The Allstate Corporation (NYSE: ALL) today reported results for
the second quarter of 2009:
Consolidated Highlights Three months ended
June 30, ($ in millions, except per share amounts and
ratios, NM=not meaningful)
2009
2008
% Change
Consolidated revenues $ 8,490
$ 7,418 14.5 Net income
389 25 NM Net income
per diluted share 0.72 0.05
NM Operating income* 297
683 (56.5 ) Operating income per
diluted share* 0.55 1.24
(55.6 ) Book value per share
27.87
35.87
**
(22.3 )
Book value per share, excluding
the impact of unrealized net capital gains and losses on
fixed income securities*
31.55
36.87
**
(14.4
)
Catastrophe losses 818 698
17.2 Property-Liability combined ratio
100.0 94.4 5.6 pts
Property-Liability combined
ratio excluding the effect of catastrophes and prior year
reserve reestimates (“underlying combined ratio”)*
87.2
84.1
3.1 pts
* Measures used in this release that are not based on accounting
principles generally accepted in the United States of America
(“non-GAAP”) are defined and reconciled to the most directly
comparable GAAP measure and operating measures are defined in the
“Definitions of Non-GAAP and Operating Measures” section of this
document.
** As a result of the adoption of FSP EITF 03-6-1 in the first
quarter of 2009, prior periods have been restated.
“Allstate’s financial strength and operational excellence
continued to serve us well in the second quarter,” said Thomas J.
Wilson, chairman, president and chief executive officer of The
Allstate Corporation. “We made excellent progress on 2009’s
priorities: protecting Allstate’s financial strength, improving
customer loyalty, and continuing to reinvent protection and
retirement for the consumer.
“We generated $297 million of operating income and $389 million
of net income despite a 17 percent increase in catastrophe losses
compared to the second quarter of last year. In combination with
strong investment results, this increased book value by $5.22 per
share, or 23 percent, from the first quarter,” said Wilson.
“Customer loyalty improved, reflecting increases in customer
satisfaction, likelihood to renew and willingness to recommend
Allstate. Our reinvention efforts are further improving our
competitive position with Your Choice Auto® and Allstate Blue®
raising auto new business sales.”
Consolidated Financial Results
Total revenues for the second quarter of 2009 were $8.5 billion,
an increase of 14.5% ($1.1 billion) compared to the second quarter
of 2008. This reflected realized capital gains compared to realized
capital losses in the prior year quarter, partially offset by a
decrease in net investment income and property-liability premiums.
Allstate’s second quarter net income was $389 million compared to
$25 million in the second quarter of 2008. Second quarter 2009
operating income was $297 million, compared to $683 million in the
prior year quarter.
Strong Auto Performance Offset by Impact of Catastrophe
Losses on Homeowners
Allstate’s Property-Liability business produced an underlying
combined ratio within the company’s full-year guidance, resulting
from low loss ratios in the auto business and actions taken to
reduce expenses. Record catastrophe losses affected results,
however, reducing homeowners profitability and leading to an
overall combined ratio of 100.0.
Allstate brand standard auto premiums written for the second
quarter of 2009 decreased 2.0% and total policies in force declined
1.6% versus the prior year quarter due to fewer policies available
to renew and a slight decline in the renewal ratio. The combined
ratio was 94.9, up 4.3 points from the second quarter of 2008,
primarily due to higher loss frequency, as frequency returned to
historical norms following low levels in 2008. Average claim cost
increases were within expectations.
Allstate brand homeowners premiums written for the second
quarter of 2009 were comparable to the same period a year ago,
while total policies in force fell 4.2%, driven by an 11.6% decline
in new issued applications. Allstate’s risk management programs
contributed to the drop in homeowners business. The combined ratio
increased 8.6 points to 116.3 in the second quarter of 2009
compared to the second quarter of 2008 due to higher catastrophe
losses, claim frequencies and severities. Allstate continues to
implement profit improvement actions in this business, including
obtaining approval for rate increases averaging 13.3% in 16 states
during the quarter.
Allstate had record catastrophe losses of $818 million for the
quarter and $1.3 billion for the first six months of the year due
to a large number of costly windstorms and hailstorms. The company
continued to maintain its aggressive hurricane risk management
programs into the 2009 hurricane season.
Operating costs and expenses declined in the second quarter of
2009 when compared to the prior year quarter resulting from more
focused spending on marketing and technology. This decline was
offset by lower premiums earned and higher restructuring charges
resulting from staff reductions, which caused a slight increase in
the expense ratio. Excluding restructuring, the expense ratio
declined 0.4 points to 23.3 in the second quarter of 2009 compared
to the second quarter of 2008.
The underlying combined ratio rose from 84.1 in the second
quarter of 2008 to 87.2 in the second quarter of 2009, which was
within Allstate’s 87-89 outlook range for the full year. Management
anticipates that the underlying combined ratio will finish the year
within the previously announced outlook range.
Progress on Restructuring at Allstate Financial
Allstate Financial continued to make progress on its “Focus to
Win” restructuring, which will improve returns by reducing
expenses, shifting fixed to variable costs, and streamlining
product offerings. Actions taken through June 30, 2009 have reduced
the annual expense run rate by approximately $65 million, and the
company remains on track to achieve annual cost savings of $90
million by 2011. Additionally, Allstate Financial’s outstanding
contractholder liabilities declined by 13.5% since June 30, 2008,
primarily as a result of proactive strategies that reduced
institutional product obligations by $8.7 billion.
Allstate Financial’s operating income was $65 million in the
second quarter of 2009, a $53 million decline from the second
quarter of 2008, primarily due to a lower investment spread. The
investment spread during the second quarter declined to $63 million
versus $242 million in the second quarter of 2008, due to
historically low short-term yields, lower total investment balances
and higher levels of short-term investments. The benefit spread
increased 3.1% to $131 million from the prior year quarter, driven
by higher premiums on accident and health products sold through the
Allstate Workplace Division. Operating expenses declined to $105
million in the second quarter of 2009 from $125 million in the same
period of 2008, reflecting progress made on restructuring
initiatives.
Allstate Financial’s net income was $19 million in the second
quarter of 2009, compared to a net loss of $379 million for the
same period of 2008. After-tax net realized capital gains of $82
million, compared to after-tax realized capital losses of $627
million in the prior year quarter, contributed $709 million to the
increase and were partly offset by higher deferred acquisition
costs and deferred sales inducements (DAC) amortization related to
the realized capital gains and lower operating income.
Proactive Investment Strategies Generate Realized Gains and
Lower Unrealized Loss Position
The company’s consolidated investment portfolio grew $2.6
billion during the second quarter to $96.5 billion at June 30,
2009. Allstate’s ongoing programs to strategically mitigate
exposure to rising interest rates and maintain exposure to credit
spreads benefited the portfolio significantly in the second
quarter. In addition to generating a pre-tax net realized gain of
$328 million, Allstate’s unrealized loss position improved by $3.2
billion in the quarter ($2.1 billion net of the impact of a change
in accounting) reducing pre-tax unrealized losses to $7.3 billion
at June 30, 2009.
Building on the past successes of its risk mitigation and return
optimization program, Allstate reduced commercial real estate
exposure by $1.2 billion and lowered its exposure to rising
interest rates by decreasing the overall duration of
interest-sensitive assets by 8% in the quarter when compared to the
first quarter of 2009. A significant exposure to corporate credit
was maintained, which resulted in improved fixed income investment
valuations as credit spreads continued to tighten. The company also
deployed more than $5 billion of short-term assets and cash
receipts into securities to generate income and capital
appreciation.
Net investment income for the quarter was $1.1 billion, down
21.5% from $1.4 billion in the second quarter of 2008, due to lower
yields and lower average asset balances. Lower yields particularly
impacted short-term assets, where elevated levels are being
maintained in anticipation of more stable market conditions.
Net realized capital gains for the quarter were $328 million,
pre-tax. This was due primarily to $419 million of net gains from
derivative instruments, including benefits from the macro hedging
program designed to mitigate increases in interest rates. In
addition, $263 million of net gains were realized on sales, mainly
of U.S. and foreign government fixed income securities sold in
anticipation of rising interest rates. Partly offsetting these
gains were $291 million of impairment write-downs on investments
where the amortized cost basis is not expected to be entirely
recovered, $37 million of net losses on the valuation of limited
partnerships, and $26 million of change in intent losses.
Unrealized net capital losses declined to $7.3 billion, pre-tax
at June 30, 2009. The decline resulted primarily from decreases of
$1.8 billion in fixed income unrealized net losses and $351 million
in equity unrealized net losses in the quarter when compared to the
first quarter of 2009. At June 30, 2009, $7.1 billion of the
unrealized net loss was related to the fixed income portfolio, of
which 64.5% was on investment grade securities. In the second
quarter of 2009, the fixed income portfolio generated cash flow of
$2.4 billion. Strong ratings and continuing cash performance
reflect the high quality of this portfolio.
On April 1, 2009, Allstate adopted Financial Accounting
Standards Board Staff Position No. FAS 115-2. This adoption
resulted in the reclassification of $1.1 billion of previously
recorded other-than-temporary impairment write-downs. While the
adoption had no impact on the income statement, the total impact,
net of related DAC and tax adjustments, was an increase in retained
income of $863 million and a decrease in unrealized net capital
gains and losses of $578 million, with a net benefit to
shareholders’ equity of $285 million. Without this adoption, the
unrealized net capital loss at June 30, 2009 would have been $6.2
billion, pre-tax.
Allstate’s Capital Position Improves
“Allstate’s capital position showed strong improvement in the
second quarter,” said Don Civgin, senior vice president and chief
financial officer. “At June 30, Allstate held $15.1 billion in
shareholders’ equity, an improvement of $2.8 billion from the first
quarter. There were $3.4 billion in assets available at the holding
company level to satisfy our modest annual fixed charge obligations
of $680 million over the next 12 months. We estimate our statutory
surplus at June 30, 2009 was $13.8 billion at Allstate Insurance
Company, including $3.4 billion at Allstate Life Insurance
Company.”
In May, Allstate demonstrated its ability to access the
financial markets by refinancing $750 million of debt that matures
in December 2009 with a $1 billion debt offering that was
substantially oversubscribed. Also in May, Allstate announced it
would not participate in the U.S. Treasury’s Capital Purchase
Program, a component of the Troubled Asset Relief Program (TARP).
Despite redeeming $1.4 billion of contractholder liabilities
through a tender offer and deploying more than $5 billion of
short-term assets and cash receipts to generate income and capital
appreciation, Allstate’s 90-day liquidity improved to $26.3 billion
in cash and highly liquid assets convertible to cash without
significant additional net realized capital losses.
Allstate continues to have access to
$1.0 billion of funds from either commercial paper issuance or an
unsecured credit facility, neither of which was utilized at June
30, 2009. Excluding the debt that was refinanced with the May
offering, Allstate’s next long-term debt maturities are $40 million
in 2011 and $350 million in 2012.
At Allstate.com, click on “Investors” to view additional
information about Allstate’s second quarter results, including a
webcast of its quarterly conference call. The conference call will
be held at 9 a.m. ET on Thursday, August 6, 2009.
The Allstate Corporation (NYSE: ALL) is the nation’s largest
publicly held personal lines insurer. Widely known through the
“You’re In Good Hands With Allstate®” slogan, Allstate is
reinventing protection and retirement to help more than 17 million
households insure what they have today and better prepare for
tomorrow. Consumers access Allstate insurance products and services
through Allstate agencies, independent agencies, and Allstate
exclusive financial representatives in the U.S. and Canada, as well
as via www.allstate.com and 1-800 Allstate®.
THE ALLSTATE CORPORATION AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS ($ in millions,
except per share data)
Three months ended Six months
ended June 30, June 30, 2009
2008 2009 2008
(unaudited)
(unaudited)
Revenues Property-liability insurance premiums earned $
6,560 $ 6,750 $ 13,142 $ 13,514 Life and annuity premiums and
contract charges 494 471 978 923 Net investment income 1,108 1,412
2,284 2,938 Realized capital gains and losses: Total
other-than-temporary impairment losses (471 ) (1,265 ) (1,196 )
(1,723 ) Portion of loss recognized in other comprehensive income
154 -- 154 -- Net other-than-temporary
impairment losses recognized in earnings (317 ) (1,265 ) (1,042 )
(1,723 ) Sales and other realized capital gains and losses 645
50 1,011 (147 ) Total realized capital gains
and losses 328 (1,215 ) (31 ) (1,870 ) 8,490
7,418 16,373 15,505
Costs and
expenses Property-liability insurance claims and claims expense
5,002 4,776 9,722 9,452 Life and annuity contract benefits 407 395
794 792 Interest credited to contractholder funds 561 563 1,140
1,187 Amortization of deferred policy acquisition costs 1,229 959
2,626 2,034 Operating costs and expenses 702 728 1,503 1,520
Restructuring and related charges 32 (5 ) 77 (6 ) Interest expense
97 88 185 176 8,030 7,504
16,047 15,155 Gain (loss) on disposition of
operations 1 -- 4 (9 )
Income (loss)
from operations before income tax expense (benefit) 461 (86 )
330
341
Income tax expense (benefit) 72 (111 ) 215 (32
)
Net income $ 389 $ 25 $ 115 $
373
Earnings per share: Net income
per share - Basic $ 0.72 $ 0.05 $ 0.21 $
0.67
Weighted average shares - Basic 539.8
551.8 539.3 556.3
Net income
per share - Diluted $ 0.72 $ 0.05 $ 0.21 $
0.67
Weighted average shares - Diluted 540.6
553.8 540.1 558.3
Cash
dividends declared per share $ 0.20 $ 0.41 $ 0.40
$ 0.82
THE ALLSTATE
CORPORATION
SEGMENT RESULTS Three months ended Six
months ended ($ in millions, except ratios)
June 30,
June 30, 2009 2008
2009 2008 Property-Liability Premiums
written $ 6,615 $ 6,803 $ 12,884 $ 13,317
Premiums earned $ 6,560 $ 6,750 $ 13,142 $ 13,514
Claims and claims expense 5,002 4,776 9,722 9,452 Amortization of
deferred policy acquisition costs 940 1,000 1,889 2,011 Operating
costs and expenses 591 601 1,269 1,271 Restructuring and related
charges 30 (5 ) 57 (6 ) Underwriting (loss) income (3
) 378 205 786 Net investment income 334
431 678 901 Periodic settlements and accruals on non-hedge
derivative instruments (3 ) -- (6 ) 1 Income tax expense on
operations 39 217 174 467
Operating income 289 592 703 1,221 Realized capital gains
and losses, after-tax 131 (153 ) (185 ) (278 ) Reclassification of
periodic settlements and accruals on non-hedge derivative
instruments, after-tax 2 -- 4 (1 ) Net
income $ 422 $ 439 $ 522 $ 942
Catastrophe losses $ 818 $ 698 $ 1,334 $ 1,266
Operating ratios: Claims and claims expense ratio
76.2 70.8 74.0 70.0 Expense ratio 23.8 23.6 24.4
24.2 Combined ratio 100.0 94.4 98.4
94.2 Effect of catastrophe losses on combined
ratio 12.5 10.3 10.2 9.4 Effect
of prior year reserve reestimates on combined ratio 0.3 0.1
(0.3 ) 0.8 Effect of catastrophe losses
included in prior year reserve reestimates on combined ratio --
0.1 (0.4 ) 0.9 Effect of Discontinued
Lines and Coverages on combined ratio -- -- --
0.1
Allstate Financial Premiums and deposits $
1,399 $ 4,453 $ 2,932 $ 7,499
Investments $ 59,861 $ 72,504 $ 59,861 $
72,504 Premiums and contract charges $ 494 $ 471 $
978 $ 923 Net investment income 764 943 1,583 1,958 Periodic
settlements and accruals on non-hedge derivative instruments (3 ) 7
(2 ) 16 Contract benefits 407 395 794 792 Interest credited to
contractholder funds 520 599 1,062 1,229 Amortization of deferred
policy acquisition costs 130 130 239 247 Operating costs and
expenses 105 125 226 243 Restructuring and related charges 2 -- 20
-- Income tax expense on operations 26 54 68
125 Operating income 65 118 150 261 Realized
capital gains and losses, after-tax 82 (627 ) (88 ) (908 ) DAC and
DSI (amortization) accretion relating to realized capital gains and
losses, after-tax (131 ) 134 (150 ) 173 DAC and DSI unlocking
related to realized capital gains and losses, after-tax -- -- (224
) -- Reclassification of periodic settlements and accruals on
non-hedge derivative instruments, after-tax 2 (4 ) 1 (10 ) Gain
(loss) on disposition of operations, after-tax 1 -- 3
(6 ) Net income (loss) $ 19 $ (379 ) $ (308 )
$ (490 )
Corporate and Other Net investment income $
10 $ 38 $ 23 $ 79 Operating costs and expenses 103 90 193 182
Income tax benefit on operations (36 ) (25 ) (68 ) (51 )
Operating loss (57 ) (27 ) (102 ) (52 ) Realized capital
gains and losses, after-tax 5 (8 ) 3 (27 ) Net
loss $ (52 ) $ (35 ) $ (99 ) $ (79 )
Consolidated net
income $ 389 $ 25 $ 115 $ 373
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ($
in millions, except par value data)
June 30,
December 31, 2009 2008 Assets
(unaudited) Investments: Fixed income securities, at fair value
(amortized cost $79,890 and $77,104) $ 72,766 $ 68,608 Equity
securities, at fair value (cost $3,483 and $3,137) 3,297 2,805
Mortgage loans 9,406 10,229 Limited partnership interests 2,464
2,791 Short-term, at fair value (amortized cost $6,070 and $8,903)
6,070 8,906 Other 2,455 2,659 Total investments
96,458 95,998 Cash 667 415 Premium installment receivables, net
4,794 4,842 Deferred policy acquisition costs 8,228 8,542
Reinsurance recoverables, net 6,621 6,403 Accrued investment income
859 884 Deferred income taxes 2,710 3,794 Property and equipment,
net 1,031 1,059 Goodwill 874 874 Other assets 2,656 3,748 Separate
Accounts 8,193 8,239
Total assets $ 133,091
$ 134,798
Liabilities Reserve for
property-liability insurance claims and claims expense $ 19,271 $
19,456 Reserve for life-contingent contract benefits 12,835 12,881
Contractholder funds 53,999 58,413 Unearned premiums 9,755 10,024
Claim payments outstanding 813 790 Other liabilities and accrued
expenses 6,469 6,663 Long-term debt 6,658 5,659 Separate Accounts
8,193 8,239
Total liabilities 117,993
122,125
Equity Preferred stock, $1 par value,
25 million shares authorized, none issued -- -- Common stock, $.01
par value, 2.0 billion shares authorized and 900 million issued,
536 million and 536 million shares outstanding 9 9 Additional
capital paid-in 3,144 3,130 Retained income 30,969 30,207 Deferred
ESOP expense (47 ) (49 ) Treasury stock, at cost (364 million and
364 million shares) (15,835 ) (15,855 ) Accumulated other
comprehensive income: Unrealized net capital gains and losses:
Unrealized net capital losses on fixed income securities with OTTI
(380 ) -- Other unrealized net capital gains and losses (4,374 )
(5,767 ) Unrealized adjustment to DAC, DSI and insurance reserves
2,642 2,029 Total unrealized net capital gains and
losses (2,112 ) (3,738 ) Unrealized foreign currency translation
adjustments 17 5 Unrecognized pension and other postretirement
benefit cost (1,077 ) (1,068 ) Total accumulated other
comprehensive loss (3,172 ) (4,801 )
Total shareholders’
equity 15,068 12,641 Noncontrolling interest 30 32
Total equity 15,098 12,673
Total
liabilities and equity $ 133,091 $ 134,798
THE ALLSTATE CORPORATION AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended
($ in millions)
June 30, 2009 2008
Cash flows from operating
activities
(Unaudited)
Net income $ 115 $ 373 Adjustments to reconcile net income to net
cash provided by operating activities: Depreciation, amortization
and other non-cash items (86 ) (141 ) Realized capital gains and
losses 31 1,870 (Gain) loss on disposition of operations (4 ) 9
Interest credited to contractholder funds
1,140
1,187
Changes in: Policy benefits and other insurance reserves (148 )
(146 ) Unearned premiums (283 ) (179 ) Deferred policy acquisition
costs 548 (269 ) Premium installment receivables, net 55 (12 )
Reinsurance recoverables, net (133 ) 51 Income taxes 1,359 (361 )
Other operating assets and liabilities (112 ) (83 ) Net cash
provided by operating activities
2,482
2,299
Cash flows from investing activities Proceeds from sales
Fixed income securities 8,856 14,113 Equity securities 3,547 5,106
Limited partnership interests 214 214
Mortgage loans
141 204 Other investments 262 163 Investment collections Fixed
income securities 2,658 2,144 Mortgage loans 598 399 Other
investments 65 69
Investment purchases
Fixed income securities
(12,424
)
(9,430
)
Equity securities
(4,207
)
(5,155
)
Limited partnership interests (268 ) (599 ) Mortgage loans (14 )
(438 ) Other investments (41 ) (75 ) Change in short-term
investments, net 3,167 (6,604 ) Change in other investments, net
(80 ) (274 ) Disposition (acquisition) of operations 12 (120 )
Purchases of property and equipment, net (104 ) (98 ) Net cash
provided by (used in) investing activities
2,382
(381
)
Cash flows from financing activities Change in short-term
debt, net -- 18
Proceeds from issuance of
long-term debt
1,000 --
Repayment of long-term debt
(1 ) --
Contractholder fund deposits
2,450 7,035
Contractholder fund
withdrawals
(7,736 ) (7,441 )
Dividends paid
(327 ) (444 ) Treasury stock purchases (3 ) (865 ) Shares reissued
under equity incentive plans, net -- 13 Excess tax benefits on
share-based payment arrangements (6 ) 2 Other 11 90
Net cash used in financing activities (4,612 ) (1,592 )
Net
increase in cash 252 326
Cash at beginning of period 415
422
Cash at end of period $ 667 $ 748
Definitions of Non-GAAP and Operating Measures
We believe that investors’ understanding of Allstate’s
performance is enhanced by our disclosure of the following non-GAAP
financial measures. Our methods of calculating these measures may
differ from those used by other companies and therefore
comparability may be limited.
Operating income is net income (loss), excluding:
- realized capital gains and
losses, after-tax, except for periodic settlements and accruals on
non-hedge derivative instruments, which are reported with realized
capital gains and losses but included in operating income,
- amortization of DAC and DSI, to
the extent they resulted from the recognition of certain realized
capital gains and losses,
- gain (loss) on disposition of
operations, after-tax, and
- adjustments for other
significant non-recurring, infrequent or unusual items, when (a)
the nature of the charge or gain is such that it is reasonably
unlikely to recur within two years, or (b) there has been no
similar charge or gain within the prior two years.
Net income (loss) is the GAAP measure that is most directly
comparable to operating income.
We use operating income as an important measure to evaluate our
results of operations. We believe that the measure provides
investors with a valuable measure of the Company’s ongoing
performance because it reveals trends in our insurance and
financial services business that may be obscured by the net effect
of realized capital gains and losses, gain (loss) on disposition of
operations and adjustments for other significant non-recurring,
infrequent or unusual items. Realized capital gains and losses and
gain (loss) on disposition of operations may vary significantly
between periods and are generally driven by business decisions and
external economic developments such as capital market conditions,
the timing of which is unrelated to the insurance underwriting
process. Consistent with our intent to protect results or earn
additional income, operating income includes periodic settlements
and accruals on certain derivative instruments that are reported in
realized capital gains and losses because they do not qualify for
hedge accounting or are not designated as hedges for accounting
purposes. These instruments are used for economic hedges and to
replicate fixed income securities, and by including them in
operating income, we are appropriately reflecting their trends in
our performance and in a manner consistent with the economically
hedged investments, product attributes (e.g., net investment income
and interest credited to contractholder funds) or replicated
investments. Non-recurring items are excluded because, by their
nature, they are not indicative of our business or economic trends.
Accordingly, operating income excludes the effect of items that
tend to be highly variable from period to period and highlights the
results from ongoing operations and the underlying profitability of
our business. A byproduct of excluding these items to determine
operating income is the transparency and understanding of their
significance to net income variability and profitability while
recognizing these or similar items may recur in subsequent periods.
Operating income is used by management along with the other
components of net income (loss) to assess our performance. We use
adjusted measures of operating income and operating income per
diluted share in incentive compensation. Therefore, we believe it
is useful for investors to evaluate net income (loss), operating
income and their components separately and in the aggregate when
reviewing and evaluating our performance. We note that investors,
financial analysts, financial and business media organizations and
rating agencies utilize operating income results in their
evaluation of our and our industry’s financial performance and in
their investment decisions, recommendations and communications as
it represents a reliable, representative and consistent measurement
of the industry and the Company and management’s performance. We
note that the price to earnings multiple commonly used by insurance
investors as a forward-looking valuation technique uses operating
income as the denominator. Operating income should not be
considered as a substitute for net income (loss) and does not
reflect the overall profitability of our business.
The following tables reconcile operating income and net income
(loss) for the three months and six months ended June 30, 2009 and
2008.
For the three months ended June 30,
Property-Liability Allstate Financial
Consolidated Per diluted share
($ in millions, except per
share data)
2009
2008
2009
2008
2009
2008
2009
2008
Operating income $ 289 $ 592 $ 65 $ 118 $ 297 $ 683 $ 0.55 $
1.24 Realized capital gains and losses (1) 201 (238 ) 121 (965 )
328 (1,215 ) Income tax (expense) benefit (70 ) 85 (39 ) 338
(110 ) 427 Realized capital gains and losses,
after-tax
131 (153 ) 82 (627 ) 218 (788 ) 0.40 (1.42 ) DAC and DSI
(amortization) accretion relating to realized capital gains and
losses, after-tax -- -- (131 ) 134 (131 ) 134 (0.24 ) 0.24
Reclassification of periodic settlements and accruals on non-hedge
derivative instruments, after-tax 2 -- 2 (4 ) 4 (4 ) 0.01 (0.01 )
Gain (loss) on disposition of operations, after-tax -- --
1 -- 1 -- -- --
Net income (loss)
$
422
$
439
$
19
$
(379 )
$
389
$
25
$
0.72
$
0.05
For the six months ended June 30,
Property-Liability Allstate Financial
Consolidated Per diluted share
($ in millions, except per
share data)
2009
2008
2009
2008
2009
2008
2009
2008
Operating income $ 703 $ 1,221 $ 150 $ 261 $ 751 $ 1,430 $
1.39 $ 2.57 Realized capital gains and losses (1) (113 ) (432 ) 78
(1,397 ) (31 ) (1,870 ) Income tax (expense) benefit (72 ) 154
(166 ) 489 (239 ) 657 Realized capital gains
and losses,
after-tax
(185 ) (278 ) (88 ) (908 ) (270 ) (1,213 ) (0.50 ) (2.18 ) DAC and
DSI (amortization) accretion relating to realized capital gains and
losses, after-tax -- -- (150 ) 173 (150 ) 173 (0.28 ) 0.31 DAC and
DSI unlocking related to realized capital gains and losses,
after-tax -- -- (224 ) -- (224 ) -- (0.42 ) -- Reclassification of
periodic settlements and accruals on non-hedge derivative
instruments, after-tax 4 (1 ) 1 (10 ) 5 (11 ) 0.01 (0.02 ) Gain
(loss) on disposition of operations, after-tax -- --
3 (6 ) 3 (6 ) 0.01 (0.01 )
Net income (loss)
$
522
$
942
$
(308 )
$
(490 )
$
115
$
373
$
0.21
$
0.67
(1) Beginning in the fourth
quarter of 2008, income from EMA LP is reported in realized capital
gains and losses. EMA LP income for periods prior to the fourth
quarter of 2008 is reported in net investment income. The amount of
EMA LP income included in the Property-Liability, Allstate
Financial and Consolidated net investment income in the three
months ended June 30, 2008 was $9 million, $8 million and $18
million, respectively. The amount of EMA LP income included in
Property-Liability, Allstate Financial and Consolidated net
investment income in the six months ended June 30, 2008 was $39
million, $23 million and $62 million, respectively.
Combined ratio excluding the effect of catastrophes and prior
year reserve reestimates (“underlying combined ratio”) is a
non-GAAP ratio, which is computed as the difference between three
GAAP operating ratios: the combined ratio, the effect of
catastrophes on the combined ratio and the effect of prior year
reserve reestimates on the combined ratio. The most directly
comparable GAAP measure is the combined ratio. We believe that this
ratio is useful to investors and it is used by management to reveal
the trends in our Property-Liability business that may be obscured
by catastrophe losses and prior year reserve reestimates. These
catastrophe losses cause our loss trends to vary significantly
between periods as a result of their incidence of occurrence and
magnitude, and can have a significant impact on the combined ratio.
Prior year reserve reestimates are caused by unexpected loss
development on historical reserves. We believe it is useful for
investors to evaluate these components separately and in the
aggregate when reviewing our underwriting performance. We also
provide it to facilitate a comparison to our outlook on the 2009
combined ratio excluding the effect of catastrophe losses and prior
year reserve reestimates. The combined ratio excluding the effect
of catastrophes and prior year reserve reestimates should not be
considered a substitute for the combined ratio and does not reflect
the overall underwriting profitability of our business. A
reconciliation of the combined ratio excluding the effect of
catastrophes and prior year reserve reestimates to the combined
ratio is provided in the following table.
Three months ended Six months ended June
30, June 30, 2009 2008 2009
2008
Combined ratio excluding the
effect of catastrophes and prior year reserve reestimates
(“underlying combined ratio”)
87.2
84.1
88.1 84.9 Effect of catastrophe losses 12.5 10.3 10.2 9.4 Effect of
prior year non-catastrophe reserve reestimates 0.3 -- 0.1
(0.1 )
Combined ratio 100.0 94.4 98.4 94.2
Effect of prior year catastrophe reserve reestimates - 0.1
(0.4 ) 0.9
In this news release, we provide our outlook range on the 2009
combined ratio excluding the effect of catastrophe losses and prior
year reserve reestimates. A reconciliation of this measure to the
combined ratio is not possible on a forward-looking basis because
it is not possible to provide a reliable forecast of catastrophes.
Future prior year reserve reestimates are expected to be zero
because reserves are determined based on our best estimate of
ultimate loss reserves as of the reporting date.
Book value per share, excluding the impact of unrealized net
capital gains and losses on fixed income securities, is a ratio
that uses a non-GAAP measure. It is calculated by dividing
shareholders’ equity after excluding the impact of unrealized net
capital gains and losses on fixed income securities and related DAC
and life insurance reserves by total shares outstanding plus
dilutive potential shares outstanding. Book value per share is the
most directly comparable GAAP measure.
We use the trend in book value per share, excluding unrealized
net capital gains and losses on fixed income securities, in
conjunction with book value per share to identify and analyze the
change in net worth attributable to management efforts between
periods. We believe the non-GAAP ratio is useful to investors
because it eliminates the effect of items that can fluctuate
significantly from period to period and are generally driven by
economic developments, primarily capital market conditions, the
magnitude and timing of which are generally not influenced by
management, and we believe it enhances understanding and
comparability of performance by highlighting underlying business
activity and profitability drivers. We note that book value per
share, excluding unrealized net capital gains and losses on fixed
income securities, is a measure commonly used by insurance
investors as a valuation technique. Book value per share, excluding
unrealized net capital gains and losses on fixed income securities,
should not be considered as a substitute for book value per share,
and does not reflect the recorded net worth of our business. The
following table shows the reconciliation.
As of June 30, ($ in millions, except per share data)
2009 2008 Book value per share
Numerator: Shareholders’ equity $ 15,068 $ 19,709
Denominator: Shares outstanding and dilutive potential shares
outstanding 540.6 549.4 Book value per share $ 27.87
$ 35.87
Book value per share, excluding the
impact of unrealized net capital gains and losses on fixed income
securities Numerator: Shareholders’ equity $ 15,068 $ 19,709
Unrealized net capital gains and losses on fixed income securities
(1,988 ) (550 ) Adjusted shareholders’ equity $ 17,056 $
20,259 Denominator: Shares outstanding and dilutive
potential shares outstanding 540.6 549.4 Book value
per share, excluding the impact of unrealized net capital gains and
losses on fixed income securities
$
31.55
$
36.87
Premiums written 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
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 Six months ended June
30, June 30, ($ in millions) 2009
2008 2009 2008 Premiums written
$ 6,615 $ 6,803 $ 12,884 $ 13,317 (Increase) decrease in
Property-Liability unearned premiums (70 ) (154 ) 267 140 Other 15
101 (9 ) 57
Premiums earned $ 6,560 $
6,750 $ 13,142 $ 13,514
Premiums and deposits is an operating measure that we use
to analyze production trends for Allstate Financial sales. It
includes premiums on insurance policies and annuities and all
deposits and other funds received from customers on deposit-type
products including the net new deposits of Allstate Bank, which we
account for under GAAP as increases to liabilities rather than as
revenue.
The following table illustrates where premiums and deposits are
reflected in the condensed consolidated financial statements.
Three months ended Six months ended June
30, June 30, ($ in millions) 2009
2008(2)
2009 2008 Total premiums and deposits $
1,399
$
4,453
$
2,932 $ 7,499 Deposits to contractholder funds (1,152 ) (4,211 )
(2,450 ) (7,035 ) Deposits to separate accounts (28 ) (33 ) (56 )
(66 ) Change in unearned premiums and other adjustments 29
24 68 63
Life and annuity premiums (1)
$ 248
$
233 $ 494 $ 461
__________________________
(1) Life and annuity contract charges in the amount of $246
million and $238 million for the three months ended June 30, 2009
and 2008, respectively, and $484 million and $462 million for the
six months ended June 30, 2009 and 2008, respectively, which are
also revenues recognized for GAAP, have been excluded from the
table above, but are a component of the Condensed Consolidated
Statements of Operations line item life and annuity premiums and
contract charges.
(2) To conform to the current period presentation certain
amounts in the prior period have been reclassified.
Forward-Looking Statements and Risk Factors
This news release contains forward-looking statements about our
outlook for the combined ratio excluding the effect of catastrophes
and prior year reserve reestimates for 2009. These statements are
subject to the Private Securities Litigation Reform Act of 1995 and
are based on management’s estimates, assumptions and projections.
Actual results may differ materially from those projected based on
the risk factors described below.
- Premiums written and premiums
earned, the denominator of the underlying combined ratio, may be
materially less than projected. Policyholder attrition may be
greater than anticipated resulting in a lower amount of insurance
in force.
- Unanticipated increases in the
severity or frequency of standard auto insurance claims may
adversely affect our underwriting results. Changes in the severity
or frequency of claims may affect the profitability of our Allstate
Protection segment. Changes in bodily injury claim severity are
driven primarily by inflation in the medical sector of the economy
and litigation. Changes in auto physical damage claim severity are
driven primarily by inflation in auto repair costs, auto parts
prices and used car prices. The short-term level of claim frequency
we experience may vary from period to period and may not be
sustainable over the longer term. A decline in gas prices and a
significant increase in miles driven are examples of factors
leading to a short-term frequency change. A significant long-term
increase in claim frequency could have an adverse effect on our
underwriting results.
We undertake no obligation to publicly correct or update any
forward-looking statements. This news release contains unaudited
financial information.
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