Other operations. The investment
portfolios are managed based upon the nature of each respective business and
its corresponding liability structure.
The composition of the investment portfolios at June 30, 2008 is
presented in the table below.
|
|
Property-Liability
|
|
Allstate Financial(4)
|
|
Corporate
and Other(4)
|
|
Total
|
|
($ in millions)
|
|
|
|
Percent
to total
|
|
|
|
Percent
to total
|
|
|
|
Percent
to total
|
|
|
|
Percent
to total
|
|
Fixed income securities (1)
|
|
$
|
28,110
|
|
76.2
|
%
|
$
|
53,164
|
|
73.3
|
%
|
$
|
1,950
|
|
46.2
|
%
|
$
|
83,224
|
|
73.3
|
%
|
Equity securities (2)
|
|
4,513
|
|
12.2
|
|
151
|
|
0.2
|
|
|
|
|
|
4,664
|
|
4.1
|
|
Mortgage loans
|
|
764
|
|
2.1
|
|
9,865
|
|
13.6
|
|
|
|
|
|
10,629
|
|
9.4
|
|
Limited partnership interests (3)
|
|
1,656
|
|
4.5
|
|
1,154
|
|
1.6
|
|
80
|
|
1.9
|
|
2,890
|
|
2.5
|
|
Short-term
|
|
1,773
|
|
4.8
|
|
5,675
|
|
7.8
|
|
2,191
|
|
51.9
|
|
9,639
|
|
8.5
|
|
Other
|
|
61
|
|
0.2
|
|
2,495
|
|
3.5
|
|
1
|
|
|
|
2,557
|
|
2.2
|
|
Total
|
|
$
|
36,877
|
|
100.0
|
%
|
$
|
72,504
|
|
100.0
|
%
|
$
|
4,222
|
|
100.0
|
%
|
$
|
113,603
|
|
100.0
|
%
|
(1)
|
Fixed income securities are carried at fair value. Amortized cost
basis for these securities was $28.28 billion, $54.21 billion and $1.95
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 $4.05 billion and $152 million for Property-Liability and
Allstate Financial, respectively.
|
|
|
(3)
|
We have commitments to invest in additional limited partnerships
totaling $2.01 billion at June 30, 2008.
|
|
|
(4)
|
Balances reflect the elimination of related party investments between
Allstate Financial and Corporate and Other.
|
Total investments decreased to $113.60
billion at June 30, 2008, from $118.98 billion at December 31, 2007,
due to unrealized net capital losses, net realized capital losses, and lower
funds associated with collateral received in conjunction with securities
lending, partially offset by a slight increase in contractholder funds.
The Property-Liability investment portfolio
decreased to $36.88 billion at June 30, 2008, from $40.91 billion at December 31,
2007, due to lower unrealized net capital gains, dividends paid by AIC to The
Allstate Corporation,
lower funds associated with collateral received in
conjunction with securities lending and
net realized capital losses.
The
Allstate Financial investment portfolio decreased to
$72.50 billion at June 30, 2008, from $74.25 billion at December 31,
2007, due to unrealized net capital losses and net realized capital losses
, partially offset by increased funds associated
with collateral received in conjunction with securities lending
.
The Corporate and Other investment portfolio
increased to $4.22 billion at June 30, 2008, from $3.82 billion at December 31,
2007, primarily due to dividends received from AIC, partially offset by cash
flows used in financing activities.
Total
investments at amortized cost related to collateral received in connection with
securities lending business activities and collateral posted by counterparties
related to derivative transactions decreased to $2.98 billion at June
55
30,
2008, from $3.46 billion at December 31, 2007. These investments are carried at fair value
and classified in fixed income securities totaling $1.92 billion and $2.85
billion, respectively, and short-term investments totaling $971 million and
$549 million, as of June 30, 2008 and December 31, 2007,
respectively.
Fixed income securities by
type are listed in the table below.
($ in millions)
|
|
June 30, 2008
|
|
% to Total
Investments
|
|
December 31, 2007
|
|
% to Total
Investments
|
|
U.S. government and agencies
|
|
$
|
4,131
|
|
3.6
|
%
|
$
|
4,421
|
|
3.7
|
%
|
Municipal
|
|
24,418
|
|
21.5
|
|
25,307
|
|
21.3
|
|
Corporate
|
|
33,691
|
|
29.7
|
|
38,467
|
|
32.3
|
|
Foreign government
|
|
2,676
|
|
2.3
|
|
2,936
|
|
2.5
|
|
MBS
|
|
6,089
|
|
5.4
|
|
6,959
|
|
5.8
|
|
CMBS
|
|
6,036
|
|
5.3
|
|
7,617
|
|
6.4
|
|
Asset-backed securities (
ABS)
|
|
6,126
|
|
5.4
|
|
8,679
|
|
7.3
|
|
Redeemable preferred stock
|
|
57
|
|
0.1
|
|
65
|
|
0.1
|
|
Total fixed income securities
|
|
$
|
83,224
|
|
73.3
|
%
|
$
|
94,451
|
|
79.4
|
%
|
At June 30, 2008, 95.0% of the consolidated fixed income
securities portfolio was rated investment grade, which is defined as a security
having a rating from the National Association of Insurance Commissioners (NAIC)
of 1 or 2; a rating of Aaa, Aa, A or Baa from Moodys or a rating of AAA, AA, A
or BBB from S&Ps, Fitch or Dominion or 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.
During the second quarter of 2008, certain financial markets continued
to experience price declines due to market and liquidity disruptions. We experienced this illiquidity and
disruption particularly in our prime residential mortgage-backed securities (Prime),
Alt-A residential mortgage-backed securities (Alt-A), commercial real estate
collateralized debt obligations (CRE CDO), ABS RMBS and ABS CDO
portfolios. These portfolios totaled
$5.29 billion, or less than 5.0% of our total investments at June 30,
2008. Certain other asset-backed and
real estate-backed securities markets experienced illiquidity, but to a lesser
degree.
We determine the fair values of securities comprising these illiquid
portfolios by obtaining information from an independent third-party valuation
service provider and brokers. We confirmed the reasonableness of the fair value
of these portfolios as of June 30, 2008 by analyzing available market
information including, but not limited to, collateral quality, anticipated cash
flows, credit enhancements, default rates, loss severities, securities
relative position within their respective capital structures, and credit
ratings from statistical rating agencies.
Investment write-downs during the second quarter of
2008 were recorded on our Alt-A, CRE CDO, ABS RMBS and ABS CDO totaling $2
million, $39 million, $137 million and $3 million, respectively. Investment write-downs during the first six
months of 2008 were recorded on our Prime, Alt-A, CRE CDO, ABS RMBS and ABS CDO
totaling $9 million, $91 million, $39 million, $172 million and $63 million,
respectively. Change in intent
write-downs, included losses on our Prime totaling $15 million, Alt-A totaling
$96 million, CRE CDO totaling $248 million and ABS RMBS totaling $185 million for
the three months ended June 30, 2008.
We continue to believe that the unrealized losses on these securities
are not necessarily predictive of the ultimate performance of the underlying
collateral. In the absence of further
deterioration in the collateral relative to our positions in the securities
respective capital structures, which could be other-than-temporary, the
unrealized losses should reverse over the remaining lives of the securities.
The cash flows of the
underlying mortgages or collateral for MBS, CRE CDO and ABS are generally applied
in a pre-determined order and are designed so that each security issued
qualifies for a specific original rating.
The security issue is typically referred to as the class. For example, the senior portion or top of
the capital structure which would originally qualify for a rating of Aaa is
referred to as the Aaa class and typically has priority in receiving the
principal repayments on the underlying mortgages. In addition, the portion of the capital
structure originally rated Aaa may further be divided into multiple
sub-classes, super senior, senior ,senior support for Prime and Alt-A
issues, and first, second, third for ABS RMBS issues where the principal
repayments are typically paid sequentially (i.e., all of the underlying mortgage
principal repayments are received by the first originally rated Aaa class in
the structure until it is paid in full, then all of the underlying mortgage
principal repayments are received by the second originally rated Aaa class in
the structure until it is paid in full).
Although securities within the various Aaa classes are paid
sequentially, they typically share any losses on a pro-rata basis after losses
are absorbed by classes with lower original ratings or what may be referred to
as more junior or subordinate securities in the capital structure. The underlying mortgages have fixed interest
rates, variable interest
56
rates (such as adjustable rate mortgages (ARM)) or
are hybrid, meaning that they contain features of both fixed and variable rate
mortgages.
MBS
totaled $6.09 billion and 99.9% were rated
investment grade at June 30, 2008.
The MBS portfolio is subject to interest rate risk since price
volatility and the ultimate realized yield are affected by the rate of
prepayment of the underlying mortgages.
The credit risk associated with our MBS is mitigated due to the fact
that 68.3% of the portfolio consists of securities that were issued by, or have
underlying collateral that is guaranteed by U.S. government agencies or U.S.
government sponsored entities (U.S. Agency).
The
following table shows MBS by type and Moodys equivalent rating.
($ in millions)
|
|
Fair value at
June 30, 2008
|
|
% to Total
Investments
|
|
Aaa
|
|
Aa
|
|
A
|
|
Ba or
lower
|
|
MBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency
|
|
$
|
4,160
|
|
3.7
|
%
|
100.0
|
%
|
|
|
|
|
|
|
Prime
|
|
976
|
|
0.9
|
|
84.8
|
|
15.2
|
%
|
|
|
|
|
Alt-A
|
|
948
|
|
0.8
|
|
95.3
|
|
3.7
|
|
0.4
|
%
|
0.6
|
%
|
Other
|
|
5
|
|
|
|
|
|
100.0
|
|
|
|
|
|
Total MBS
|
|
$
|
6,089
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
Prime are collateralized by residential mortgage loans issued to prime
borrowers. As of June 30, 2008,
fair value represents 94.1% of amortized cost of these securities. During both the second quarter and first six
months of 2008, we sold $154 million of Prime, recognizing a loss of $3
million. In addition, we acquired $21 million of Prime during the first six
months of 2008. We also collected $33
million and $60 million of principal repayments consistent with the expected
cash flows during the second quarter and first six months of 2008, respectively.
Investment write-downs during the first six months of 2008 were recorded on our
Prime totaling $9 million. In addition,
$15 million of change in intent write-downs were recorded during the second
quarter of 2008 on Prime.
Our Prime positions comprised 73.0% fixed rate mortgages, and 84.8% of
the portfolio is in the Aaa class of the capital structure. The following table
shows our Prime portfolio of June 30, 2008 by vintage year, based upon our
participation in the capital structure.
|
|
Vintage Year
|
|
|
|
|
|
($ in millions)
Capital structure classification
|
|
2007
|
|
2006
|
|
2005
|
|
Pre-2005
|
|
Fair
value
|
|
Amortized
Cost
|
|
Unrealized
Gain/Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaa Fixed rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Super Senior
|
|
$
|
|
|
$
|
58
|
|
$
|
|
|
$
|
48
|
|
$
|
106
|
|
$
|
109
|
|
$
|
(3
|
)
|
Senior
|
|
37
|
|
60
|
|
121
|
|
240
|
|
458
|
|
487
|
|
(29
|
)
|
|
|
37
|
|
118
|
|
121
|
|
288
|
|
564
|
|
596
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaa Hybrid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Super Senior
|
|
17
|
|
5
|
|
76
|
|
12
|
|
110
|
|
122
|
|
(12
|
)
|
Senior
|
|
20
|
|
|
|
17
|
|
105
|
|
142
|
|
149
|
|
(7
|
)
|
Senior Support
|
|
|
|
|
|
12
|
|
|
|
12
|
|
16
|
|
(4
|
)
|
|
|
37
|
|
5
|
|
105
|
|
117
|
|
264
|
|
287
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aa Fixed rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Super Senior
|
|
|
|
|
|
|
|
7
|
|
7
|
|
8
|
|
(1
|
)
|
Senior
|
|
141
|
|
|
|
|
|
|
|
141
|
|
146
|
|
(5
|
)
|
|
|
141
|
|
|
|
|
|
7
|
|
148
|
|
154
|
|
(6
|
)
|
Total
|
|
$
|
215
|
|
$
|
123
|
|
$
|
226
|
|
$
|
412
|
|
$
|
976
|
|
$
|
1,037
|
|
$
|
(61
|
)
|
57
Included
in our mortgage-backed fixed income securities are Alt-A at fixed or variable
rates. The following table presents
information about the collateral in our Alt-A holdings.
($ in millions)
|
|
Fair value at
June 30, 2008
|
|
% to Total
Investments
|
|
Alt-A
|
|
|
|
|
|
Fixed rate
|
|
$
|
594
|
|
0.5
|
%
|
Variable rate
|
|
354
|
|
0.3
|
|
Total Alt-A
|
|
$
|
948
|
|
0.8
|
%
|
Alt-A can be issued by trusts backed by pools of residential mortgages
with either fixed or variable interest rates.
The mortgage pools can include
residential mortgage
loans issued to borrowers with stronger credit profiles than sub-prime
borrowers, but who do not qualify for prime financing terms due to high
loan-to-value ratios or limited supporting documentation. As of June 30, 2008, fair value
represents 87.6% of the amortized cost of these securities. Alt-A securities with a fair value less than
70% of amortized cost totaled $69 million, with unrealized losses of $69
million. During
both the second quarter and first six months of 2008, we sold $43 million of Alt-A, recognizing a loss
of $15 million. We also collected $42 million and $83 million
of principal repayments consistent with the expected cash flows during the
second quarter and first six months of 2008, respectively. Investment write-downs during the second
quarter and first six months of 2008 were recorded on our Alt-A totaling $2
million and $91 million, respectively.
In addition, $96 million of change in intent write-downs were recorded
during the second quarter of 2008 on Alt-A.
The
following table shows our Alt-A portfolio at June 30, 2008 by vintage
year, based upon our participation in the capital structure.
|
|
Vintage Year
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
|
|
|
Pre-
|
|
Fair
|
|
Amortized
|
|
Unrealized
|
|
Capital structure classification
|
|
2007
|
|
2006
|
|
2005
|
|
2005
|
|
Value
|
|
Cost
|
|
Gain/Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaa Fixed rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Super Senior
|
|
$
|
|
|
$
|
48
|
|
$
|
46
|
|
$
|
|
|
$
|
94
|
|
$
|
104
|
|
$
|
(10
|
)
|
Senior
|
|
34
|
|
136
|
|
103
|
|
159
|
|
432
|
|
469
|
|
(37
|
)
|
Senior Support
|
|
49
|
|
7
|
|
|
|
|
|
56
|
|
55
|
|
1
|
|
|
|
83
|
|
191
|
|
149
|
|
159
|
|
582
|
|
628
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaa Hybrid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Super Senior
|
|
|
|
28
|
|
3
|
|
|
|
31
|
|
39
|
|
(8
|
)
|
Senior
|
|
|
|
|
|
12
|
|
12
|
|
24
|
|
28
|
|
(4
|
)
|
Senior Support
|
|
9
|
|
4
|
|
19
|
|
9
|
|
41
|
|
54
|
|
(13
|
)
|
|
|
9
|
|
32
|
|
34
|
|
21
|
|
96
|
|
121
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaa - Option Adjustable Rate Mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Super Senior
|
|
21
|
|
|
|
33
|
|
|
|
54
|
|
54
|
|
|
|
Senior
|
|
|
|
|
|
10
|
|
|
|
10
|
|
10
|
|
|
|
Senior Support
|
|
47
|
|
29
|
|
3
|
|
9
|
|
88
|
|
142
|
|
(54
|
)
|
Super Senior Mid
|
|
32
|
|
27
|
|
6
|
|
8
|
|
73
|
|
79
|
|
(6
|
)
|
|
|
100
|
|
56
|
|
52
|
|
17
|
|
225
|
|
285
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aa - Option Adjustable Rate Mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Support
|
|
|
|
8
|
|
5
|
|
|
|
13
|
|
13
|
|
|
|
Subordinate
|
|
|
|
|
|
4
|
|
18
|
|
22
|
|
20
|
|
2
|
|
|
|
|
|
8
|
|
9
|
|
18
|
|
35
|
|
33
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A and lower
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
9
|
|
1
|
|
|
|
10
|
|
15
|
|
(5
|
)
|
|
|
|
|
9
|
|
1
|
|
|
|
10
|
|
15
|
|
(5
|
)
|
Total
|
|
$
|
192
|
|
$
|
296
|
|
$
|
245
|
|
$
|
215
|
|
$
|
948
|
|
$
|
1,082
|
|
$
|
(134
|
)
|
58
CMBS
totaled $6.04
billion and 99.9% were rated investment grade at June 30, 2008. The CMBS portfolio is subject to credit risk,
but unlike other structured securities, is generally not subject to prepayment
risk due to protections within the underlying commercial mortgages whereby
borrowers are effectively restricted from prepaying their mortgages due to
changes in interest rates. Approximately
83.6% of the CMBS investments are pools of commercial mortgages, broadly
diversified across property types and geographical area. The following table shows CMBS by type and
Moodys equivalent rating.
($ in millions)
|
|
Fair value at
June 30, 2008
|
|
% to Total
Investments
|
|
Aaa
|
|
Aa
|
|
A
|
|
Baa
|
|
Ba or
lower
|
|
CMBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS
|
|
$
|
5,660
|
|
5.0
|
%
|
81.2
|
%
|
13.2
|
%
|
4.0
|
%
|
1.4
|
%
|
0.2
|
%
|
CRE CDO
|
|
376
|
|
0.3
|
|
38.3
|
|
28.4
|
|
24.5
|
|
8.8
|
|
|
|
Total CMBS
|
|
$
|
6,036
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
CRE CDO are investments secured primarily by commercial mortgage-backed
securities and other commercial mortgage debt obligations. These securities are generally less
liquid and have a higher risk profile than other commercial mortgage-backed
securities.
As of June 30,
2008,
fair value represents
101.1% of the amortized cost of these securities. During the second quarter and first six months
of 2008, we sold $27 million and $36 million of CRE CDO, respectively,
recognizing a loss of $22 million and $24 million, respectively. We
also collected $2 million and $3 million of principal repayments consistent
with the expected cash flows during the second quarter and first six months of
2008, respectively. Investment
write-downs during both the second quarter and first six months of 2008 were
recorded on our CRE CDO totaling $39 million.
In addition, $248 million of change in intent write-downs were recorded
during the second quarter of 2008 on CRE CDO.
The following table shows our CRE CDO portfolio at June 30, 2008 by
vintage year, based upon our participation in the capital structure.
|
|
Vintage Year
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
Fair
|
|
Amortized
|
|
Unrealized
|
|
Capital structure/ Current rating
|
|
2007
|
|
2006
|
|
2005
|
|
Pre-2005
|
|
Value
|
|
Cost (1)
|
|
Gain/Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aaa
|
|
$
|
18
|
|
$
|
34
|
|
$
|
42
|
|
$
|
50
|
|
$
|
144
|
|
$
|
143
|
|
$
|
1
|
|
Aa
|
|
3
|
|
69
|
|
10
|
|
25
|
|
107
|
|
104
|
|
3
|
|
A
|
|
18
|
|
27
|
|
14
|
|
33
|
|
92
|
|
92
|
|
|
|
Baa
|
|
6
|
|
19
|
|
8
|
|
|
|
33
|
|
33
|
|
|
|
Total
|
|
$
|
45
|
|
$
|
149
|
|
$
|
74
|
|
$
|
108
|
|
$
|
376
|
|
$
|
372
|
|
$
|
4
|
|
ABS
totaled $6.13
billion and 97.2% were rated investment grade at June 30, 2008.
ABS
by type are listed in the table below.
($ in millions)
|
|
Fair value at
June 30, 2008
|
|
% to Total
Investments
|
|
Fair value as a
% of
Amortized cost
|
|
Aaa
|
|
Aa
|
|
A
|
|
Baa
|
|
Ba or
lower
|
|
ABS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS RMBS non-insured
|
|
$
|
2,424
|
|
2.1
|
%
|
86.2
|
%
|
60.8
|
%
|
27.4
|
%
|
7.6
|
%
|
2.7
|
%
|
1.5
|
%
|
ABS RMBS insured
|
|
550
|
|
0.5
|
|
65.3
|
|
13.6
|
|
28.6
|
|
22.2
|
|
22.7
|
|
12.9
|
|
Total ABS RMBS
|
|
2,974
|
|
2.6
|
|
81.4
|
|
52.1
|
|
27.6
|
|
10.3
|
|
6.4
|
|
3.6
|
|
ABS CDO
|
|
14
|
|
|
|
116.7
|
|
|
|
|
|
|
|
|
|
100.0
|
|
Total asset-backed securities
collateralized by sub-prime residential mortgage loans
|
|
2,988
|
|
2.6
|
|
81.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other collateralized debt obligations
|
|
1,652
|
|
1.5
|
|
74.2
|
|
35.2
|
|
26.4
|
|
27.4
|
|
8.3
|
|
2.7
|
|
Other asset-backed securities
|
|
1,486
|
|
1.3
|
|
93.8
|
|
47.3
|
|
16.6
|
|
23.5
|
|
9.0
|
|
3.6
|
|
Total ABS
|
|
$
|
6,126
|
|
5.4
|
%
|
81.9
|
|
|
|
|
|
|
|
|
|
|
|
59
ABS
RMBS portfolio includes securities that are collateralized by 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 borrowers credit history.
The
following table presents additional information about our ABS RMBS portfolio
including a summary by first and second lien collateral.
($ in millions)
|
|
Fair value at
June 30, 2008
|
|
% to Total
Investments
|
|
ABS RMBS
|
|
|
|
|
|
First lien:
|
|
|
|
|
|
Fixed rate(1)
|
|
$
|
886
|
|
0.8
|
%
|
Variable rate(1)
|
|
1,581
|
|
1.4
|
|
Total first lien(2)
|
|
2,467
|
|
2.2
|
|
Second lien :
|
|
|
|
|
|
Insured
|
|
382
|
|
0.3
|
|
Other
|
|
125
|
|
0.1
|
|
Total second lien(3)
|
|
507
|
|
0.4
|
|
Total ABS RMBS
|
|
$
|
2,974
|
|
2.6
|
%
|
(1)
|
Fixed
rate and variable rate refer to the primary interest rate characteristics of
the underlying mortgages at the time of issuance.
|
|
|
(2)
|
The
credit ratings of the first lien ABS RMBS were 58.9% Aaa, 29.5% Aa, 7.7% A,
2.1% Baa and 1.8% Ba or lower at June 30, 2008.
|
|
|
(3)
|
The
credit ratings of the second lien ABS RMBS were 18.9% Aaa, 18.6% Aa, 23.1% A,
27.0% Baa and 12.4% Ba or lower at June 30, 2008.
|
As
of June 30, 2008, the ABS RMBS portfolio had net unrealized losses of $680
million. Fair value represents 81.4% of
the amortized cost of these securities.
ABS RMBS securities with a fair value less than 70% of amortized cost
totaled $451 million, with unrealized losses of $460 million.
During the second quarter and first six months
of 2008, we sold $40 million and $59 million of ABS RMBS, respectively,
recognizing a loss of $3 million and $20 million, respectively. We also collected $185 million and $335
million of principal repayments consistent with the expected cash flows during
the second quarter and first six months of 2008, respectively. Investment write-downs during the second
quarter and first six months of 2008 were recorded on our ABS RMBS totaling
$137 million and $172 million, respectively.
In addition, $185 million of change in intent write-downs were recorded
during the second quarter of 2008 on ABS RMBS.
When buying ABS RMBS securities from 2006 and 2007 vintages, we
concentrated our holdings in securities that were senior or at the top of the
structure and that were generally within the first three Aaa sub-classes of the
capital structure, as it was expected that, in the unlikely event of losses in
the underlying collateral, these sub-classes within the Aaa class would likely
either be paid in full or receive substantial principal repayments before
underlying mortgage losses would breach that level. However, when the underlying mortgage product
was fixed-rate in nature, which we assessed to have stronger underwriting
origination standards than variable rate collateral, we invested somewhat lower
in the capital structure, such as securities below the first three Aaa
sub-classes. The vast majority of our
investment in either of these vintages was concentrated within originally rated
Aaa or Aa securities.
60
The
following table includes first lien non-insured ABS RMBS by vintage, the
interest rate characteristics of the underlying mortgage product and our
participation in the capital structure.
The information in this table, together with the second lien
non-insured, comprise the $2.42 billion of non-insured ABS RMBS.
|
|
2007
|
|
2006
|
|
2005
|
|
($ in millions)
Capital structure classification
|
|
Variable
Rate
|
|
Fixed
Rate
|
|
Total Fair
Value
|
|
Total
Amortized
Cost
|
|
Variable
Rate
|
|
Fixed
Rate
|
|
Total Fair
Value
|
|
Total
Amortized
Cost
|
|
Variable
Rate
|
|
Fixed
Rate
|
|
Total Fair
Value
|
|
Total
Amortized
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First or Second
Aaa class
|
|
$
|
131
|
|
$
|
42
|
|
$
|
173
|
|
$
|
181
|
|
$
|
422
|
|
$
|
19
|
|
$
|
441
|
|
$
|
464
|
|
$
|
31
|
|
$
|
7
|
|
$
|
38
|
|
$
|
39
|
|
Third Aaa class
|
|
17
|
|
|
|
17
|
|
17
|
|
186
|
|
65
|
|
251
|
|
280
|
|
18
|
|
43
|
|
61
|
|
62
|
|
Fourth Aaa class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Last cash flow
Aaa class
|
|
15
|
|
|
|
15
|
|
15
|
|
22
|
|
7
|
|
29
|
|
43
|
|
28
|
|
17
|
|
45
|
|
45
|
|
Other Aaa (1)
|
|
25
|
|
138
|
|
163
|
|
164
|
|
4
|
|
88
|
|
92
|
|
97
|
|
56
|
|
95
|
|
151
|
|
155
|
|
Total Aaa
|
|
188
|
|
180
|
|
368
|
|
377
|
|
634
|
|
179
|
|
813
|
|
884
|
|
133
|
|
162
|
|
295
|
|
301
|
|
Aa
|
|
5
|
|
90
|
|
95
|
|
215
|
|
5
|
|
18
|
|
23
|
|
38
|
|
190
|
|
33
|
|
223
|
|
279
|
|
A
|
|
|
|
6
|
|
6
|
|
10
|
|
|
|
5
|
|
5
|
|
7
|
|
2
|
|
12
|
|
14
|
|
22
|
|
Baa
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
1
|
|
2
|
|
|
|
|
|
|
|
|
|
Total First Lien
Non-Insured ABS RMBS
|
|
$
|
193
|
|
$
|
276
|
|
$
|
469
|
|
$
|
602
|
|
$
|
639
|
|
$
|
203
|
|
$
|
842
|
|
$
|
931
|
|
$
|
325
|
|
$
|
207
|
|
$
|
532
|
|
$
|
602
|
|
|
|
Pre- 2005
|
|
Total
|
|
($ in millions)
Capital structure classification
|
|
Variable
Rate
|
|
Fixed
Rate
|
|
Total Fair
Value
|
|
Total
Amortized
Cost
|
|
Variable
Rate
|
|
Fixed
Rate
|
|
Total Fair
Value
|
|
Total
Amortized
Cost
|
|
Unrealized
Gain/Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First or Second
Aaa class
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
584
|
|
$
|
68
|
|
$
|
652
|
|
$
|
684
|
|
$
|
(32
|
)
|
Third Aaa class
|
|
4
|
|
|
|
4
|
|
4
|
|
225
|
|
108
|
|
333
|
|
363
|
|
(30
|
)
|
Fourth Aaa class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Last cash flow
Aaa class
|
|
15
|
|
12
|
|
27
|
|
27
|
|
80
|
|
36
|
|
116
|
|
130
|
|
(14
|
)
|
Other Aaa (1)
|
|
|
|
26
|
|
26
|
|
29
|
|
85
|
|
347
|
|
432
|
|
445
|
|
(13
|
)
|
Total Aaa
|
|
19
|
|
38
|
|
57
|
|
60
|
|
974
|
|
559
|
|
1,533
|
|
1,622
|
|
(89
|
)
|
Aa
|
|
259
|
|
47
|
|
306
|
|
339
|
|
459
|
|
188
|
|
647
|
|
871
|
|
(224
|
)
|
A
|
|
83
|
|
10
|
|
93
|
|
122
|
|
85
|
|
33
|
|
118
|
|
161
|
|
(43
|
)
|
Baa
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
1
|
|
2
|
|
(1
|
)
|
Total First Lien
Non-Insured ABS RMBS
|
|
$
|
361
|
|
$
|
95
|
|
$
|
456
|
|
$
|
521
|
|
$
|
1,518
|
|
$
|
781
|
|
$
|
2,299
|
|
$
|
2,656
|
|
$
|
(357
|
)
|
We
also own approximately $125 million of second lien ABS RMBS non-insured
securities, representing 80.1% of amortized cost. Approximately $62 million, or 49.6%, of this
portfolio are 2006 and 2007 vintage years.
At
June 30, 2008, $550 million or 18.5% of the total ABS RMBS securities are
insured by 6 bond insurers and 87.1% were rated investment grade. $2.44 billion or 81.9% of the portfolio
consisted of securities that were issued during 2005, 2006 and 2007. At June 30, 2008, 59.8% of securities
issued during 2005, 2006 and 2007 were rated Aaa, 21.0% rated Aa, 7.6% rated A,
7.7% rated Baa and 3.9% rated Ba or lower.
61
The
following table shows our insured ABS RMBS portfolio at June 30, 2008 by bond
insurer and vintage year for the first lien and second lien collateral.
|
|
Vintage Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
Amortized
|
|
Unrealized
|
|
($ in millions)
|
|
2007
|
|
2006
|
|
2005
|
|
Pre- 2005
|
|
Value
|
|
Cost
|
|
Gain/Loss
|
|
First Lien:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Guarantee
Insurance Company (FGIC)
|
|
$
|
21
|
|
$
|
10
|
|
$
|
14
|
|
$
|
12
|
|
$
|
57
|
|
$
|
80
|
|
$
|
(23
|
)
|
Ambac
Financial Group, Inc. (AMBAC)
|
|
|
|
6
|
|
54
|
|
4
|
|
64
|
|
84
|
|
(20
|
)
|
MBIA, Inc.
(MBIA)
|
|
|
|
|
|
7
|
|
|
|
7
|
|
7
|
|
|
|
Financial
Security Assurance Inc. (FSA)
|
|
28
|
|
|
|
6
|
|
|
|
34
|
|
34
|
|
|
|
CIFG Holding
(CIFG)
|
|
|
|
6
|
|
|
|
|
|
6
|
|
6
|
|
|
|
Total First
Lien
|
|
49
|
|
22
|
|
81
|
|
16
|
|
168
|
|
211
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FGIC
|
|
9
|
|
88
|
|
51
|
|
|
|
148
|
|
249
|
|
(101
|
)
|
AMBAC
|
|
11
|
|
46
|
|
3
|
|
24
|
|
84
|
|
112
|
|
(28
|
)
|
MBIA
|
|
99
|
|
12
|
|
|
|
2
|
|
113
|
|
193
|
|
(80
|
)
|
FSA
|
|
19
|
|
9
|
|
|
|
|
|
28
|
|
63
|
|
(35
|
)
|
XL Capital
Assurance Inc. (XLCA)
|
|
9
|
|
|
|
|
|
|
|
9
|
|
14
|
|
(5
|
)
|
Total Second
Lien
|
|
147
|
|
155
|
|
54
|
|
26
|
|
382
|
|
631
|
|
(249
|
)
|
Total
Insured ABS RMBS
|
|
$
|
196
|
|
$
|
177
|
|
$
|
135
|
|
$
|
42
|
|
$
|
550
|
|
$
|
842
|
|
$
|
(292
|
)
|
ABS
CDO are securities collateralized by a variety of residential mortgage-backed
securities and other securities, which may include sub-prime RMBS. Fair value represents 116.7% of the amortized
cost of these securities.
During
both the second quarter and first six months of 2008, we sold $1 million of ABS
CDO. Investment
write-downs during the second quarter and first six months of 2008 were
recorded on our ABS CDO totaling $3 million and $63 million, respectively. As of June 30, 2008, the ABS CDO
portfolio had unrealized gains of $2 million.
Other collateralized debt obligations
totaled $1.65 billion and 97.3% are rated
investment grade at June 30, 2008.
Other collateralized debt obligations consist primarily of obligations
secured by high yield and investment grade corporate credits including $1.01
billion of collateralized loan obligations; $193 million of synthetic CDOs;
$158 million of primarily bank trust preferred CDOs; $108 million of market
value CDOs; $44 million of CDOs that invest in other CDOs (CDO squared); and
$30 million of collateralized bond obligations.
As of June 30, 2008, net unrealized losses on the other CDOs were
$574 million. Other CDOs with a fair
value less than 70% of amortized cost totaled $390 million, or 23.6% of the
total other CDOs at June 30, 2008, with unrealized losses of $335 million.
Other asset-backed securities
consist primarily of investments secured by portfolios of credit card loans,
auto loans, student loans and other consumer and corporate obligations. As of June 30, 2008, the net unrealized
losses on these securities were $99 million. Additionally, 22.1% of the other
asset-backed securities that are rated Aaa, Aa, A and Baa were insured by five
bond insurers. During the second quarter
and first six months of 2008, we sold $4 million and $25 million of these
securities, respectively, recognizing a gain of $1 million and $2 million,
respectively. In addition, we acquired
$11 million of securities during the first six months of 2008. We also collected $5 million and $10 million
of principal repayments consistent with the expected cash flows during the
second quarter and first six months of 2008, respectively.
As of June 30, 2008, we hold $13.55 billion of fixed income
securities that are insured by bond insurers, including approximately $12.64
billion or 51.7% of our municipal bond portfolio, $550 million of our ABS RMBS
and $329 million of our other asset-backed securities. Additionally, we hold $4 million of corporate
bonds and credit default swaps that were directly issued by these bond
insurers. 51.7% of our municipal bond portfolio is insured by eight bond
insurers and 55.4% have a Moodys equivalent rating of Aaa or Aa. Our practices for acquiring and monitoring
municipal bonds primarily are based on the quality of the underlying
security. As of June 30, 2008, we
believe the valuations already reflected a decline in the value of the
insurance, and further such
62
declines if any,
are not expected to be material. While
the valuation of these holdings may be temporarily impacted by negative and
rapidly changing market developments, we continue to have the intent and
ability to hold the bonds and expect to receive all of the contractual cash
flows. As of June 30, 2008, 32.8%
of our insured municipal bond portfolio was insured by MBIA, 25.2% by AMBAC,
18.7% by FSA and 18.1% by FGIC.
Included
in our municipal bond portfolio at June 30, 2008 are $2.01 billion of
auction rate securities (ARS) that have long-term stated maturities, with the
interest rate reset based on auctions that generally occur every 7, 28 or 35
days depending on the specific security.
This is compared to a balance of ARS at December 31, 2007 of $2.56
billion, with the decline representing primarily redemptions during the second
quarter of 2008.
Our holdings primarily have a Moodys
equivalent rating of Aaa. We make our
investment decisions based on the underlying credit of each security. Approximately $1.92 billion of our holdings
are pools of student loans for which at least 85% of the collateral was insured
by the U.S. Department of Education at the time we purchased the security. As of June 30, 2008, $1.3 billion of our
ARS backed by student loans was 100% insured by the U.S. Department of
Education, $383 million was 90% to 99% insured and $178 million was 80% to 89%
insured. During the second quarter of
2008, all of our ARS holdings experienced failed auctions and we received the
failed auction rate or, for those which contain maximum reset rate formulas, we
received the contractual maximum rate.
We anticipate that failed auctions may persist and most of our holdings
will continue to pay the failed auction rate or, for those that contain maximum
rate reset formulas, the maximum rate, as described below. Auctions continue to be conducted as
scheduled for each of the securities.
We
estimate that approximately one third of our student loan backed ARS include
maximum rate reset formulas whereby when the failed auction rate exceeds an
annual contractual maximum rate over a preceding stipulated period, the coupon
interest rate is temporarily reset to the maximum rate, which can vary between
zero and the failed auction rate. This
maximum rate formula causes the reset interest rate on these securities to be
lower than the failed auction rate in order to reduce the annual interest rate
so that it does not exceed the annual contractual maximum rate. Generally, the annual contractual maximum
rate is higher than the historical rates paid on these securities. During the second quarter of 2008, $291
million of our ARS reset using the maximum rate reset formula.
Fannie Mae and Freddie Mac
direct fixed income and equity exposure investments totaled $733
million as of June 30, 2008. The
following table shows our direct exposure to Fannie Mae and Freddie Mac at June 30,
2008.
($ in millions)
|
|
Fannie Mae
|
|
Freddie Mac
|
|
Total
|
|
Fixed Income Securities:
|
|
|
|
|
|
|
|
Fair Value
|
|
$
|
425
|
|
$
|
180
|
|
$
|
605
|
|
Net Unrealized Capital Gains (Losses)
|
|
15
|
|
(4
|
)
|
11
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
Fair Value
|
|
$
|
77
|
|
$
|
51
|
|
$
|
128
|
|
Net Unrealized Capital Gains (Losses)
|
|
(7
|
)
|
(6
|
)
|
(13
|
)
|
Limited partnership interests
consist of investments in private equity/debt funds, real estate funds
and hedge funds. The overall limited
partnership interests portfolio is well diversified across a number of metrics
including fund sponsors, vintage years, strategies, geography (including
international), and company/property types.
At June 30, 2008, our limited partnership interests comprise:
Private
equity/debt funds - Approximately 43% or $1.23 billion of the limited
partnership interests comprised private equity/debt funds diversified across
the following fund types: buyout, mezzanine, distressed security, and secondary
offerings. Private/equity debt funds
were spread across 75 sponsors and 106 individual funds. The largest exposure to any single private
equity/debt fund was $39 million.
Real
estate funds - Approximately 30% or $878 million of the limited partnership
interests comprised real estate funds diversified across a variety of
strategies including opportunistic, value-add platforms, distressed property,
and property/market specific. Real
estate funds were spread across 34 sponsors and 79 individual funds. The largest exposure to any single real
estate fund was $44 million.
Hedge
funds - Approximately 27% or $779 million of the limited partnership interests
comprised hedge funds with the majority invested with fund of funds
advisors. Hedge funds were spread across
9 sponsors and 160 individual funds. The largest exposure to any single hedge
fund was $26 million.
Our
aggregate limited partnership exposure represented 2.5% and 2.1% of total
invested assets as of June 30, 2008 and December 31, 2007,
respectively. Income from limited
partnership interest was $30 million and $90 million for the second quarter and
first six months of 2008, respectively, versus $86 million and $156 million for
the
63
same
periods in 2007, respectively. The
decline was primarily related to reduced income from both real estate funds and
hedge funds as capital market deleveraging has slowed the pace at which portfolio
holdings are being sold.
Unrealized net capital losses
totaled $789 million as of June 30, 2008, compared to unrealized net
capital gains of $1.91 billion at December 31, 2007. The decline was primarily due to investment
grade fixed income securities as the yields supporting fair values increased,
resulting from widening credit spreads and relatively flat risk-free interest
rates. This increase in fixed income unrealized net capital losses more than
offset the decline in unrealized net capital losses resulting from the
realization of capital losses on write-downs, change in intent to hold to
recovery and sales. We continue to
experience volatility in the balance of our unrealized net capital gains and
losses as we did between the years 2004/2005 and 2006/2007. The following table presents total unrealized
gains and losses.
|
|
June 30,
|
|
December 31,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
U.S. government and agencies
|
|
$
|
854
|
|
$
|
918
|
|
Municipal
|
|
32
|
|
720
|
|
Corporate
|
|
(530
|
)
|
90
|
|
Foreign government
|
|
354
|
|
394
|
|
Mortgage-backed securities
|
|
(183
|
)
|
(43
|
)
|
Commercial mortgage-backed securities
|
|
(388
|
)
|
(308
|
)
|
Asset-backed securities
|
|
(1,351
|
)
|
(816
|
)
|
Redeemable preferred stock
|
|
(2
|
)
|
1
|
|
Fixed income securities
|
|
(1,214
|
)
|
956
|
|
Equity securities
|
|
467
|
|
990
|
|
Derivatives
|
|
(42
|
)
|
(33
|
)
|
Unrealized net gains and losses
|
|
$
|
(789
|
)
|
$
|
1,913
|
|
The net unrealized loss for the fixed income portfolio totaled $1.21
billion, comprised of $2.38 billion of unrealized gains and $3.59 billion of
unrealized losses at June 30, 2008.
This is compared to a net unrealized gain for the fixed income portfolio
totaling $956 million at December 31, 2007, comprised of $3.15 billion of
unrealized gains and $2.20 billion of unrealized losses. Included in gross unrealized losses at June 30,
2008 were $1.15 billion of fixed income securities with a fair value below 70%
of amortized cost, or 1.4% of our fixed income portfolio at June 30,
2008. The percentage of fair value to
amortized cost for the remaining fixed income gross unrealized losses at June 30,
2008 are shown in the following table.
($ in millions)
|
|
Unrealized
(loss) gain
|
|
Fair value
|
|
% to Total
Fixed
Income
Investments
|
|
> 80% of amortized cost
|
|
$
|
(1,950
|
)
|
$
|
38,964
|
|
46.8
|
%
|
70% to 80% of amortized cost
|
|
(648
|
)
|
1,986
|
|
2.4
|
|
< 70% of amortized cost
|
|
(1,000
|
)
|
1,150
|
|
1.4
|
|
Gross unrealized losses on fixed income
securities
|
|
$
|
(3,598
|
)
|
$
|
42,100
|
|
50.6
|
|
Gross unrealized gains on fixed income
securities
|
|
2,384
|
|
41,124
|
|
49.4
|
|
Net unrealized gains and losses on fixed
income securities
|
|
$
|
(1,214
|
)
|
$
|
83,224
|
|
100.0
|
%
|
79.1% of the fixed income
securities with a fair value less than 70% of amortized cost were ABS RMBS,
Alt-A and other CDOs with a fair value totaling $910 million. We continue to believe that the unrealized
losses on these securities are not necessarily predictive of the ultimate
performance. The unrealized losses
should reverse over the remaining lives of the securities, in the absence of
further deterioration in the collateral relative to our positions in the securities
respective capital structures.
Of the gross unrealized losses in the fixed income portfolio at June 30,
2008, $3.32 billion or 92.2% were related to investment grade securities and
are primarily interest rate related. Of
the remaining $282 million of unrealized losses in the fixed income portfolio,
$180 million or 63.8% were in the corporate fixed income portfolio and
primarily comprised securities in the consumer goods, financial services,
communications, utilities and banking sectors.
The gross unrealized losses in these sectors were primarily related to
changes in interest rates and credit spreads, and company specific conditions.
64
The net unrealized gain for the equity portfolio totaled $467 million,
comprised of $599 million of unrealized gains and $132 million of unrealized
losses at June 30, 2008. This is
compared to a net unrealized gain for the equity portfolio totaling $990
million at December 31, 2007, comprised of $1.10 billion of unrealized
gains and $106 million of unrealized losses.
Within the equity portfolio, the losses were primarily concentrated in
the financial services, consumer goods, and banking sectors. The unrealized losses in these sectors were
company and sector specific.
We have a comprehensive portfolio monitoring
process to identify and evaluate, on a case-by-case basis, fixed income and
equity securities whose carrying value may be other-than-temporarily
impaired. The process includes a
quarterly review of all securities using a screening process to identify
situations where the fair value, compared to amortized cost for fixed income
securities, and cost for equity securities is below established thresholds for
certain time periods, or which are identified through other monitoring criteria
such as ratings, ratings downgrades or payment defaults. The securities identified, in addition to
other securities for which we may have a concern, are evaluated based on facts
and circumstances for inclusion on our watch-list. All investments in an unrealized loss
position at June 30, 2008 were included in our portfolio monitoring
process for determining whether declines in value were
other-than-temporary.
We also
conduct a portfolio review to recognize impairment on securities in an
unrealized loss position for which we do not have the intent and ability to
hold until recovery as a result of approved programs involving the disposition
of investments for reasons such as changes in economic and market outlooks,
duration, revisions to strategic asset allocations, unanticipated liquidity
actions, investment risk mitigation actions and unanticipated federal income
tax situations involving capital gain (loss) carryforwards and carrybacks with
specific expiration dates, as well as changes in intent to hold certain
investments by portfolio managers.
The following table
summarizes fixed income and equity securities in a gross unrealized loss
position according to significance, aging and investment grade classification.
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
|
Fixed Income
|
|
|
|
|
|
Fixed Income
|
|
|
|
|
|
($ in millions except number of issues)
|
|
Investment
Grade
|
|
Below
Investment
Grade
|
|
Equity
|
|
Total
|
|
Investment
Grade
|
|
Below
Investment
Grade
|
|
Equity
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category (I): Unrealized loss less than 20% of cost
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Issues
|
|
5,379
|
|
420
|
|
194
|
|
5,993
|
|
4,058
|
|
379
|
|
322
|
|
4,759
|
|
Fair Value
|
|
$
|
36,302
|
|
$
|
2,461
|
|
$
|
1,195
|
|
$
|
39,958
|
|
$
|
31,489
|
|
$
|
2,446
|
|
$
|
884
|
|
$
|
34,819
|
|
Unrealized
|
|
$
|
(1,776
|
)
|
$
|
(165
|
)
|
$
|
(99
|
)
|
$
|
(2,040
|
)
|
$
|
(1,391
|
)
|
$
|
(146
|
)
|
$
|
(66
|
)
|
$
|
(1,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category (II): Unrealized loss greater than or equal to
20% of cost for a period of less than 6 consecutive months (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Issues
|
|
312
|
|
43
|
|
25
|
|
380
|
|
176
|
|
21
|
|
192
|
|
389
|
|
Fair Value
|
|
$
|
2,713
|
|
$
|
238
|
|
$
|
69
|
|
$
|
3,020
|
|
$
|
1,096
|
|
$
|
134
|
|
$
|
102
|
|
$
|
1,332
|
|
Unrealized
|
|
$
|
(1,274
|
)
|
$
|
(107
|
)
|
$
|
(22
|
)
|
$
|
(1,403
|
)
|
$
|
(578
|
)
|
$
|
(80
|
)
|
$
|
(38
|
)
|
$
|
(696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category (III): Unrealized loss greater than or equal to
20% of cost for a period of 6 or more consecutive months, but less than
12 consecutive months (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Issues
|
|
54
|
|
4
|
|
3
|
|
61
|
|
|
|
|
|
5
|
|
5
|
|
Fair Value
|
|
$
|
204
|
|
$
|
16
|
|
$
|
15
|
|
$
|
235
|
|
$
|
|
|
$
|
|
|
$
|
1
|
|
$
|
1
|
|
Unrealized
|
|
$
|
(266
|
)
|
$
|
(10
|
)
|
$
|
(11
|
)
|
$
|
(287
|
)
|
$
|
|
|
$
|
|
|
$
|
(2
|
)
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category (IV): Unrealized loss greater than or equal to
20% of cost for 12 or more consecutive months (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Issues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Unrealized
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Issues
|
|
5,745
|
|
467
|
|
222
|
|
6,434
|
|
4,234
|
|
400
|
|
519
|
|
5,153
|
|
Total Fair Value
|
|
$
|
39,219
|
|
$
|
2,715
|
|
$
|
1,279
|
|
$
|
43,213
|
|
$
|
32,585
|
|
$
|
2,580
|
|
$
|
987
|
|
$
|
36,152
|
|
Total Unrealized Losses
|
|
$
|
(3,316
|
)
|
$
|
(282
|
)
|
$
|
(132
|
)
|
$
|
(3,730
|
)
|
$
|
(1,969
|
)
|
$
|
(226
|
)
|
$
|
(106
|
)
|
$
|
(2,301
|
)
|
(1) For fixed income securities, cost represents amortized cost.
65
The largest individual
unrealized loss was $31 million for category (I), $50 million for category (II) and
$22 million for category (III) as of June 30, 2008.
Categories (I) and (II) have
generally been adversely affected by overall economic conditions including
interest rate increases and the markets evaluation of certain sectors. The degree to which and/or length of time
that the securities have been in an unrealized loss position does not suggest
that these securities pose a high risk of being other-than-temporarily impaired. Categories (III) and (IV) have primarily
been historically adversely affected by industry and issue specific, or issuer
specific conditions. All of the
securities in these categories are monitored for other-than-temporary
impairment.
At June 30, 2008,
Category (III) for fixed income comprised primarily $121 million of ABS
RMBS with unrealized losses of $163 million.
Included in the $163 million unrealized losses were $153 million with a
fair value less than 70% of amortized cost.
Also included in Category (III) was $58 million of synthetic CDOs
with an unrealized loss of $87 million all of which had a fair value less than
70% of amortized cost.
W
e continue to
believe that the unrealized losses on these securities are not necessarily
predictive of the ultimate performance.
The unrealized losses should reverse over the remaining lives of the
securities, including in the absence of further deterioration in the collateral
relative to our positions in the securities respective capital structures.
We have the intent and ability to hold these
securities until recovery.
Whenever our initial analysis indicates that a fixed
income securitys unrealized loss of 20% or more for at least 36 months or any
equity securitys unrealized loss of 20% or more for at least 12 months is
temporary, additional evaluations and management approvals are required to
substantiate that a write-down is not appropriate. As of June 30, 2008, no securities met
these criteria.
We also monitor the quality of our fixed income and
bank loan portfolios by categorizing certain investments as problem, restructured
or potential problem. Problem fixed
income securities and bank loans are in default with respect to principal or
interest and/or are investments issued by companies that have gone into
bankruptcy subsequent to our acquisition or loan. Restructured fixed income and bank loan
investments have rates and terms that are not consistent with market rates or
terms prevailing at the time of the restructuring. Potential problem fixed income or bank loan
investments are current with respect to contractual principal and/or interest,
but because of other facts and circumstances, we have concerns regarding the
borrowers ability to pay future principal and interest, which causes us to
believe these investments may be classified as problem or restructured in the
future.
The following table summarizes problem,
restructured and potential problem fixed income securities and bank loans.
|
|
June 30, 2008
|
|
December 31, 2007
|
|
($ in millions)
|
|
Amortized
cost
|
|
Fair
value
|
|
Percent of
total Fixed
Income and
Bank Loan
portfolios
|
|
Amortized
cost
|
|
Fair
value
|
|
Percent of
total Fixed
Income and
Bank Loan
portfolios
|
|
Problem
|
|
$
|
71
|
|
$
|
81
|
|
0.1
|
%
|
$
|
35
|
|
$
|
43
|
|
0.1
|
%
|
Restructured
|
|
35
|
|
33
|
|
|
|
35
|
|
35
|
|
|
|
Potential problem
|
|
426
|
|
417
|
|
0.5
|
|
245
|
|
198
|
|
0.2
|
|
Total net carrying value
|
|
$
|
532
|
|
$
|
531
|
|
0.6
|
%
|
$
|
315
|
|
$
|
276
|
|
0.3
|
%
|
Cumulative write-downs recognized(1)
|
|
$
|
820
|
|
|
|
|
|
$
|
358
|
|
|
|
|
|
(1)
|
Cumulative write-downs recognized only reflects write-downs related
to investments within the problem, potential problem and restructured
categories.
|
We have experienced an increase in the
amortized cost of investments categorized as problem and potential problem as
of June 30, 2008 compared to December 31, 2007. The increase was primarily due to
additions of certain residential mortgage-backed securities, including Alt-A, Prime
and ABS RMBS. Partly offsetting the
increase were write-downs of investments categorized as potential problem at December 31,
2007, including certain ABS CDOs
.
We also evaluated each of these investments
through our portfolio monitoring process at June 30, 2008 and recorded
write-downs when appropriate. We further
concluded that any remaining unrealized losses on these investments were
temporary in nature and that we have the intent and ability to hold the
securities until recovery.
66
While these balances may increase in the future, particularly if
economic conditions are unfavorable, management expects that
the total amount of investments in these
categories will remain low relative to the total fixed income securities and
bank loans portfolios.
Net Investment Income
The following table presents net investment income.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
1,197
|
|
$
|
1,374
|
|
$
|
2,476
|
|
$
|
2,720
|
|
Equity securities
|
|
31
|
|
34
|
|
63
|
|
61
|
|
Mortgage loans
|
|
156
|
|
146
|
|
316
|
|
289
|
|
Limited partnership interests
|
|
30
|
|
86
|
|
90
|
|
156
|
|
Short-term
|
|
54
|
|
61
|
|
94
|
|
110
|
|
Other
|
|
2
|
|
46
|
|
28
|
|
91
|
|
Investment income, before expense
|
|
1,470
|
|
1,747
|
|
3,067
|
|
3,427
|
|
Investment expense
|
|
(58
|
)
|
(113
|
)
|
(129
|
)
|
(222
|
)
|
Net investment income
|
|
$
|
1,412
|
|
$
|
1,634
|
|
$
|
2,938
|
|
$
|
3,205
|
|
Net Realized Capital Gains and Losses
The following
tables present the components of realized capital gains and losses and the
related tax effect.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Investment write-downs (1)
|
|
$
|
(250
|
)
|
$
|
(8
|
)
|
$
|
(665
|
)
|
$
|
(13
|
)
|
Sales
|
|
(2
|
)
|
378
|
|
133
|
|
855
|
|
Change in intent write-downs
|
|
(1,086
|
)
|
(71
|
)
|
(1,161
|
)
|
(98
|
)
|
Valuation of derivative instruments
|
|
40
|
|
199
|
|
(285
|
)
|
187
|
|
Settlement of derivative instruments
|
|
83
|
|
47
|
|
108
|
|
85
|
|
Realized capital gains and losses, pretax
|
|
(1,215
|
)
|
545
|
|
(1,870
|
)
|
1,016
|
|
Income tax benefit (expense)
|
|
427
|
|
(193
|
)
|
657
|
|
(359
|
)
|
Realized capital gains and losses, after-tax
|
|
$
|
(788
|
)
|
$
|
352
|
|
$
|
(1,213
|
)
|
$
|
657
|
|
(1) Investment write-downs include other-than-temporary impairments
except for those related to changes in intent to hold.
The above table includes realized capital gains and
losses as a result of sales, change in intent write-downs and other
transactions such as calls and prepayments.
We may sell or change our assertion to hold a security until recovery
for impaired fixed income or equity securities that were in an unrealized loss
position at the previous reporting date, or other investments where the fair
value has declined below the carrying value, in situations where new facts and
circumstances emerge or increase in significance that are anticipated to
adversely impact securities future valuation; including negative developments
in a holding, subsequent credit deterioration of an issuer or holding, subsequent
further deterioration in capital markets (i.e. debt and equity) and of domestic
economic conditions to levels previously unanticipated, subsequent further
deterioration in the financial services and real estate industries,
unanticipated liquidity needs and unanticipated federal income tax situations
involving capital gain (loss) carryforwards
and carrybacks with specific expiration dates, investment risk mitigation
actions, and other new facts and circumstances that would cause a change in our
previous intent to hold a security to recovery or maturity.
Investment write-downs for the three months ended June 30,
2008 comprised $205 million from fixed income securities, $37 million from
equity securities, $7 million from limited partnership interests and $1 million
from other investments compared to $4 million from fixed income securities, $2
million from equity securities and $2 million from limited partnership
interests for the same period of the prior year. Investment write-downs for the six months
ended June 30, 2008 comprised $552 million from fixed income securities,
$89 million from equity securities, $20 million from limited partnership
interests and $4 million from other investments compared to $4 million from
fixed income securities, $5 million from equity securities, $3 million from
limited partnership interests and $1 million from short-term investments for
the same period of the prior year. $198
million, or 96.6% and $414 million, or 75.0% of the fixed income security
write-downs for the three months and six months ended June 30, 2008,
respectively, relate to impaired securities that were performing in line with
anticipated or contractual cash flows, but which were written down primarily
because of further expected deterioration in the performance of the underlying
67
collateral. As of June 30, 2008, for these
securities, there have been no defaults or defaults occurred in classes lower
in the capital structure. $7 million and
$35 million of the fixed income security write-downs for the three months and
six months ended June 30, 2008, respectively, primarily related to
securities experiencing a significant departure from anticipated residual cash
flows, however, we believe they retain economic value.
Investment
write-downs and cash received on these investments were as follows:
($ in millions)
Performing in accordance with anticipated or
contractual cash flows
|
|
Three Months Ended
June 30, 2008
|
|
Six Months Ended
June 30, 2008(3)
|
|
Investment
write-downs
|
|
Cash
received(4)
|
|
Investment
write-downs
|
|
Cash
Received
|
|
Prime
|
|
$
|
|
|
$
|
|
|
$
|
(9
|
)
|
$
|
64
|
|
AltA
|
|
(2
|
)
|
|
|
(91
|
)
|
21
|
|
ABS RMBS
|
|
(133
|
)
|
6
|
|
(168
|
)
|
12
|
|
ABS CDO
|
|
(3
|
)
|
|
|
(63
|
)
|
2
|
|
CMBS/CRE CDO
|
|
(39
|
)
|
2
|
|
(39
|
)
|
2
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
Bond insurer
|
|
(17
|
)
|
|
|
(17
|
)
|
|
|
Bond reinsurer convertible to perpetual security
|
|
|
|
|
|
(20
|
)
|
|
|
Other
|
|
(4
|
)
|
1
|
|
(7
|
)
|
4
|
|
Subtotal (1)
|
|
(198
|
)
|
9
|
|
(414
|
)
|
105
|
|
|
|
|
|
|
|
|
|
|
|
Departure from anticipated or contractual cash
flows
|
|
|
|
|
|
|
|
|
|
Future cash flows expected
Residual interest trust security
|
|
|
|
|
|
(82
|
)
|
|
|
Other
|
|
|
|
|
|
(1
|
)
|
|
|
Subtotal (2)
|
|
|
|
|
|
(83
|
)
|
|
|
Future cash flows very uncertain -
|
|
|
|
|
|
|
|
|
|
Collateralized loan obligation
|
|
|
|
|
|
(18
|
)
|
|
|
ABS RMBS
|
|
(4
|
)
|
1
|
|
(4
|
)
|
1
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
Food manufacturer
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
Bond insurer
|
|
|
|
|
|
(10
|
)
|
|
|
Subtotal
|
|
(7
|
)
|
1
|
|
(35
|
)
|
1
|
|
Investments disposed during the quarter
|
|
|
|
|
|
(20
|
)
|
38
|
|
Total fixed income securities
|
|
$
|
(205
|
)
|
$
|
10
|
|
$
|
(552
|
)
|
$
|
144
|
|
Total equity securities
|
|
$
|
(37
|
)
|
$
|
66
|
|
$
|
(89
|
)
|
$
|
125
|
|
Total limited partnership interests
|
|
$
|
(7
|
)
|
$
|
|
|
$
|
(20
|
)
|
$
|
5
|
|
Total other investments
|
|
$
|
(1
|
)
|
$
|
|
|
$
|
(4
|
)
|
$
|
|
|
(1)
|
Written down primarily because of expected deterioration in the
performance of the underlying collateral.
As of June 30, 2008, for the securities with direct interest in
the lender, there have been no defaults.
For securities supported by collateral, there have been no defaults or
defaults have occurred in classes lower in the capital structure.
|
|
|
(2)
|
While these fixed income security write-downs were valued at a
significant discount to cost, we believe these securities retain economic
value.
|
|
|
(3)
|
During
the second quarter of 2008, we sold our mortgage lender securities that were
written down at March 31, 2008 recognizing an additional gain of $3
million. Additionally, a bond insurer
was reclassified from performing in the first quarter of 2008 to departure
from anticipated cash flows in the second quarter of 2008.
|
|
|
(4)
|
Cash
received includes both income and principal collected during the period.
|
Notwithstanding our
intent and ability to hold these securities with investment write-downs, we
concluded that we could not reasonably assert that the recovery period would be
temporary.
Change
in intent write-downs for the three months ended June 30, 2008 totaled
$1.09 billion and comprised net realized losses on fixed income of $909
million, equity of $143 million, mortgage loans of $33 million and limited
partnerships of $1 million compared to realized losses on fixed income of $35
million, equity of $16 million and mortgage loans of $20 million for the same
period of the prior year. Change in
intent write-downs for the six months ended June 30, 2008 totaled $1.16
billion and comprised net realized losses on fixed income of $948 million,
equity of $177 million, mortgage loans of $34 million, limited partnerships of
$1 million and other investments of $1 million compared to net realized losses
on fixed income of $61 million, equity of $17 million and mortgage loans of $20
million for the same period of the prior year.
68
Change in intent write-downs for the three months
ended June 30, 2008 are presented in the table below.
($ in millions)
Criteria
|
|
|
|
Financial Accounting
|
|
|
|
|
|
|
|
|
Standards Board
|
|
|
|
|
|
|
|
|
Statement No. 157,
|
|
|
|
Net realized
|
|
|
|
|
Fair Value
|
|
Fair
|
|
capital loss
|
|
|
|
|
Measurements
|
|
value at
|
|
Three Months
|
|
|
Security Type
|
|
(SFAS No. 157)
Level
|
|
June 30,
2008
|
|
Ended
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Risk Mitigation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Targeted reductions in
commercial real estate exposure where it is anticipated that future downside
risk remains. Considerations included position held in the capital structure,
vintage year, illiquidity and deteriorating fundamentals.
|
|
CRE CDO
|
|
3
|
|
$
|
376
|
|
$
|
(248
|
)
|
|
CMBS
|
|
2
|
|
235
|
|
(95
|
)
|
|
|
|
3
|
|
32
|
|
(32
|
)
|
|
Mortgage loans
|
|
3
|
|
281
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
Targeted reductions in
residential real estate where management believes there is a risk of future
material declines in price in the event of continued deterioration in the
economy. Considerations included position held in the capital structure,
projected performance of the collateral, and expected internal rates of
return.
|
|
Prime
|
|
2
|
|
165
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
Alt-A
|
|
3
|
|
321
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
ABS RMBS
|
|
3
|
|
824
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
Targeted reductions in
financial sector exposure included securities issued by certain regional
banks and certain large financial institutions.
|
|
Financial Sector
|
|
1
|
|
2
|
|
|
|
|
|
|
2
|
|
862
|
|
(131
|
)
|
|
|
|
3
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
2
|
|
175
|
|
(20
|
)
|
|
|
|
|
3
|
|
25
|
|
(2
|
)
|
Total Risk Mitigation
|
|
|
|
|
|
3,310
|
|
(857
|
)
|
Individual Identification
|
|
|
|
|
|
2,449
|
|
(159
|
)
|
EAA
|
|
|
|
|
|
2,387
|
|
(70
|
)
|
Other
|
|
|
|
|
|
50
|
|
|
|
Total change in intent
|
|
|
|
|
|
$
|
8,196
|
|
$
|
(1,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized
capital gains on the valuation and settlement of derivative instruments totaled
$123 million for the second quarter of 2008, primarily comprised $114 million
for risk reduction programs. Gains from the risk reduction programs, primarily
in our duration management programs, were related to changing interest rates
and credit spreads as rates declined during the period. Net realized capital losses on the valuation
and settlement of derivative instruments totaled $177 million for the first six
months of 2008, primarily comprised $160 million for the valuation of equity
indexed notes and convertible fixed income securities.
At June 30,
2008, our securities with embedded options totaled $2.04 billion and decreased
in fair value from December 31, 2007 by $357 million, comprising realized
capital losses related to the valuation of embedded options of $160 million,
net sales activity of $194 million in realized capital losses, and unrealized
net capital losses reported in other comprehensive income (OCI) of $3 million
for the host security. Unrealized
capital losses were further increased by $21 million due to amortization of the
host security. The change in the fair
value of embedded options is bifurcated from the host securities, separately
valued and reported in realized capital gains and losses, while the change in
value of the host securities is reported in OCI. Total fair value exceeded total amortized
cost by $15 million at June 30, 2008.
Valuation gains and losses are converted into cash for securities with
embedded options upon our election to sell these securities. In the event the economic value of the
options is not realized, we will recover the par value if held to maturity. Total fair value exceeded par value by $74
million at June 30, 2008.
69
Losses
from the previously established risk reduction programs, primarily in our
duration management programs, were related to changing interest rates and
credit spreads as rates declined during the period.
A changing interest rate environment
will drive changes in our portfolio duration targets at a tactical level. A duration target and range is established
with an economic view of liabilities relative to a long-term portfolio
view. Tactical duration management is
accomplished through both cash market transactions including new purchases and
derivative activities that generate realized gains and losses. As a component of our approach to managing
portfolio duration, realized gains and losses on certain derivative instruments
are most appropriately considered in conjunction with the unrealized gains and
losses on the fixed income portfolio.
This approach mitigates the impacts of general interest rate changes to
the overall financial condition of the Corporation.
The table below presents
the realized capital gains
and losses (pretax) on the valuation and settlement of derivative instruments
shown by underlying exposure and derivative strategy.
|
|
Six
months ended June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
($ in
millions)
|
|
Valuation
|
|
Settlements
|
|
Total
|
|
Total
|
|
YTD 2008
Explanations
|
Risk
reduction
|
|
|
|
|
|
|
|
|
|
Net short interest rate derivatives are used to
offset the effects of changing interest rates
|
PropertyLiability
|
|
|
|
|
|
|
|
|
|
on a portion of PropertyLiability fixed income
portfolio which are reported in unrealized
|
Portfolio
duration management
|
|
$
|
|
|
$
|
(4
|
)
|
$
|
(4
|
)
|
$
|
21
|
|
net capital gains in OCI. The contracts are daily cash settled and
can be exited any time for minimal additional cost. The 2008 YTD loss resulted from declining
interest rates. Unrealized gains on
the fixed income portfolio caused by the decreasing interest rates did not
offset these amounts due to widening credit spreads.
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
spike exposure
|
|
(8
|
)
|
|
|
(8
|
)
|
|
|
Interest rate swaptions contracts acquired in the
second half of 2007 with approximately oneyear terms that provide an offset
to declining fixed income market values resulting from potential rising
interest rates. The contracts protect
$21.5 billion of notional principal by limiting the decline in value to $1.5
billion for an increase in riskfree rates greater than approximately 150
basis points above those in effect at inception of the contracts. The 2008 YTD loss resulted from declining
interest rates. If interest rates do
not increase above the strike rate, the maximum remaining potential loss in
2008 is limited to the remaining unrecognized cost of $15 million at June 30,
2008.
|
|
|
|
|
|
|
|
|
|
|
|
Hedging
unrealized gains on equity securities
|
|
(2
|
)
|
58
|
|
56
|
|
6
|
|
Short S&P futures were primarily used to protect
unrealized gains on our equity securities portfolio reported in unrealized
net capital gains in accumulated OCI.
The results offset the decline in our unrealized gains on equity
securities as equity markets declined during the year.
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
contracts
|
|
(9
|
)
|
(2
|
)
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
(21
|
)
|
1
|
|
(20
|
)
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allstate
Financial
|
|
|
|
|
|
|
|
|
|
Interest rate caps, floors and swaps are used by
Allstate Financial to align interest-rate
|
Duration gap
management
|
|
(29
|
)
|
17
|
|
(12
|
)
|
37
|
|
sensitivities of its assets and liabilities. The contracts settle based on differences
between current market rates and a contractually specified fixed rate through
expiration. The change in valuation
reflects the changing value of expected future settlements, which may vary
over the period of the contracts. The
loss should offset unrealized gain in OCI to the extent it relates to changes
in risk-free rates, however any offset was reduced by the impact of widening credit
spreads. The 2008 loss resulted from
declining interest rates.
|
|
|
|
|
|
|
|
|
|
|
|
Anticipatory
hedging
|
|
|
|
23
|
|
23
|
|
6
|
|
Futures are used to protect investment spread from
interest rate changes during mismatches in the timing of cash flows between
product sales and the related investment activity. The contracts are cash settled daily and
can be exited at any time for a minimal additional cost. If the cash flow mismatches are such that a
positive net investment position is being hedged, there is an offset for the
related investments unrealized gain or loss in OCI. The 2008 YTD amounts reflect decreases in
riskfree interest rates on a net long position as liability issuances
exceeded asset acquisitions.
|
|
|
|
|
|
|
|
|
|
|
|
Hedging of
interest rate exposure in annuity contracts
|
|
(9
|
)
|
6
|
|
(3
|
)
|
8
|
|
Interest rate caps used to hedge the effect of
changing crediting rates that are indexed to changes in treasury rates on
certain annuity contracts. The change
in valuation reflects the changing value of expected future settlements
including the underlying cost to hedge the treasury-rate index feature. The offset to the product hedging cost is
reflected in the base crediting rates on the underlying annuity policies,
which is reported in credited interest.
The value of expected future settlements and the associated value of
future credited interest, which is reportable in future periods when
incurred, decreased in 2008 due to declining interest rates.
|
|
|
|
|
|
|
|
|
|
|
|
Hedging
unrealized gains on equity indexed notes
|
|
|
|
2
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge
ineffectiveness
|
|
(9
|
)
|
(2
|
)
|
(11
|
)
|
9
|
|
The hedge ineffectiveness of $(9) million includes
$23 million in realized capital losses on swaps that were offset by $14
million in realized capital gains on the hedged risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
Six
months ended June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
($ in
millions)
|
|
Valuation
|
|
Settlements
|
|
Total
|
|
Total
|
|
YTD 2008
Explanations
|
Foreign currency
contracts
|
|
|
|
(3
|
)
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Risk reduction
|
|
$
|
(87
|
)
|
$
|
96
|
|
$
|
9
|
|
$
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
generation
|
|
|
|
|
|
|
|
|
|
Credit default swaps are used to replicate fixed
income securities and to complement the
|
Asset replication
credit exposure
|
|
|
|
|
|
|
|
|
|
cash market when credit exposure to certain issuers
is not available or when the
|
PropertyLiability
|
|
$
|
(18
|
)
|
$
|
8
|
|
$
|
(10
|
)
|
$
|
|
|
derivative alternative is less expensive than the
cash market alternative. The credit
default swaps typically have fiveyear terms for which we receive periodic
premiums through expiration. Valuation
gains and losses will reverse if allowed to expire. The 2008 YTD changes in valuation are due
to widening credit spreads, and would only be converted to cash upon
disposition or a default on an underlying credit obligation.
|
Allstate
Financial
|
|
(20
|
)
|
4
|
|
(16
|
)
|
|
|
|
Total
|
|
(38
|
)
|
12
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset replication
equity exposure
|
|
|
|
|
|
|
|
|
|
|
PropertyLiability
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
derivatives PropertyLiability
|
|
|
|
|
|
|
|
21
|
|
|
Total
Income generation
|
|
$
|
(38
|
)
|
$
|
12
|
|
$
|
(26
|
)
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
|
|
|
|
|
|
|
|
|
|
|
Equity indexed
notes Allstate Financial
|
|
$
|
(105
|
)
|
$
|
|
|
$
|
(105
|
)
|
$
|
58
|
|
Equity indexed notes are fixed income securities that
contain embedded equity options. The
changes in valuation of the embedded equity indexed call options are reported
in realized capital gains and losses.
The results generally track the performance of underlying equity
indices. Valuation gains and losses
are converted into cash upon sale. In
the event the economic value of the options is not realized, we will recover
the par value if held to maturity.
Fair value exceeded par value by $28 million at June 30, 2008. The following table compares the June 30,
2008 holdings and December 31, 2007 holdings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in
millions)
|
|
June 30,
2008
|
|
Change
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
Par value
|
|
$
|
800
|
|
$
|
|
|
$
|
800
|
|
|
|
|
|
|
|
|
|
|
Amortized cost of
host contract
|
|
$
|
507
|
|
$
|
10
|
|
$
|
497
|
|
|
|
|
|
|
|
|
|
|
Fair value of
equityindexed call option
|
|
317
|
|
(105
|
)
|
422
|
|
|
|
|
|
|
|
|
|
|
Total amortized
cost
|
|
$
|
824
|
|
$
|
(95
|
)
|
$
|
919
|
|
|
|
|
|
|
|
|
|
|
Total Fair value
|
|
$
|
828
|
|
$
|
(96
|
)
|
$
|
924
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain/loss
|
|
$
|
4
|
|
$
|
(1
|
)
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
options in fixed income securities
|
|
|
|
|
|
|
|
|
|
Convertible bonds are fixed income securities that
contain embedded options. Changes
|
PropertyLiability
|
|
(33
|
)
|
|
|
(33
|
)
|
54
|
|
in valuation of the embedded option are reported in
realized capital gains and losses.
|
Allstate
Financial
|
|
(22
|
)
|
|
|
(22
|
)
|
28
|
|
The results generally track the performance of
underlying equity indices. Valuation
gains and losses are converted into cash upon our election to sell these
securities. In the event the economic
value of the options is not realized, we will recover the par value if held
to maturity. Fair value exceeded par
value by $46 million at June 30, 2008.
The following table compares the June 30, 2008 holdings and December
31, 2007 holdings.
|
Total
|
|
(55
|
)
|
|
|
(55
|
)
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in
millions)
|
|
June 30,
2008
|
|
Change
in Fair
Value
|
|
Change
due
to Net Sale
Activity
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
Par value
|
|
$
|
1,162
|
|
$
|
|
|
$
|
(254
|
)
|
$
|
1,416
|
|
|
|
|
|
|
|
|
|
|
Amortized cost of
host contract
|
|
$
|
818
|
|
$
|
11
|
|
$
|
(182
|
)
|
$
|
989
|
|
|
|
|
|
|
|
|
|
|
Fair value of
conversion option
|
|
379
|
|
(55
|
)
|
(27
|
)
|
461
|
|
|
|
|
|
|
|
|
|
|
Total amortized
cost
|
|
$
|
1,197
|
|
$
|
(44
|
)
|
$
|
(209
|
)
|
$
|
1,450
|
|
|
|
|
|
|
|
|
|
|
Total Fair value
|
|
$
|
1,208
|
|
$
|
(67
|
)
|
$
|
(194
|
)
|
$
|
1,469
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain/loss
|
|
$
|
11
|
|
$
|
(23
|
)
|
$
|
15
|
|
$
|
19
|
Total
Accounting
|
|
$
|
(160
|
)
|
$
|
|
|
$
|
(160
|
)
|
$
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(285
|
)
|
$
|
108
|
|
$
|
(177
|
)
|
$
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
The breakout by operating
segment for realized capital gains and losses from derivatives were as follows:
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Property-Liability
|
|
$
|
113
|
|
$
|
89
|
|
$
|
(30
|
)
|
$
|
126
|
|
Allstate Financial
|
|
10
|
|
157
|
|
(147
|
)
|
146
|
|
Corporate and Other
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
123
|
|
$
|
246
|
|
$
|
(177
|
)
|
$
|
272
|
|
APPLICATION
OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in
conformity with GAAP requires management to adopt accounting policies and make
estimates and assumptions that affect amounts reported in the consolidated
financial statements.
In
applying policies, management makes subjective and complex judgments that
frequently require estimates about matters that are inherently uncertain. Many
of these policies, estimates and related judgments are common in the insurance
and financial services industries; others are specific to our businesses and
operations. It is reasonably likely that
changes in these estimates could occur from period to period and result in a
material impact on our consolidated financial statements.
Our critical accounting estimate for the
fair value of financial assets and financial liabilities follows. For a description of critical accounting
estimates not discussed below, see the Application of Critical Accounting
Estimates section of the MD&A found under Part II. Item 7. of The
Allstate Corporation Annual Report on Form 10-K for 2007.
Fair Value of Financial Assets and Financial Liabilities
SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007. We adopted the provisions of SFAS No. 157
as of January 1, 2008 for financial assets and financial liabilities that
are measured at fair value. SFAS No. 157:
·
Defines fair value 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, and
establishes a framework for measuring fair value;
·
Establishes a three-level hierarchy for
fair value measurements based upon the transparency of inputs to the valuation
as of the measurement date;
·
Expands disclosures about financial
instruments measured at fair value.
We categorize our financial assets and
financial liabilities measured at fair value based on the priority of the
inputs to the valuation technique, into a three-level fair value hierarchy. The
fair value hierarchy gives the highest priority to quoted prices in active
markets for identical assets or liabilities which we can access (Level 1); the
second highest priority for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in non-active
markets, or valuation models whose inputs are observable (Level 2); and the
lowest priority to unobservable inputs (Level 3). If inputs used to measure a financial
instrument fall within different levels of the fair value hierarchy, the
categorization is based on the lowest level input that is significant to the
fair value measurement of the entire instrument. Certain financial 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, and thus are only
categorized in the fair value hierarchy when held at fair value on a
non-recurring basis. In addition, equity options embedded in fixed income
securities are not disclosed in the hierarchy with free-standing derivatives as
the embedded derivatives are presented as combined instruments in fixed income
securities.
The availability of
market observable information is the principal factor in determining the level
that financial instruments are assigned in the three-level hierarchy.
Observable inputs are those used by market participants in valuing financial
instruments that are developed based on market data obtained from independent
sources. In the absence of sufficient observable
inputs, unobservable inputs reflect our estimates of the assumptions market
participants would use in valuing financial assets and financial liabilities
and are developed based on the best information available in the
circumstances. The degree of management
judgment involved in determining fair values is inversely related to the
availability of market observable information.
72
Financial assets and financial liabilities recorded on the Condensed
Consolidated Statements of Financial Position at fair value are categorized
based on the reliability of inputs to the valuation techniques as follows:
Level 1:
Financial assets and financial liabilities whose values are based on
unadjusted quoted prices for identical assets or liabilities in an active
market that we can access.
Level 2:
Financial assets and financial 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 non-active markets; or
c)
Valuation models whose inputs are observable,
directly or indirectly, for substantially the full term of the asset or
liability
Level 3:
Financial assets and financial 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. These inputs may reflect our estimates of the assumptions that
market participants would use in valuing the financial assets and financial
liabilities.
We utilize a combination of third party valuation service providers,
brokers, and internal valuation models to determine fair value.
We gain assurance on the overall
reasonableness and consistent application of input assumptions, valuation
methodologies, and compliance with accounting standards for fair value
determination through the execution of various processes and controls designed
to ensure that our financial assets and financial liabilities are appropriately
valued and our ongoing monitoring of the fair values received or derived
internally.
We are responsible for the determination
of the value of the financial assets and financial liabilities carried at fair
value and the supporting assumptions and methodologies. In certain situations, we employ independent
third-party valuation service providers to gather, analyze, and interpret market
information and derive fair values based upon relevant assumptions and
methodologies for individual instruments.
In situations where our valuation service providers are unable to obtain
sufficient market observable information upon which to estimate the fair value
for a particular security, fair value is determined either by requesting
brokers who are knowledgeable about these securities to provide a quote or by
employing internal valuation models that are widely accepted in the financial
services industry. Changing market
conditions in the second quarter of 2008 were incorporated into valuation
assumptions and reflected in the fair values, which were validated by
calibration and other analytical techniques to available market observable
data.
Valuation service providers typically
obtain data about market transactions and other key valuation model inputs from
multiple sources and, through the use of proprietary algorithms, produce
valuation information in the form of a single fair value for individual
securities for which a fair value has been requested under the terms of our
agreements. For certain equity
securities, valuation service providers provide market quotations for completed
transactions on the measurement date.
For other security types, fair values are derived from the valuation
service providers proprietary valuation models. The inputs used by the valuation service
providers include, but are not limited to, market prices from recently
completed transactions and transactions of comparable securities, interest rate
yield curves, credit spreads, currency rates, and other market-observable
information, as applicable. Valuation service providers also use proprietary
discounted cash flow models that are widely accepted in the financial services
industry and similar to those used by other market participants to value the
same financial instruments. The
valuation models take into account, among other things, market observable
information as of the measurement date, as described above, as well as the
specific attributes of the security being valued including its term, interest
rate, credit rating, industry sector, and where applicable, collateral quality
and other issue or issuer specific information.
Executing valuation models effectively requires seasoned professional
judgment and experience. In cases where
market transactions or other market observable data is limited, the extent to
which judgment is applied varies inversely with the availability of market
observable information.
For certain of our financial assets carried at fair value,
where our valuation service providers cannot provide fair value determinations,
we obtain non-binding price quotes from brokers familiar with the security who,
similar to our valuation service providers, may consider transactions or
activity in similar securities, as applicable, among other information. The brokers providing price quotes are
generally from the brokerage divisions of leading financial institutions with
market making, underwriting and distribution expertise.
The
fair value of financial assets and financial liabilities, including
privately-placed securities and certain derivatives embedded in certain
contractholder liabilities, where our
valuation service providers or brokers do not provide fair value
determinations, is determined using valuation methods and models widely
accepted in the
73
financial services industry.
Internally developed valuation models, which include inputs that may not
be market observable and as such involve some degree of judgment, are
considered appropriate for each class of security to which they are applied.
Our internal pricing
methods are primarily based on models using discounted cash flow methodologies
that determine a single best estimate of fair value for individual financial
instruments. In addition, our models use
internally assigned credit ratings as inputs (which are generally consistent
with any external ratings and those we use to report our holdings by credit
rating) and stochastically determined cash flows for certain derivatives
embedded in certain contractholder liabilities, both of which are difficult to
independently observe and verify.
Instrument specific inputs used in our internal fair value
determinations include: coupon rate, weighted average life, sector of the
issuer, call provisions, and the contractual elements of derivatives embedded
in certain contractholder liabilities.
Market specific inputs used in these fair values, which we believe are
representative of inputs other market participants would use to determine fair
value of the same instruments include: interest rate yield curves, quoted
market prices of comparable securities, credit spreads, estimated liquidity
premiums, and other applicable market data including lapse and anticipated
market return estimates for derivatives embedded in certain contractholder
liabilities. As a result of the
significance of non-market observable inputs, including internally assigned
credit ratings and stochastic cash flow estimates as described above, judgment
is required in developing these fair values. The fair value of these financial
assets and financial liabilities may differ from the amount received to sell an
asset or the amount paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Moreover, the use of different valuation
assumptions may have a material effect on the financial assets and financial
liabilities fair values.
Fair value of our investments comprise an
aggregation of numerous, single best estimates for each security in the
Condensed Consolidated Statements of Financial Position. Because of this detailed approach, there is
no single set of assumptions that determine our fair value estimates at a
consolidated level. Moreover, management
does not compile a range of estimates for items reported at fair value at the
consolidated level because we do not believe that a range would provide
meaningful information. Level 1 and
Level 2 measurements represent valuations where all significant inputs are
market observable. Level 3 measurements have one or more significant inputs
that are not market observable and as a result these fair value determinations
have greater potential variability as it relates to their significant inputs. The Level 3 principal components are
privately placed securities valued using internal models, broker quoted
securities, ABS RMBS, Alt-A, ARS backed by student loans and other CDO. In
general, the greater the reliance on significant inputs that are not market
observable, the greater potential variability of the fair value determinations.
ABS RMBS and Alt-A reflected the most significant impacts to their respective
fair value determinations, due to the continued illiquidity that existed for
these classes of securities. For broker quoted securities fair value
determinations, we believe the brokers providing the quotes may consider market
observable transactions or activity in similar securities, as applicable, and
other information as calibration points.
Privately placed securities fair value determinations, which were based
on internal ratings that are not market observable, are calibrated to market
observable information in the form of external NAIC ratings and credit
spreads. We believe our most significant
exposure to changes in fair value is due to market risk. Our exposure to changes in market conditions
is discussed fully in the Market Risk section of the MD&A included in our
2007 Form 10-K.
We employ specific control processes to
determine the reasonableness of the fair values of our financial assets and
financial liabilities. Our processes are
designed to ensure that the values received or internally estimated are
accurately recorded and that the data inputs and the valuation techniques utilized
are appropriate, consistently applied, and that the assumptions are reasonable
and consistent with the objective of determining fair value. For example, on a continuing basis, we assess
the reasonableness of individual security values received from valuation
service providers that exceed certain thresholds as compared to previous values
received from those valuation service providers. In addition, we may validate
the reasonableness of fair values by comparing information obtained from our
valuation service providers to other third party valuation sources for selected
financial assets. When fair value determinations are expected to be more
variable, we validate them through reviews by members of management who have
relevant expertise and who are independent of those charged with executing
investing transactions.
74
The
following table identifies investments as of June 30, 2008 by source of
value determination:
|
|
Investments
|
|
($ in millions)
|
|
Fair
Value
|
|
Percent
to total
|
|
Fair value based on internal sources (1)
|
|
$
|
18,492
|
|
16.3
|
%
|
Fair value based on external sources (2)
|
|
78,088
|
|
68.7
|
|
Total fixed income, equity and certain
short-term securities
|
|
96,580
|
|
85.0
|
|
Fair value of derivatives
|
|
246
|
|
0.2
|
|
Mortgage loans, policy loans, bank loans
and certain limited partnership, short-term and other investments, valued at
cost, amortized cost and the equity method
|
|
16,777
|
|
14.8
|
|
Total
|
|
$
|
113,603
|
|
100.0
|
%
|
(1) Includes
short-term, commercial paper and other of $7.80 billion reported in Level 2.
(2) Includes
$6.31 billion that are valued using broker quotes.
For more detailed information on our accounting policy for the fair
value of financial assets and financial liabilities and information on the
financial assets and financial liabilities included in the Levels promulgated
by SFAS No. 157, see Note 4 to the Condensed Consolidated Financial
Statements.
75
The
following table provides additional details regarding Level 1, 2 and 3
financial assets and financial liabilities by their classification in the
Condensed Consolidated Statement of Financial Position at June 30, 2008.
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Other
Valuations
and
|
|
Balance as of
|
|
($ in millions)
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Netting
|
|
June 30, 2008
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
$
|
17,246
|
|
$
|
610
|
|
|
|
$
|
17,856
|
|
Corporate privately placed securities
|
|
|
|
4,422
|
|
11,413
|
|
|
|
15,835
|
|
Municipal
|
|
|
|
21,440
|
|
968
|
|
|
|
22,408
|
|
Municipal ARS
|
|
|
|
89
|
|
1,921
|
|
|
|
2,010
|
|
U.S. government and agencies
|
|
$
|
875
|
|
3,256
|
|
|
|
|
|
4,131
|
|
ABS RMBS
|
|
|
|
|
|
2,974
|
|
|
|
2,974
|
|
Alt-A
|
|
|
|
|
|
948
|
|
|
|
948
|
|
Other CDO
|
|
|
|
|
|
1,652
|
|
|
|
1,652
|
|
Other ABS
|
|
|
|
|
|
873
|
|
|
|
873
|
|
ABS CDO
|
|
|
|
|
|
14
|
|
|
|
14
|
|
CRE CDO
|
|
|
|
|
|
376
|
|
|
|
376
|
|
CMBS
|
|
|
|
5,452
|
|
208
|
|
|
|
5,660
|
|
Preferred stock
|
|
|
|
56
|
|
1
|
|
|
|
57
|
|
MBS
|
|
|
|
5,115
|
|
26
|
|
|
|
5,141
|
|
Foreign government
|
|
|
|
2,671
|
|
5
|
|
|
|
2,676
|
|
ABS Credit card and auto loans
|
|
|
|
315
|
|
298
|
|
|
|
613
|
|
Total fixed income securities
|
|
875
|
|
60,062
|
|
22,287
|
|
|
|
83,224
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. equities
|
|
3,373
|
|
3
|
|
40
|
|
|
|
3,416
|
|
International equities
|
|
595
|
|
207
|
|
26
|
|
|
|
828
|
|
Other
|
|
|
|
411
|
|
9
|
|
|
|
420
|
|
Total equity securities
|
|
3,968
|
|
621
|
|
75
|
|
|
|
4,664
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper and other
|
|
|
|
7,797
|
|
|
|
|
|
7,797
|
|
Money market funds
|
|
895
|
|
|
|
|
|
|
|
895
|
|
Total shortterm investments
|
|
895
|
|
7,797
|
|
|
|
|
|
8,692
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding derivatives
|
|
|
|
601
|
|
59
|
|
|
|
660
|
|
Total other investments
|
|
|
|
601
|
|
59
|
|
|
|
660
|
|
Total recurring basis assets
|
|
5,738
|
|
69,081
|
|
22,421
|
|
|
|
97,240
|
|
Nonrecurring basis
|
|
|
|
|
|
282
|
|
|
|
282
|
|
Valued at cost, amortized cost or using the
equity method
|
|
|
|
|
|
|
|
$
|
16,495
|
|
16,495
|
|
Counterparty and cash collateral netting
(1)
|
|
|
|
|
|
|
|
(414
|
)
|
(414
|
)
|
Total investments
|
|
5,738
|
|
69,081
|
|
22,703
|
|
16,081
|
|
113,603
|
|
Separate account assets
|
|
12,438
|
|
|
|
|
|
|
|
12,438
|
|
Other assets
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
Total financial assets
|
|
$
|
18,177
|
|
$
|
69,081
|
|
$
|
22,705
|
|
$
|
16,081
|
|
$
|
126,044
|
|
% of total financial assets
|
|
14.4
|
%
|
54.8
|
%
|
18.0
|
%
|
12.8
|
%
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder funds:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives embedded in annuity contracts
|
|
$
|
|
$
|
(50
|
)
|
$
|
(20
|
)
|
|
|
$
|
(70
|
)
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding derivatives
|
|
|
|
(424
|
)
|
(78
|
)
|
|
|
(502
|
)
|
Nonrecurring basis
|
|
|
|
|
|
(89
|
)
|
|
|
(89
|
)
|
Counterparty and cash collateral netting
(1)
|
|
|
|
|
|
|
|
$
|
263
|
|
263
|
|
Total financial liabilities
|
|
$
|
|
|
$
|
(474
|
)
|
$
|
(187
|
)
|
$
|
263
|
|
$
|
(398
|
)
|
% of total financial liabilities
|
|
0.0
|
%
|
119.1
|
%
|
47.0
|
%
|
(66.1
|
)%
|
100.0
|
%
|
(1) In
accordance with
Financial Accounting Standards Board
(FASB) Staff Position No. FIN 39-1, Amendment of FASB Interpretation No.39
,
we net all fair value amounts recognized for derivative instruments and fair
value amounts recognized for the right to reclaim cash collateral or the
obligation to return cash collateral executed with the same
counterparty under a master netting agreement. At June 30,
2008, the right to reclaim cash collateral was offset by securities held, and
the obligation to return collateral was $151 million.
76
The
following table provides a summary of changes in fair value during the threemonth
period ended June 30, 2008 of Level 3 financial assets and financial
liabilities held at fair value on a recurring basis at June 30, 2008.
|
|
|
|
Total realized and unrealized
Gains (Losses) included in:
|
|
|
|
|
|
|
|
Total
Gains (Losses)
included in
|
|
($ in millions)
|
|
Balance as of
March 31, 2008
|
|
Net Income (1)
|
|
OCI on
Statement of
Financial
Position
|
|
Purchases,
Sales, Issuances
and Settlements,
net
|
|
Net
Transfers In
and/or (Out)
of Level 3
|
|
Balance as of
June 30, 2008
|
|
Net Income for
Instruments
Still Held at
June 30, 2008 (4)
|
|
Financial
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$
|
792
|
|
$
|
(12
|
)
|
$
|
(7
|
)
|
$
|
7
|
|
$
|
(170
|
)
|
$
|
610
|
|
$
|
(11
|
)
|
Corporate
privately placed securities
|
|
12,012
|
|
(28
|
)
|
(180
|
)
|
(486
|
)
|
95
|
|
11,413
|
|
(53
|
)
|
Municipal
|
|
991
|
|
(2
|
)
|
(3
|
)
|
9
|
|
(27
|
)
|
968
|
|
(2
|
)
|
Municipal ARS
|
|
486
|
|
|
|
(59
|
)
|
(35
|
)
|
1,529
|
|
1,921
|
|
|
|
ABS RMBS
|
|
3,335
|
|
(312
|
)
|
177
|
|
(226
|
)
|
|
|
2,974
|
|
(310
|
)
|
AltA
|
|
1,056
|
|
(112
|
)
|
89
|
|
(85
|
)
|
|
|
948
|
|
(97
|
)
|
Other CDO
|
|
1,740
|
|
2
|
|
(62
|
)
|
(8
|
)
|
(20
|
)
|
1,652
|
|
2
|
|
Other ABS
|
|
1,181
|
|
(7
|
)
|
(8
|
)
|
(313
|
)
|
20
|
|
873
|
|
(4
|
)
|
ABS CDO
|
|
17
|
|
(3
|
)
|
1
|
|
(1
|
)
|
|
|
14
|
|
(3
|
)
|
CRE CDO
|
|
438
|
|
(311
|
)
|
279
|
|
(30
|
)
|
|
|
376
|
|
(288
|
)
|
CMBS
|
|
232
|
|
(38
|
)
|
28
|
|
(18
|
)
|
4
|
|
208
|
|
(35
|
)
|
Preferred stock
|
|
1
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
MBS
|
|
26
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
Foreign
government
|
|
14
|
|
|
|
|
|
5
|
|
(14
|
)
|
5
|
|
|
|
ABS Credit card
and auto loans
|
|
245
|
|
(3
|
)
|
3
|
|
(42
|
)
|
95
|
|
298
|
|
|
|
Total fixed
income securities
|
|
22,566
|
|
(826
|
)
|
258
|
|
(1,223
|
)
|
1,512
|
|
22,287
|
|
(801
|
)
|
Equity securities
|
|
128
|
|
(4
|
)
|
(3
|
)
|
36
|
|
(82
|
)
|
75
|
|
(2
|
)
|
Other
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing
derivatives, net
|
|
(39
|
)
|
10
|
|
|
|
10
|
|
|
|
(19
|
)(2)
|
41
|
|
Total other
investments
|
|
(39
|
)
|
10
|
|
|
|
10
|
|
|
|
(19
|
)
|
41
|
|
Total
investments
|
|
22,655
|
|
(820
|
)
|
255
|
|
(1,177
|
)
|
1,430
|
|
22,343
|
(3)
|
(762
|
)
|
Other assets
|
|
2
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
Total
recurring Level 3 financial assets
|
|
$
|
22,657
|
|
$
|
(820
|
)
|
$
|
255
|
|
$
|
(1,177
|
)
|
$
|
1,430
|
|
$
|
22,345
|
|
$
|
(762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder
funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
embedded in annuity contracts
|
|
$
|
(10
|
)
|
$
|
(11
|
)
|
$
|
|
|
$
|
1
|
|
$
|
|
|
$
|
(20
|
)
|
$
|
(11
|
)
|
Total
recurring Level 3 financial liabilities
|
|
$
|
(10
|
)
|
$
|
(11
|
)
|
$
|
|
|
$
|
1
|
|
$
|
|
|
$
|
(20
|
)
|
$
|
(11
|
)
|
(1)
|
The amounts
above total $(831) million and are reported in the Condensed Consolidated
Statements of Operations as follows: $(834) million in
realized capital gains and losses; $15
million in net investment income; $(1) million in interest credited to
contractholder funds, and; $(11) million in life and annuity contract
benefits.
|
|
|
(2)
|
Comprises
$59 million of financial assets and $(78) million of financial liabilities.
|
|
|
(3)
|
Comprises
$22.42 billion of investments and $(78) million of freestanding derivatives
included in financial liabilities.
|
|
|
(4)
|
The amounts
above represent gains and losses included in net income for the period of
time that the financial asset or financial liability was determined to be in
Level 3. These gains and losses total $(773) million and are reported in the
Condensed Consolidated Statements of Operations as follows: $(777) million in
r
ealized capital
gains and losses; $15 million in net investment income, and; $(11) million in
life and annuity contract benefits.
|
77
The
following table provides a summary of changes in fair value during the six-month
period ended June 30, 2008 of Level 3 financial assets and financial
liabilities held at fair value on a recurring basis at June 30, 2008.
|
|
|
|
Total realized and unrealized
Gains (Losses) included in:
|
|
|
|
|
|
|
|
Total
Gains (Losses)
included in
|
|
($ in millions)
|
|
Balance as of
January 1,
2008
|
|
Net Income (1)
|
|
OCI on
Statement of
Financial
Position
|
|
Purchases,
Sales, Issuances
and Settlements,
net
|
|
Net
Transfers In
and/or (Out)
of Level 3
|
|
Balance as of
June 30, 2008
|
|
Net Income for
Instruments
Still Held at
June 30, 2008 (4)
|
|
Financial
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$
|
810
|
|
$
|
(48
|
)
|
$
|
(8
|
)
|
$
|
(11
|
)
|
$
|
(133
|
)
|
$
|
610
|
|
$
|
(56
|
)
|
Corporate
privately placed securities
|
|
12,058
|
|
(119
|
)
|
(181
|
)
|
(583
|
)
|
238
|
|
11,413
|
|
(150
|
)
|
Municipal
|
|
991
|
|
3
|
|
(19
|
)
|
|
|
(7
|
)
|
968
|
|
(2
|
)
|
Municipal ARS
|
|
486
|
|
|
|
(59
|
)
|
(35
|
)
|
1,529
|
|
1,921
|
|
|
|
ABS RMBS
|
|
3,926
|
|
(364
|
)
|
(193
|
)
|
(395
|
)
|
|
|
2,974
|
|
(345
|
)
|
AltA
|
|
1,347
|
|
(200
|
)
|
(73
|
)
|
(126
|
)
|
|
|
948
|
|
(185
|
)
|
Other CDO
|
|
2,010
|
|
2
|
|
(318
|
)
|
(22
|
)
|
(20
|
)
|
1,652
|
|
|
|
Other ABS
|
|
1,339
|
|
(19
|
)
|
(54
|
)
|
(573
|
)
|
180
|
|
873
|
|
(20
|
)
|
ABS CDO
|
|
36
|
|
(63
|
)
|
42
|
|
(1
|
)
|
|
|
14
|
|
(63
|
)
|
CRE CDO
|
|
568
|
|
(311
|
)
|
159
|
|
(40
|
)
|
|
|
376
|
|
(286
|
)
|
CMBS
|
|
265
|
|
(36
|
)
|
(4
|
)
|
(22
|
)
|
5
|
|
208
|
|
(34
|
)
|
Preferred stock
|
|
1
|
|
|
|
|
|
|
|
|
|
1
|
|
4
|
|
MBS
|
|
96
|
|
(2
|
)
|
(2
|
)
|
(45
|
)
|
(21
|
)
|
26
|
|
|
|
Foreign
government
|
|
19
|
|
1
|
|
|
|
(1
|
)
|
(14
|
)
|
5
|
|
1
|
|
ABS Credit card
and auto loans
|
|
420
|
|
(3
|
)
|
(9
|
)
|
(45
|
)
|
(65
|
)
|
298
|
|
|
|
Total fixed
income securities
|
|
24,372
|
|
(1,159
|
)
|
(719
|
)
|
(1,899
|
)
|
1,692
|
|
22,287
|
|
(1,136
|
)
|
Equity securities
|
|
129
|
|
(5
|
)
|
(9
|
)
|
49
|
|
(89
|
)
|
75
|
|
(3
|
)
|
Other
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing
derivatives, net
|
|
10
|
|
(42
|
)
|
|
|
13
|
|
|
|
(19
|
)(2)
|
3
|
|
Total other
investments
|
|
10
|
|
(42
|
)
|
|
|
13
|
|
|
|
(19
|
)
|
3
|
|
Total
investments
|
|
24,511
|
|
(1,206
|
)
|
(728
|
)
|
(1,837
|
)
|
1,603
|
|
22,343
|
(3)
|
(1,136
|
)
|
Other assets
|
|
2
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
Total
recurring Level 3 financial assets
|
|
$
|
24,513
|
|
$
|
(1,206
|
)
|
$
|
(728
|
)
|
$
|
(1,837
|
)
|
$
|
1,603
|
|
$
|
22,345
|
|
$
|
(1,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder
funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
embedded in annuity contracts
|
|
$
|
4
|
|
$
|
(25
|
)
|
$
|
|
|
$
|
1
|
|
$
|
|
|
$
|
(20
|
)
|
$
|
(25
|
)
|
Total
recurring Level 3 financial liabilities
|
|
$
|
4
|
|
$
|
(25
|
)
|
$
|
|
|
$
|
1
|
|
$
|
|
|
$
|
(20
|
)
|
$
|
(25
|
)
|
(1)
|
The amounts
above total $(1.23) billion and are reported in the Condensed Consolidated
Statements of Operations as follows: $(1.23) billion in
realized capital gains and losses; $28
million in net investment income; $(4) million in interest credited to
contractholder funds, and; $(25) million in life and annuity contract
benefits.
|
|
|
(2)
|
Comprises
$59 million of financial assets and $(78) million of financial liabilities.
|
|
|
(3)
|
Comprises
$22.42 billion of investments and $(78) million of freestanding derivatives
included in financial liabilities.
|
|
|
(4)
|
The
amounts above represent gains and losses included in net income for the
period of time that the financial asset or financial liability was determined
to be in Level 3. These gains and losses total $(1.16) billion and are
reported in the Condensed Consolidated Statements of Operations as follows:
$(1.16) billion in r
ealized capital gains and losses; $28 million in net investment
income; $(1) million in interest credited to contractholder funds, and;
$(25) million in life and annuity contract benefits.
|
78
Transfers into and out of
Level 3 during the six months ended June 20, 2008 are attributable to a
change in the availability of market observable information for individual
securities within the respective categories.
Due to a further deterioration in liquidity for the segment of the ARS
market backed by student loans, certain market observable data utilized for
valuation purposes became unavailable during the second quarter of 2008. As of June 30, 2008, $1.92 billion or
95.5% of our total ARS holdings were valued using a discounted cash flow model. Certain
inputs to the valuation model that are significant to the overall valuation and
not market observable included: estimates of future coupon rates if auction
failures continue, maturity assumptions, and illiquidity premium. As a result of the reliance on certain
non-market observable inputs, the portion of the ARS portfolio backed by
student loans have been transferred to Level 3 for the period ended June 30,
2008. These same securities were classified as Level 2 measurements for the
period ended March 31, 2008. Our
ARS holdings that are not backed by student loans have a fair value equal to
their corresponding par value based on market observable inputs and, therefore,
continue to have a Level 2 classification.
The following
table presents fair value as a percent of amortized cost for Level 3
investments at June 30, 2008.
($ in millions)
|
|
Fair value
|
|
Fair value as a
% of
Amortized cost
|
|
Fixed income securities:
|
|
|
|
|
|
Corporate
|
|
$
|
610
|
|
100.5
|
%
|
Corporate privately placed securities
|
|
11,413
|
|
99.7
|
|
Municipal
|
|
968
|
|
98.8
|
|
Municipal - ARS
|
|
1,921
|
|
97.0
|
|
ABS RMBS
|
|
2,974
|
|
81.4
|
|
Alt-A
|
|
948
|
|
87.6
|
|
Other CDO
|
|
1,652
|
|
74.2
|
|
Other ABS
|
|
873
|
|
91.4
|
|
ABS CDO
|
|
14
|
|
116.7
|
|
CRE CDO
|
|
376
|
|
101.1
|
|
CMBS
|
|
208
|
|
85.2
|
|
Preferred stock
|
|
1
|
|
100.0
|
|
MBS
|
|
26
|
|
92.9
|
|
Foreign government
|
|
5
|
|
100.0
|
|
ABS Credit card and auto loans
|
|
298
|
|
94.9
|
|
Total fixed income securities
|
|
22,287
|
|
93.2
|
|
Equity securities:
|
|
|
|
|
|
U.S. Equities
|
|
40
|
|
105.3
|
|
International equities
|
|
26
|
|
100.0
|
|
Other
|
|
9
|
|
112.5
|
|
Total equity securities
|
|
75
|
|
104.2
|
|
Other investments:
|
|
|
|
|
|
Free-standing derivatives
|
|
59
|
|
100.0
|
|
Total other investments
|
|
59
|
|
100.0
|
|
Sub-total recurring Level 3 investments
|
|
22,421
|
|
93.3
|
|
Non-recurring basis
|
|
282
|
|
100.0
|
|
Total Level 3 investments
|
|
$
|
22,703
|
|
93.4
|
|
Non-recurring investments
include certain mortgage loans, limited partnership interests and other
investments at fair value due to our change in intent write-downs and other-than-temporary
impairments at June 30, 2008.
79
CAPITAL RESOURCES AND LIQUIDITY
Capital
Resources
consist of shareholders equity and debt,
representing funds deployed or available to be deployed to support business
operations or for general corporate purposes.
The following table summarizes our capital resources.
($ in millions)
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Common stock, retained income and other shareholders equity items
|
|
$
|
20,337
|
|
$
|
21,228
|
|
Accumulated other comprehensive income
|
|
(628
|
)
|
623
|
|
Total shareholders equity
|
|
19,709
|
|
21,851
|
|
Debt
|
|
5,658
|
|
5,640
|
|
Total capital resources
|
|
$
|
25,367
|
|
$
|
27,491
|
|
|
|
|
|
|
|
Ratio of debt to shareholders equity
|
|
28.7
|
%
|
25.8
|
%
|
Ratio of debt to capital resources
|
|
22.3
|
%
|
20.5
|
%
|
Shareholders equity
decreased in the first six months of 2008, due to
unrealized net capital losses on investments, share repurchases, dividends paid
to shareholders and an increase in the net underfunded status of the pension
and other post-retirement benefit obligation partially offset by net income.
The increase in
the net underfunded status of the pension and other post-retirement benefit
obligation was the result of conforming our plan measurement date with our
fiscal year-end reporting date as required by SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans.
We
recorded a decrease of $13 million, after-tax, to beginning retained income
representing the net periodic benefit cost for the period between October 31,
2007 and December 31, 2007 and a decrease of $80 million, after-tax, to
beginning net funded status of pension and other postretirement benefit
obligations to reflect changes in the fair value of plan assets and the benefit
obligations between October 31, 2007 and January 1, 2008 and for
amortization of actuarial gains and losses and prior service costs between October 31,
2007 and December 31, 2007. For
further information on SFAS No. 158, see Note 1 to the
Condensed
Consolidated Financial Statements.
We completed o
ur
$4.00 billion share repurchase program that commenced in November 2006,
and commenced a $2.00 billion share repurchase program that is expected to be
completed by March 31, 2009. During
the first six months of 2008, we repurchased 17.5 million shares for $858
million; $1.38 billion remains of the $2 billion share repurchase program.
Financial Ratings and Strength
Our ratings are
influenced by many factors including our operating and financial performance,
asset quality, liquidity, asset/liability management, overall portfolio mix,
financial leverage (i.e., debt), exposure to risks such as catastrophes and the
current level of operating leverage.
There have been no changes to our debt, commercial paper and insurance
financial strength ratings since December 31, 2007.
We have distinct groups of subsidiaries licensed to sell property and
casualty insurance in New Jersey and Florida that maintain separate group
ratings. The ratings of these groups are
influenced by the risks that relate specifically to each group. S&P affirmed the ratings for The Allstate
Corporation, AIC and ALIC in July 2008.
Moodys affirmed the ratings of AIC and The Allstate Corporations
commercial paper rating but placed under review the ratings for ALIC and The
Allstate Corporations senior long-term debt.
Effective May 8, 2008, ALIC, AIC and The Allstate Corporation
entered into a one-year Amended and Restated Intercompany Liquidity Agreement (Liquidity
Agreement) replacing the Intercompany Liquidity Agreement between ALIC and
AIC, dated January 1, 2008. The
agreement allows for short-term advances of funds to be made between parties
for liquidity and other general corporate purposes. It shall be automatically renewed for
subsequent one-year terms unless terminated by the parties. The Liquidity Agreement does not establish a
commitment to advance funds on the part of either party. ALIC and AIC each serve as a lender and
borrower and The Allstate Corporation serves only as a lender.
80
Liquidity Sources and Uses
The following table summarizes consolidated
cash flow activities by business segment for the first six months ended June 30.
|
|
Property-Liability(1)
|
|
Allstate
Financial
(1)
|
|
Corporate
and Other
(1)
|
|
Consolidated
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
1,179
|
|
$
|
1,192
|
|
$
|
1,059
|
|
$
|
1,276
|
|
$
|
61
|
|
$
|
126
|
|
$
|
2,299
|
|
$
|
2,594
|
|
Investing activities
|
|
861
|
|
196
|
|
(741
|
)
|
(482
|
)
|
(501
|
)
|
(844
|
)
|
(381
|
)
|
(1,130
|
)
|
Financing activities
|
|
2
|
|
65
|
|
(298
|
)
|
(387
|
)
|
(1,296
|
)
|
(1,200
|
)
|
(1,592
|
)
|
(1,522
|
)
|
Net increase (decrease) in consolidated cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
326
|
|
$
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Business
unit cash flows reflect the elimination of intersegment dividends and
borrowings.
Property-Liability
Lower
cash provided by operating activities for Property-Liability in the
first six months of 2008, compared to the first six months of 2007, was
primarily due to higher claim payments.
Cash flows provided by
investing activities increased in the first six months of 2008, compared to the
first six months of 2007, primarily due to increased sales of fixed income
securities, partially offset by net change in short-term investments.
Cash flows were impacted by
dividends paid by AIC to its parent, The Allstate Corporation, totaling $1.9
billion in the first six months of 2008.
During 2008, AIC will have the capacity to pay a total of $4.96 billion
in dividends without obtaining prior approval from the Illinois Department of
Insurance.
Allstate
Financial
Lower
operating cash flows for Allstate Financial in the first six months of 2008,
compared to the first six months of 2007, were primarily related to a decrease
in investment income and premiums.
Cash flows used in investing activities increased in the first six
months of 2008, compared to the first six months of 2007, primarily due to an
increased investment in short-term securities, partially offset by a lower
investment in and higher proceeds from sales of fixed income securities.
Cash flows used
in financing activities decreased primarily due to increased contractholder
fund deposits and net short-term borrowings in the first six months of 2008,
compared to net repayments of short-term debt in the first six months of 2007,
partially offset by higher contractholder fund withdrawals. For quantification of the changes in
contractholder funds, see the Allstate Financial Segment section of the
MD&A.
A
total of $986 million of extendible medium-term notes backed by funding
agreements have been called and will be retired in July 2008.
We have accumulated, and expect to
maintain, short-term investments to retire these obligations. As of June 30, 2008, $3.12 billion of extendible funding
agreements have maturity dates prior to or on March 31, 2009.
Corporate and Other
Fluctuations in the Corporate and Other
operating cash flows were primarily due to the timing of intercompany
settlements. Investing activities
primarily relate to investments in the portfolios of Kennett Capital Holdings,
LLC (Kennett Capital Holdings).
Financing cash flows of the Corporate and Other segment reflect actions
such as fluctuations in short-term debt, repayment of debt, proceeds from the
issuance of debt, dividends to shareholders of The Allstate Corporation and
share repurchases; therefore, financing cash flows are affected when we
increase or decrease the level of these activities.
.
The sources of
liquidity for The Allstate Corporation include but are not limited to dividends
from AIC and $2.76 billion of consolidated investments of Kennett Capital
Holdings at June 30, 2008.
We have access to additional
borrowing to support liquidity as follows:
·
A commercial paper program with a borrowing
limit of $1.00 billion to cover short-term cash needs. As of June 30, 2008, there were no
balances outstanding and therefore the remaining borrowing capacity was $1.00
billion; however, the outstanding balance can fluctuate daily.
·
Our primary
credit facility covers short-term liquidity requirements. Our $1.00 billion unsecured revolving credit
facility has an initial term of five years expiring in 2012 with two optional
one-year extensions that can be exercised at the end of any of the remaining
four years of the facility
upon approval of existing or replacement lenders providing more than
two thirds of the commitments to lend.
This facility contains an increase provision that would allow up to an
additional $500 million of borrowing provided the increased portion could be
fully syndicated at a
81
later
date among existing or new lenders. This
facility has a financial covenant requiring that we not exceed a 37.5% debt to
capital resources ratio as defined in the agreement. This ratio at June 30, 2008 was
21.7%. Although the right to borrow
under the facility is not subject to a minimum rating requirement, the costs of
maintaining the facility and borrowing under it are based on the ratings of our
senior, unsecured, nonguaranteed long-term debt. There were no borrowings under this line of
credit during the first six months of 2008. The total amount outstanding at any
point in time under the combination of the commercial paper program and the
credit facility cannot exceed the amount that can be borrowed under the credit
facility.
·
A
universal shelf registration statement was filed with
the Securities and Exchange Commission in May 2006. We can use it to issue an unspecified amount
of debt securities, common stock (including 354 million shares of treasury
stock as of June 30, 2008), preferred stock, depositary shares, warrants,
stock purchase contracts, stock purchase units and securities of
subsidiaries. The specific terms of any
securities we issue under this registration statement will be provided in the
applicable prospectus supplements.
As of June 30, 2008,
we recorded a net deferred tax asset of $1.33 billion, which included $873
million relating to unrealized and realized tax net capital losses that have
not yet been recognized for tax purposes.
Although realization is not assured, management believes it is more
likely than not that the deferred tax asset will be realized based on our
assumption that we will be able to fully utilize the deductions that are
ultimately recognized for tax purposes.
During the second
quarter of 2008, we settled the case involving our 2003 and 2004 federal income
tax returns at the Internal Revenue Service Appeals Office. Settlement of the examination of these tax
years resulted in a $57 million decrease to our liability for unrecognized tax
benefits, resulting in a liability balance of $19 million at June 30,
2008.
We believe it is
reasonably possible that the liability balance will not significantly increase
or decrease within the next twelve months.
Because of the impact of deferred tax accounting, recognition of
previously unrecognized tax benefits is not expected to impact our effective
tax rate.
We recognize
interest accrued related to unrecognized tax benefits in income tax
expense. During the six months ended June 30,
2008, the balance of interest expense accrued with respect to unrecognized tax
benefits decreased to $1 million from $7 million at January 1, 2008 due to
the Appeals settlement for 2003 and 2004.
$4 million of this reduction was recognized in tax expense in the second
quarter of 2008. No amounts have been
accrued for penalties.
82
Item 4. Controls and
Procedures
Evaluation of
Disclosure Controls and Procedures.
We maintain disclosure
controls and procedures as defined in Rule 13a-15(e) and 15(d)-15(e) under
the Securities Exchange Act of 1934.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based upon this evaluation, the principal executive
officer and the principal financial officer concluded that our disclosure
controls and procedures are effective in providing reasonable assurance that
material information required to be disclosed in our reports filed with or
submitted to the Securities and Exchange Commission under the Securities
Exchange Act is made known to management, including the principal executive
officer and the principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal
Control over Financial Reporting.
During the fiscal quarter
ended June 30, 2008, there have been no changes in our internal control
over financial reporting that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
83
PART II. OTHER INFORMATION
Item 1. Legal
Proceedings
Information
required for Part II, Item 1 is incorporated by reference to the
discussion under the heading Regulation and under the heading Legal and
regulatory proceedings and inquiries in Note 8 of the Condensed Consolidated
Financial Statements in Part I, Item 1 of this Form 10-Q.
Item 1A. Risk Factors
This document contains forward-looking statements that
anticipate results based on our estimates, assumptions and plans that are
subject to uncertainty. These statements
are made subject to the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995. We assume
no obligation to update any forward-looking statements as a result of new
information or future events or developments.
These forward-looking statements do not
relate strictly to historical or current facts and may be identified by their
use of words like plans, seeks, expects, will, should, anticipates,
estimates, intends, believes, likely, targets and other words with
similar meanings. These statements may
address, among other things, our strategy for growth, catastrophe exposure
management, product development, regulatory approvals, market position,
expenses, financial results, litigation and reserves. We believe that these statements are based on
reasonable estimates, assumptions and plans.
However, if the estimates, assumptions or plans underlying the
forward-looking statements prove inaccurate or if other risks or uncertainties
arise, actual results could differ materially from those communicated in these
forward-looking statements. Risk
factors which could cause actual results to differ materially from those
suggested by such forward-looking statements include but are not limited to
those discussed or identified in this document (including the risks described
below), in our public filings with the Securities and Exchange Commission, and
those incorporated by reference in Part I, Item 1A of The Allstate
Corporation Annual Report on Form 10-K for 2007.
The
impact of premium rate decreases for the Texas homeowners and California auto
and homeowners matters on premiums written and underwriting income, may be
materially greater than projected
The adverse effect on premiums written and premiums earned, a component
of underwriting income, may be materially greater than projected because
policyholder attrition may be lower.
The cost and impact of our investment
strategies may be adversely affected by developments in the investment markets
The cost and impact of
our investment portfolio risk mitigation and return optimization programs and
enterprise asset allocation actions may be adversely affected by unexpected
developments in the investment markets, such as the terms and provisions of our
anticipated derivative contracts, when entered, may result in higher than
anticipated costs or coverage that is not as effective.
The realization of deferred tax
assets is subject to uncertainty
The realization of
our deferred tax assets is based on our assumption that we will be able to
fully utilize the deductions that are ultimately recognized for tax
purposes. However, actual results may
differ from our assumptions if adequate levels of taxable income are not
attained
.
84
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
Issuer Purchases of
Equity Securities
Period
|
|
Total
Number of
Shares
(or Units)
Purchased(1)
|
|
Average Price
Paid per Share
(or Unit)
|
|
Total Number
of Shares
(or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs (2)
|
|
Maximum Number
(or Approximate Dollar
Value) of Shares
(or Units) that May Yet
Be Purchased Under the
Plans or Programs
|
|
April 1, 2008 - April 30, 2008
|
|
3,440,904
|
|
$
|
49.3328
|
|
3,440,974
|
|
$
|
1.6
Billion
|
|
May 1, 2008 - May 31, 2008
|
|
2,669,236
|
|
$
|
50.3226
|
|
2,668,500
|
|
$
|
1.5
Billion
|
|
June 1, 2008 - June 30, 2008
|
|
2,664,300
|
|
$
|
48.7513
|
|
2,664,300
|
|
$
|
1.4
Billion
|
|
Total
|
|
8,774,440
|
|
$
|
49.4574
|
|
8,773,774
|
|
|
|
(1)
In accordance
with the terms of its equity compensation plans, Allstate acquired the
following shares in connection with stock option exercises by employees and/or
directors. The stock was received in
payment of the exercise price of the options and in satisfaction of withholding
taxes due upon exercise or vesting
.
April:
|
82
|
May:
|
736
|
June:
|
none
|
(2)
Repurchases
under our programs are, from time to time, executed under the terms of a
pre-set trading plan meeting the requirements of Rule 10b5-1(c) of
the Securities Exchange Act of 1934.
On February 26, 2008, Allstate announced the approval of a new share
repurchase program for $2.00 billion.
This program is expected to be completed by March 31, 2009.
85
Item 4.
Submission of Matters to a Vote of Security Holders
On May 20, 2008, Allstate held its annual
meeting of stockholders. Eleven board
nominees for director were elected for terms expiring at the 2009 annual
meeting of stockholders. In addition,
the stockholders ratified the appointment of Deloitte & Touche LLP as
Allstates independent registered public accountant for 2008. There were three stockholder proposals presented
and voted on at the meeting. The
proposal regarding cumulative voting did not receive a majority vote of the
shares represented and entitled to vote at the meeting. The proposal regarding special shareholder
meetings did not receive the vote of a majority of the shares represented and
entitled to vote at the meeting. The
proposal on an advisory resolution to ratify the compensation of the named
executive officers did not receive the vote of a majority of the shares
represented and entitled to vote at the meeting.
Election of Directors.
Nominee
|
|
Votes for
|
|
Votes Withheld
|
|
Votes Abstained
|
|
F. Duane Ackerman
|
|
466,839,036
|
|
6,079,389
|
|
6,239,128
|
|
Robert D. Beyer
|
|
467,050,324
|
|
5,887,951
|
|
6,219,278
|
|
W. James Farrell
|
|
457,395,691
|
|
15,507,992
|
|
6,253,871
|
|
Jack M. Greenberg
|
|
461,723,222
|
|
11,125,983
|
|
6,308,348
|
|
Ronald T. LeMay
|
|
463,599,871
|
|
9,246,177
|
|
6,311,505
|
|
J. Christopher Reyes
|
|
466,234,709
|
|
6,712,815
|
|
6,210,028
|
|
H. John Riley, Jr.
|
|
465,994,038
|
|
6,881,256
|
|
6,282,259
|
|
Joshua I. Smith
|
|
462,980,457
|
|
9,925,805
|
|
6,251,292
|
|
Judith A. Sprieser
|
|
455,647,029
|
|
17,227,135
|
|
6,283,390
|
|
Mary Alice Taylor
|
|
466,673,969
|
|
6,223,360
|
|
6,260,224
|
|
Thomas J. Wilson
|
|
461,267,295
|
|
11,623,772
|
|
6,266,486
|
|
Ratification
of Appointment of Deloitte & Touche LLP as Allstates Independent
Registered Public Accountant for 2008.
Votes For
|
|
Votes Against
|
|
Votes Abstained
|
|
468,608,905
|
|
4,613,073
|
|
5,935,576
|
|
Stockholder proposal on
Cumulative Voting.
Votes For
|
|
Votes Against
|
|
Votes Abstained
|
|
Broker Non-Votes
|
|
130,638,948
|
|
280,105,558
|
|
7,735,493
|
|
60,677,515
|
|
Stockholder proposal on
Special Shareholder Meetings.
Votes For
|
|
Votes Against
|
|
Votes Abstained
|
|
Broker Non-Votes
|
|
177,436,911
|
|
229,360,125
|
|
11,683,004
|
|
60,677,514
|
|
Stockholder proposal on
an Advisory Resolution to Ratify the Compensation of the Named Executive
Officers.
Votes For
|
|
Votes Against
|
|
Votes Abstained
|
|
Broker Non-Votes
|
|
164,883,312
|
|
239,729,616
|
|
13,866,710
|
|
60,677,916
|
|
Item 6.
Exhibits
(a)
|
|
Exhibits
|
|
|
|
|
|
An
Exhibit Index has been filed as part of this report on page E-1.
|
86
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
The
Allstate Corporation
|
|
(Registrant)
|
|
|
|
|
|
|
August 6,
2008
|
By
|
/s/
Samuel H. Pilch
|
|
Samuel
H. Pilch
|
|
(chief
accounting officer and duly
|
|
authorized
officer of Registrant)
|
87
Exhibit No.
|
|
Description
|
|
|
|
3(ii)
|
|
Amended and Restated
Bylaws of The Allstate Corporation effective July 22, 2008, incorporated
herein by reference to Exhibit 3(ii) to The Allstate Corporation
current report on Form 8-K filed July 25, 2008.
|
|
|
|
4
|
|
Registrant hereby agrees
to furnish the Commission, upon request, with the instruments defining the
rights of holders of each issue of long-term debt of the Registrant and its
consolidated subsidiaries.
|
|
|
|
10.1
|
|
Amendment No. 1 to
Credit Agreement dated as of May 22, 2008, incorporated herein by
reference to Exhibit 10.1 to The Allstate Corporation current report on
Form 8-K filed May 27, 2008.
|
|
|
|
15
|
|
Acknowledgment of
awareness from Deloitte & Touche LLP, dated August 5, 2008,
concerning unaudited interim financial information.
|
|
|
|
31.1
|
|
Rule 13a-14(a) Certification
of Principal Executive Officer
|
|
|
|
31.2
|
|
Rule 13a-14(a) Certification
of Principal Financial Officer
|
|
|
|
32
|
|
Section 1350
Certifications
|
E-1
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