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 March 31, 2010
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-11840
THE ALLSTATE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
|
|
36-3871531
|
(State or other jurisdiction of incorporation or
organization)
|
|
(I.R.S. Employer Identification No.)
|
2775 Sanders Road, Northbrook, Illinois 60062
(Address of principal executive
offices) (Zip Code)
(847) 402-5000
(Registrants telephone number, including area code)
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (
§
232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files).
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
X
|
|
Accelerated
filer
|
|
|
|
Non-accelerated
filer
(Do
not check if a smaller reporting company)
|
|
Smaller reporting
company
|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
As of April 23, 2010, the
registrant had 537,903,261 common shares, $.01 par value, outstanding.
THE ALLSTATE CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2010
PART I
|
FINANCIAL
INFORMATION
|
PAGE
|
|
|
|
Item 1.
|
Financial
Statements
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the Three-Month Periods Ended
March 31, 2010 and 2009 (unaudited)
|
1
|
|
|
|
|
Condensed Consolidated Statements of Financial
Position as of March 31, 2010 (unaudited) and December 31, 2009
|
2
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Three-Month Periods Ended
March 31, 2010 and 2009 (unaudited)
|
3
|
|
|
|
|
Notes to
Condensed Consolidated Financial Statements (unaudited)
|
4
|
|
|
|
|
Report of
Independent Registered Public Accounting Firm
|
43
|
|
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
|
|
|
Highlights
|
44
|
|
Consolidated
Net Income (Loss)
|
45
|
|
Property-Liability
Highlights
|
46
|
|
Allstate
Protection Segment
|
49
|
|
Discontinued
Lines and Coverages Segment
|
57
|
|
Property-Liability
Investment Results
|
57
|
|
Allstate
Financial Highlights
|
58
|
|
Allstate
Financial Segment
|
58
|
|
Investments
Highlights
|
64
|
|
Investments
|
65
|
|
Capital
Resources and Liquidity Highlights
|
85
|
|
Capital
Resources and Liquidity
|
85
|
|
|
|
Item 4.
|
Controls and
Procedures
|
89
|
|
|
|
PART II
|
OTHER
INFORMATION
|
|
|
|
|
Item 1.
|
Legal
Proceedings
|
90
|
|
|
|
Item 1A.
|
Risk Factors
|
90
|
|
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
90
|
|
|
|
Item 6.
|
Exhibits
|
91
|
PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in millions, except per share
data)
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
Revenues
|
|
|
|
|
|
|
Property-liability insurance premiums
|
$
|
6,503
|
|
$
|
6,582
|
|
Life and annuity premiums and contract charges
|
|
544
|
|
|
484
|
|
Net investment income
|
|
1,050
|
|
|
1,176
|
|
Realized capital gains and losses:
|
|
|
|
|
|
|
Total other-than-temporary impairment losses
|
|
(250
|
)
|
|
(725
|
)
|
Portion of loss recognized in other comprehensive
income
|
|
(5
|
)
|
|
--
|
|
Net other-than-temporary impairment loss recognized
in earnings
|
|
(255
|
)
|
|
(725
|
)
|
Sales and other realized capital gains and losses
|
|
(93
|
)
|
|
366
|
|
Total realized capital gains and losses
|
|
(348
|
)
|
|
(359
|
)
|
|
|
7,749
|
|
|
7,883
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
Property-liability insurance claims and claims
expense
|
|
4,792
|
|
|
4,720
|
|
Life and annuity contract benefits
|
|
442
|
|
|
387
|
|
Interest credited to contractholder funds
|
|
463
|
|
|
579
|
|
Amortization of deferred policy acquisition costs
|
|
1,014
|
|
|
1,397
|
|
Operating costs and expenses
|
|
829
|
|
|
801
|
|
Restructuring and related charges
|
|
11
|
|
|
45
|
|
Interest expense
|
|
92
|
|
|
88
|
|
|
|
7,643
|
|
|
8,017
|
|
|
|
|
|
|
|
|
Gain on disposition of
operations
|
|
1
|
|
|
3
|
|
|
|
|
|
|
|
|
Income (loss) from operations before income tax
(benefit) expense
|
|
107
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
(13
|
)
|
|
143
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
120
|
|
$
|
(274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - Basic
|
$
|
0.22
|
|
$
|
(0.51
|
)
|
|
|
|
|
|
|
|
Weighted average shares - Basic
|
|
540.5
|
|
|
538.9
|
|
|
|
|
|
|
|
|
Net income (loss) per share - Diluted
|
$
|
0.22
|
|
$
|
(0.51
|
)
|
|
|
|
|
|
|
|
Weighted average shares - Diluted
|
|
541.8
|
|
|
538.9
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
$
|
0.20
|
|
$
|
0.20
|
|
See notes to condensed
consolidated financial statements.
1
THE ALLSTATE
CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
($ in
millions, except par value data)
|
|
March 31,
2010
|
|
December 31,
2009
|
Assets
|
|
(unaudited)
|
|
|
|
Investments
|
|
|
|
|
|
|
Fixed income securities, at fair value (amortized
cost $82,486 and $81,243)
|
$
|
81,284
|
|
$
|
78,766
|
|
Equity securities, at fair value (cost $3,436 and
$4,845)
|
|
3,807
|
|
|
5,024
|
|
Mortgage loans
|
|
7,639
|
|
|
7,935
|
|
Limited partnership interests
|
|
2,802
|
|
|
2,744
|
|
Short-term, at fair value (amortized cost $2,482 and
$3,056)
|
|
2,482
|
|
|
3,056
|
|
Other
|
|
2,209
|
|
|
2,308
|
|
Total investments
|
|
100,223
|
|
|
99,833
|
|
Cash
|
|
704
|
|
|
612
|
|
Premium installment receivables, net
|
|
4,823
|
|
|
4,839
|
|
Deferred policy acquisition costs
|
|
5,186
|
|
|
5,470
|
|
Reinsurance recoverables, net
|
|
6,415
|
|
|
6,355
|
|
Accrued investment income
|
|
904
|
|
|
864
|
|
Deferred income taxes
|
|
1,440
|
|
|
1,870
|
|
Property and equipment, net
|
|
954
|
|
|
990
|
|
Goodwill
|
|
874
|
|
|
875
|
|
Other assets
|
|
1,804
|
|
|
1,872
|
|
Separate Accounts
|
|
9,059
|
|
|
9,072
|
|
Total assets
|
$
|
132,386
|
|
$
|
132,652
|
|
Liabilities
|
|
|
|
|
|
|
Reserve for property-liability insurance claims and
claims expense
|
$
|
19,420
|
|
$
|
19,167
|
|
Reserve for life-contingent contract benefits
|
|
13,052
|
|
|
12,910
|
|
Contractholder funds
|
|
51,027
|
|
|
52,582
|
|
Unearned premiums
|
|
9,575
|
|
|
9,822
|
|
Claim payments outstanding
|
|
763
|
|
|
742
|
|
Other liabilities and accrued expenses
|
|
5,992
|
|
|
5,726
|
|
Long-term debt
|
|
5,910
|
|
|
5,910
|
|
Separate Accounts
|
|
9,059
|
|
|
9,072
|
|
Total liabilities
|
|
114,798
|
|
|
115,931
|
|
|
|
|
|
|
|
|
Commitments and Contingent Liabilities (Note 10)
|
|
|
|
|
|
|
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, 538 million and 537 million shares
outstanding
|
|
9
|
|
|
9
|
|
Additional capital paid-in
|
|
3,152
|
|
|
3,172
|
|
Retained income
|
|
31,514
|
|
|
31,492
|
|
Deferred ESOP expense
|
|
(44
|
)
|
|
(47
|
)
|
Treasury stock, at cost (362 million and 363 million
shares)
|
|
(15,782
|
)
|
|
(15,828
|
)
|
Accumulated other comprehensive income:
|
|
|
|
|
|
|
Unrealized net capital gains and losses:
|
|
|
|
|
|
|
Unrealized net capital losses on fixed income
securities with OTTI
|
|
(384
|
)
|
|
(441
|
)
|
Other unrealized net capital gains and losses
|
|
(172
|
)
|
|
(1,072
|
)
|
Unrealized adjustment to DAC, DSI and insurance
reserves
|
|
472
|
|
|
643
|
|
Total unrealized net capital gains and losses
|
|
(84
|
)
|
|
(870
|
)
|
Unrealized foreign currency translation adjustments
|
|
60
|
|
|
46
|
|
Unrecognized pension and other postretirement benefit
cost
|
|
(1,265
|
)
|
|
(1,282
|
)
|
Total accumulated other comprehensive loss
|
|
(1,289
|
)
|
|
(2,106
|
)
|
Total shareholders equity
|
|
17,560
|
|
|
16,692
|
|
Noncontrolling interest
|
|
28
|
|
|
29
|
|
Total equity
|
|
17,588
|
|
|
16,721
|
|
Total liabilities and equity
|
$
|
132,386
|
|
$
|
132,652
|
|
See notes to condensed
consolidated financial statements.
2
THE ALLSTATE
CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
($ in millions)
|
|
Three Months Ended
March 31,
|
|
|
2010
|
|
2009
|
Cash flows from operating activities
|
|
(unaudited)
|
|
Net income (loss)
|
$
|
120
|
|
$
|
(274
|
)
|
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation, amortization and other non-cash items
|
|
16
|
|
|
(74
|
)
|
Realized capital gains and losses
|
|
348
|
|
|
359
|
|
Gain on disposition of operations
|
|
(1
|
)
|
|
(3
|
)
|
Interest credited to contractholder funds
|
|
463
|
|
|
579
|
|
Changes in:
|
|
|
|
|
|
|
Policy benefits and other insurance reserves
|
|
188
|
|
|
(244
|
)
|
Unearned premiums
|
|
(261
|
)
|
|
(330
|
)
|
Deferred policy acquisition costs
|
|
30
|
|
|
381
|
|
Premium installment receivables, net
|
|
24
|
|
|
71
|
|
Reinsurance recoverables, net
|
|
(72
|
)
|
|
(81
|
)
|
Income taxes
|
|
73
|
|
|
1,443
|
|
Other operating assets and liabilities
|
|
36
|
|
|
(305
|
)
|
Net cash provided by operating activities
|
|
964
|
|
|
1,522
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Proceeds from sales
|
|
|
|
|
|
|
Fixed income securities
|
|
4,930
|
|
|
4,483
|
|
Equity securities
|
|
1,990
|
|
|
1,872
|
|
Limited partnership interests
|
|
146
|
|
|
154
|
|
Mortgage loans
|
|
3
|
|
|
12
|
|
Other investments
|
|
37
|
|
|
16
|
|
Investment collections
|
|
|
|
|
|
|
Fixed income securities
|
|
1,122
|
|
|
1,203
|
|
Mortgage loans
|
|
263
|
|
|
472
|
|
Other investments
|
|
18
|
|
|
31
|
|
Investment purchases
|
|
|
|
|
|
|
Fixed income securities
|
|
(7,099
|
)
|
|
(5,425
|
)
|
Equity securities
|
|
(556
|
)
|
|
(1,933
|
)
|
Limited partnership interests
|
|
(185
|
)
|
|
(144
|
)
|
Mortgage loans
|
|
(1
|
)
|
|
(10
|
)
|
Other investments
|
|
(43
|
)
|
|
--
|
|
Change in short-term investments, net
|
|
411
|
|
|
707
|
|
Change in other investments, net
|
|
(49
|
)
|
|
(48
|
)
|
Disposition of operations
|
|
--
|
|
|
12
|
|
Purchases of property and equipment, net
|
|
(24
|
)
|
|
(53
|
)
|
Net cash provided by investing activities
|
|
963
|
|
|
1,349
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Contractholder fund deposits
|
|
828
|
|
|
1,298
|
|
Contractholder fund withdrawals
|
|
(2,569
|
)
|
|
(3,577
|
)
|
Dividends paid
|
|
(107
|
)
|
|
(220
|
)
|
Treasury stock purchases
|
|
(5
|
)
|
|
(3
|
)
|
Shares reissued under equity incentive plans, net
|
|
14
|
|
|
--
|
|
Excess tax benefits on share-based payment
arrangements
|
|
(2
|
)
|
|
(6
|
)
|
Other
|
|
6
|
|
|
59
|
|
Net cash used in financing activities
|
|
(1,835
|
)
|
|
(2,449
|
)
|
Net increase in cash
|
|
92
|
|
|
422
|
|
Cash at beginning of period
|
|
612
|
|
|
415
|
|
Cash at end of period
|
$
|
704
|
|
$
|
837
|
|
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 property
-
liability insurance
company with various property
-
liability and life and
investment subsidiaries, including Allstate Life Insurance Company (ALIC)
(collectively referred to as the Company or Allstate).
The condensed consolidated financial statements and notes
as of March 31, 2010, and for the three-month periods ended March 31,
2010 and 2009 are unaudited. The
condensed consolidated financial statements reflect all adjustments (consisting
only of normal recurring
accruals
), which
are, in the opinion of management, necessary for the fair presentation of the
financial position, results of operations and cash flows for the interim
periods. These condensed consolidated
financial statements and notes should be read in conjunction with the
consolidated financial statements and notes thereto included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2009. The results of operations for the interim
periods should not be considered indicative of results to be expected for the
full year.
Adopted
accounting standards
Disclosures about Fair Value
Measurements
In January 2010, the FASB issued new accounting
guidance which expands disclosure requirements relating to fair value
measurements. The guidance adds
requirements for disclosing amounts of and reasons for significant transfers
into and out of Levels 1 and 2 and requires gross rather than net disclosures
about purchases, sales, issuances and settlements relating to Level 3
measurements. The guidance also provides
clarification that fair value measurement disclosures are required for each
class of assets and liabilities.
Disclosures about the valuation techniques and inputs used to measure fair
value for measurements that fall in either Level 2 or Level 3 are also
required. The Company adopted the
provisions of the new guidance as of March 31, 2010, except for
disclosures about purchases, sales, issuances and settlements in the roll
forward of activity in Level 3 fair value measurements, which are required for
fiscal years beginning after December 15, 2010. Disclosures are not required for earlier
periods presented for comparative purposes.
The new guidance affects disclosures only; and therefore, the adoption
had no impact on the Companys results of operations or financial position.
Consolidation of Variable Interest Entities
In June 2009, the FASB issued new accounting guidance
which requires an entity to perform a qualitative analysis to determine whether
it holds a controlling financial interest (i.e., is a primary beneficiary) in a
variable interest entity (VIE). The
analysis identifies the primary beneficiary of a VIE as the entity that has
both the power to direct the activities of the VIE that most significantly
impact the economic performance of the VIE and the obligation to absorb losses,
or the right to receive benefits, that could potentially be significant to the
VIE.
The Company adopted the new guidance as of January 1,
2010.
The
adoption resulted in the consolidation of four VIEs for which the Company
concluded it is the primary beneficiary as of
January 1, 2010
.
Two of the consolidated VIEs hold investments managed by
Allstate Investment Management Company (AIMCO), a subsidiary of the
Company. Consolidation as of January 1,
2010 resulted in an increase in total assets of $696 million, an increase in
total liabilities of $679 million, an increase in retained income of $7 million
and an increase in noncontrolling interest of $10 million. During the first quarter of 2010, the Company
sold substantially all its variable interests in these two VIEs. As a result, the Company deconsolidated the
VIEs as of March 26, 2010. Since
the deconsolidation was effective prior to March 31, 2010, the Condensed
Consolidated Statement of Financial Position as of March 31, 2010 does not
reflect the assets, liabilities and noncontrolling interests in the VIEs. The Condensed Consolidated Statement of
Operations for the first quarter of 2010 does, however, reflect the effects of
the consolidation for the portion of the quarter the Company was the primary
beneficiary, which were not material.
The adoption also
resulted in the consolidation of two insurance company affiliates, Allstate
Texas Lloyds and Allstate County Mutual Insurance Company, that underwrite
homeowners and auto insurance polices, respectively, and reinsure all of their
net business to AIC. Consolidation as of
January 1, 2010 resulted in an increase in total assets of $38 million, an
increase in total liabilities of $34 million, an increase in retained income of
$3 million and an increase in unrealized net capital gains and losses of $1
million.
4
In
the normal course of investing activities, the Company invests in variable
interests issued by VIEs. These variable interests include structured
investments such as asset-backed securities, commercial mortgage-backed
securities and residential mortgage-backed securities as well as limited
partnerships, special purpose entities and trusts. For these variable interests, the Company
concluded it is not the primary beneficiary due to the amount of the Companys
interest in the VIEs and the Companys lack of power to direct the activities
that are most significant to the economic performance of the VIEs. The Companys maximum exposure to loss on
these interests is limited to the amount of the Companys investment.
Pending
accounting standards
Embedded Credit Derivatives Scope
Exception
In March 2010, the FASB issued
accounting guidance that clarifies the scope exception for embedded credit
derivative features related to the transfer of credit risk in the form of
subordination of one financial instrument to another. The guidance addresses
how to determine which embedded credit derivative features, including those in
collateralized debt obligations and synthetic collateralized debt obligations,
are considered to be embedded derivatives that should not be analyzed for
potential bifurcation and separate accounting under the existing accounting
guidance for embedded derivatives. The
guidance is effective for fiscal quarters beginning after June 15,
2010. The Company is evaluating the
impact of adoption on the Companys results of operations or financial
position.
Consolidation Analysis Considering
Investments Held through Separate Accounts
In April 2010,
the FASB issued guidance clarifying that an insurer is not required to combine
interests in investments held in a qualifying separate account with its
interests in the same investments held in the general account when performing a
consolidation evaluation. The guidance
is effective for fiscal years and interim periods beginning after December 15,
2010 with early adoption permitted. The
adoption of this guidance is not expected to have a material impact on the
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,
including unvested restricted stock units.
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.
The computation of basic and
diluted earnings per share is presented in the following table.
($ in millions, except per share data)
|
|
Three months
ended
March 31,
|
|
|
2010
|
|
2009
|
|
Numerator:
|
|
|
|
|
|
Net income (loss)
|
$
|
120
|
$
|
(274)
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
540.5
|
|
538.9
|
|
Effect of dilutive potential common shares:
|
|
|
|
|
|
Stock options
|
|
1.3
|
|
--
|
|
Weighted average common and dilutive potential
common shares outstanding
|
|
541.8
|
|
538.9
|
|
|
|
|
|
|
|
Earnings per
share - Basic
|
$
|
0.22
|
$
|
(0.51)
|
|
Earnings per
share - Diluted
|
$
|
0.22
|
$
|
(0.51)
|
|
The effect of dilutive potential
common shares does not include the effect of options with an anti-dilutive
effect on earnings per share because their exercise prices exceed the average
market price of Allstate common shares during the period or for which the
unrecognized compensation cost would have an anti-dilutive effect. Options to
5
purchase
24.4 million and 27.3 million Allstate common shares, with exercise prices
ranging from $27.36 to $64.53 and $23.72 to $65.38, were outstanding at March 31,
2010 and 2009, respectively, but were not included in the computation of
diluted earnings per share for the three-month periods.
As a result of the net loss for
the three-month period ended March 31, 2009, weighted average dilutive
potential common shares outstanding resulting from stock options of 0.6 million
were not included in the computation of diluted earnings per share since
inclusion of these securities would have an anti-dilutive effect. In the absence of the net loss, weighted
average common and dilutive potential common shares outstanding would have
totaled 539.5 million for the three-month period ended March 31, 2009.
3.
Supplemental Cash Flow Information
Non-cash investment exchanges, including modifications of
certain mortgage loans, fixed income securities, and other investments, as well
as mergers completed with equity securities and limited partnerships, totaled
$51 million and $75 million for the three-month periods ended March 31,
2010 and 2009, respectively.
Liabilities for collateral received in conjunction with the
Companys securities lending and over-the-counter (OTC) derivatives are
reported in other liabilities and accrued expenses or other investments in the
Condensed Consolidated Statements of Financial Position. The accompanying cash flows are included in
cash flows from operating activities in the Condensed Consolidated Statements
of Cash Flows along with the activities resulting from management of the
proceeds, which are as follows:
($ in
millions)
|
|
Three months
ended
March 31,
|
|
|
2010
|
|
2009
|
|
Net change in proceeds managed
|
|
|
|
|
|
Net change in
fixed income securities
|
$
|
--
|
$
|
--
|
|
Net change in short-term
investments
|
|
171
|
|
67
|
|
Operating cash flow provided
|
|
171
|
|
67
|
|
Net change in
cash
|
|
6
|
|
--
|
|
Net change in proceeds managed
|
$
|
177
|
$
|
67
|
|
|
|
|
|
|
|
Net
change in liabilities
|
|
|
|
|
|
Liabilities for collateral and security repurchase,
beginning of year
|
$
|
(658)
|
$
|
(340)
|
|
Liabilities for collateral and security repurchase,
end of period
|
|
(481)
|
|
(273)
|
|
Operating cash flow used
|
$
|
(177)
|
$
|
(67)
|
|
6
4.
Investments
Fair values
The amortized cost, gross
unrealized gains and losses and fair value for fixed income securities are as
follows:
($ in
millions)
|
|
Amortized
|
|
Gross unrealized
|
|
Fair
|
|
|
cost
|
|
Gains
|
|
Losses
|
|
value
|
At
March 31, 2010
|
|
|
|
|
|
|
|
|
|
U.S. government
and agencies
|
$
|
8,204
|
$
|
238
|
$
|
(20)
|
$
|
8,422
|
|
Municipal
|
|
20,404
|
|
517
|
|
(773)
|
|
20,148
|
|
Corporate
|
|
33,585
|
|
1,413
|
|
(499)
|
|
34,499
|
|
Foreign
government
|
|
3,008
|
|
315
|
|
(9)
|
|
3,314
|
|
Residential mortgage-backed securities (RMBS)
|
|
10,343
|
|
173
|
|
(1,404)
|
|
9,112
|
|
Commercial mortgage-backed securities (CMBS)
|
|
3,220
|
|
44
|
|
(812)
|
|
2,452
|
|
Asset-backed
securities (ABS)
|
|
3,684
|
|
80
|
|
(467)
|
|
3,297
|
|
Redeemable
preferred stock
|
|
38
|
|
2
|
|
--
|
|
40
|
|
Total fixed income securities
|
$
|
82,486
|
$
|
2,782
|
$
|
(3,984)
|
$
|
81,284
|
|
At
December 31, 2009
|
|
|
|
|
|
|
|
|
|
U.S. government
and agencies
|
$
|
7,333
|
$
|
219
|
$
|
(16)
|
$
|
7,536
|
|
Municipal
|
|
21,683
|
|
537
|
|
(940)
|
|
21,280
|
|
Corporate
|
|
32,770
|
|
1,192
|
|
(847)
|
|
33,115
|
|
Foreign
government
|
|
2,906
|
|
306
|
|
(15)
|
|
3,197
|
|
RMBS
|
|
9,487
|
|
130
|
|
(1,630)
|
|
7,987
|
|
CMBS
|
|
3,511
|
|
30
|
|
(955)
|
|
2,586
|
|
ABS
|
|
3,514
|
|
62
|
|
(550)
|
|
3,026
|
|
Redeemable
preferred stock
|
|
39
|
|
1
|
|
(1)
|
|
39
|
|
Total fixed income securities
|
$
|
81,243
|
$
|
2,477
|
$
|
(4,954)
|
$
|
78,766
|
|
Scheduled maturities
The scheduled maturities for
fixed income securities are as follows at March 31, 2010:
($ in millions)
|
|
Amortized
|
|
Fair
|
|
|
cost
|
|
value
|
Due in one year or less
|
$
|
2,731
|
$
|
2,767
|
Due after one year through five years
|
|
24,024
|
|
24,731
|
Due after five years through ten years
|
|
15,082
|
|
15,757
|
Due after ten years
|
|
26,622
|
|
25,620
|
|
|
68,459
|
|
68,875
|
RMBS and ABS
|
|
14,027
|
|
12,409
|
Total
|
$
|
82,486
|
$
|
81,284
|
Actual maturities may differ from
those scheduled as a result of prepayments by the issuers. Because of the potential for prepayment on
RMBS and ABS, they are not categorized by contractual maturity. The CMBS are categorized by contractual
maturity because they generally are not subject to prepayment risk.
7
Net investment income
Net investment income is as follows:
($ in millions)
|
|
Three months ended
March 31,
|
|
|
2010
|
|
2009
|
Fixed income securities
|
$
|
959
|
$
|
1,042
|
Equity securities
|
|
21
|
|
16
|
Mortgage loans
|
|
104
|
|
137
|
Limited partnership interests
|
|
6
|
|
3
|
Short-term investments
|
|
2
|
|
13
|
Other
|
|
1
|
|
1
|
Investment income, before expense
|
|
1,093
|
|
1,212
|
Investment expense
|
|
(43)
|
|
(36)
|
Net investment income
|
$
|
1,050
|
$
|
1,176
|
Realized capital gains and losses
Realized capital gains and losses by security type
are as follows:
($ in
millions)
|
|
Three months ended
March 31,
|
|
|
2010
|
|
2009
|
Fixed income
securities
|
$
|
(136)
|
$
|
107
|
Equity
securities
|
|
14
|
|
(163)
|
Mortgage loans
|
|
(25)
|
|
(32)
|
Limited
partnership interests
|
|
(21)
|
|
(339)
|
Derivatives
|
|
(185)
|
|
95
|
Other
|
|
5
|
|
(27)
|
Realized capital gains and losses
|
$
|
(348)
|
$
|
(359)
|
Realized capital gains and losses by transaction type
are as follows:
($ in millions)
|
|
Three months ended
March 31,
|
|
|
2010
|
|
2009
|
Impairment
write-downs
|
$
|
(223)
|
$
|
(620)
|
Change
in intent write-downs
|
|
(32)
|
|
(105)
|
Net OTTI losses recognized in
earnings
|
|
(255)
|
|
(725)
|
Sales
|
|
88
|
|
418
|
Valuation of derivative instruments
|
|
(155)
|
|
103
|
Settlements of derivative instruments
|
|
(30)
|
|
(12)
|
EMA limited
partnership income
|
|
4
|
|
(143)
|
Realized capital gains and losses
|
$
|
(348)
|
$
|
(359)
|
Gross gains of $142 million
and $480 million and gross losses of $74 million and $82 million were realized
on sales of fixed income securities during the three months ended March 31,
2010 and 2009, respectively.
8
Other-than-temporary
impairment losses by asset type for the three months ended March 31, 2010
are as follows:
($ in millions)
|
|
Total
|
|
Included
in OCI
|
|
Net
|
Fixed
income securities:
|
|
|
|
|
|
|
Municipal
|
$
|
(37)
|
$
|
--
|
$
|
(37)
|
Corporate
|
|
(47)
|
|
3
|
|
(44)
|
RMBS
|
|
(88)
|
|
(7)
|
|
(95)
|
CMBS
|
|
(26)
|
|
--
|
|
(26)
|
ABS
|
|
(3)
|
|
(1)
|
|
(4)
|
Total fixed income securities
|
|
(201)
|
|
(5)
|
|
(206)
|
Equity
securities
|
|
(6)
|
|
--
|
|
(6)
|
Mortgage
loans
|
|
(19)
|
|
--
|
|
(19)
|
Limited
partnership interests
|
|
(24)
|
|
--
|
|
(24)
|
Other-than-temporary impairment losses
|
$
|
(250)
|
$
|
(5)
|
$
|
(255)
|
The total amount of
other-than-temporary impairment losses included in accumulated other
comprehensive income for fixed income securities, which were not included in
earnings, are presented in the following table.
The amount excludes $269 million and $192 million as of March 31,
2010 and December 31, 2009, respectively, of net unrealized gains related
to changes in valuation of the fixed income securities subsequent to the
impairment measurement date.
($ in
millions)
|
|
March 31,
2010
|
|
December 31,
2009
|
Municipal
|
$
|
(9)
|
$
|
(10)
|
Corporate
|
|
(51)
|
|
(51)
|
RMBS
|
|
(590)
|
|
(594)
|
CMBS
|
|
(121)
|
|
(127)
|
ABS
|
|
(88)
|
|
(89)
|
Total
|
$
|
(859)
|
$
|
(871)
|
A rollforward of the amount
recognized in earnings related to credit losses for fixed income securities is
presented in the following table.
($ in
millions)
|
|
|
Beginning balance at December 31, 2009
|
$
|
(1,187)
|
Additional credit loss for securities previously
other-than-temporarily impaired
|
|
(101)
|
Additional credit loss for securities not previously
other-than-temporarily impaired
|
|
(79)
|
Reduction in credit loss for securities disposed or
collected
|
|
131
|
Reduction in credit loss for securities
other-than-temporarily impaired to fair value
|
|
--
|
Change in credit loss due to accretion of increase
in cash flows and time value of cash flows for securities previously
other-than-temporarily impaired
|
|
--
|
Ending balance at March 31, 2010
|
$
|
(1,236)
|
The Company uses its best
estimate of future cash flows expected to be collected from the fixed income
security discounted at the securitys original or current effective rate, as
appropriate, to calculate a recovery value and determine whether a credit loss
exists. The determination of cash flow
estimates is inherently subjective and methodologies may vary depending on facts
and circumstances specific to the security.
All reasonably available information relevant to the collectability of
the security, including past events,
current conditions, and reasonable and supportable assumptions and forecasts,
are considered when developing the estimate of cash flows expected to be
collected. That information generally
includes, but is not limited to, the remaining payment terms of the security,
prepayment speeds, foreign exchange rates, the financial condition of the issue
or issuer(s), expected defaults, expected recoveries, the value of underlying
collateral and current subordination levels, vintage, geographic concentration,
available reserves or escrows, third party guarantees and other credit
enhancements. Additionally, other
information, such as industry analyst reports and forecasts, sector credit
ratings, financial condition of the bond
9
insurer
for insured fixed income securities, and other market data relevant to the realizability
of contractual cash flows, may also be considered. The estimated fair value of collateral may be
used to estimate recovery value if the Company determines that the security is
dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery value is less than
the amortized cost of the security, a credit loss exists and an
other-than-temporary impairment for the difference between the estimated
recovery value and amortized cost is recorded in earnings. The unrealized loss deemed to be related to
factors other than credit remains classified in OCI. If the Company determines that the fixed
income security does not have sufficient cash flow or other information to
determine a recovery value for the security, the Company may conclude that the
entire decline in fair value is deemed to be credit related and is recorded in
earnings.
Unrealized net capital gains and losses
Unrealized net capital gains
and losses included in accumulated other comprehensive income are as follows:
($ in
millions)
|
|
Fair
|
|
Gross unrealized
|
|
Unrealized net
|
|
At
March 31, 2010
|
|
value
|
|
Gains
|
|
Losses
|
|
gains (losses)
|
|
Fixed income
securities
(1)
|
$
|
81,284
|
$
|
2,782
|
$
|
(3,984)
|
|
$
|
(1,202)
|
|
Equity
securities
|
|
3,807
|
|
457
|
|
(86)
|
|
|
371
|
|
Short-term
investments
|
|
2,482
|
|
--
|
|
--
|
|
|
--
|
|
Derivative
instruments
(2)
|
|
(14)
|
|
3
|
|
(21)
|
|
|
(18)
|
|
Unrealized net capital gains and losses, pre-tax
|
|
|
|
|
|
|
|
|
(849)
|
|
Amounts
recognized for:
|
|
|
|
|
|
|
|
|
|
|
Insurance reserves
(3)
|
|
|
|
|
|
|
|
|
--
|
|
DAC and DSI
(4)
|
|
|
|
|
|
|
|
|
726
|
|
Amounts recognized
|
|
|
|
|
|
|
|
|
726
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
39
|
|
Unrealized net capital gains and losses, after-tax
|
|
|
|
|
|
|
|
$
|
(84)
|
|
(1)
Unrealized net
capital gains and losses for fixed income securities as of March 31, 2010
comprises $(590) million related to unrealized net capital losses on fixed
income securities with OTTI and $(612) million related to other unrealized net
capital gains and losses.
(2)
Included in the
fair value of derivative securities are $2 million classified as assets and $16
million classified as liabilities.
(3)
The insurance
reserves adjustment represents the amount by which the reserve balance would
increase if the net unrealized gains in the applicable product portfolios were
realized and reinvested at current lower interest rates, resulting in a premium
deficiency. Although the Company
evaluates premium deficiencies on the combined performance of life insurance
and immediate annuities with life contingencies, the adjustment primarily
relates to structured settlement annuities with life contingencies, in addition
to annuity buy-outs and certain payout annuities with life contingencies.
(4)
The DAC and DSI
adjustment balance represents the amount by which the amortization of DAC and
DSI would increase or decrease if the unrealized gains or losses in the
respective product portfolios were realized.
|
|
Fair
|
|
Gross unrealized
|
|
Unrealized net
|
|
At
December 31, 2009
|
|
value
|
|
Gains
|
|
Losses
|
|
gains (losses)
|
|
Fixed income
securities
|
$
|
78,766
|
$
|
2,477
|
$
|
(4,954)
|
|
$
|
(2,477)
|
|
Equity
securities
|
|
5,024
|
|
381
|
|
(202)
|
|
|
179
|
|
Short-term
investments
|
|
3,056
|
|
--
|
|
--
|
|
|
--
|
|
Derivative
instruments
(1)
|
|
(20)
|
|
2
|
|
(25)
|
|
|
(23)
|
|
Unrealized net capital gains and losses, pre-tax
|
|
|
|
|
|
|
|
|
(2,321)
|
|
Amounts
recognized for:
|
|
|
|
|
|
|
|
|
|
|
Insurance reserves
|
|
|
|
|
|
|
|
|
--
|
|
DAC and DSI
|
|
|
|
|
|
|
|
|
990
|
|
Amounts recognized
|
|
|
|
|
|
|
|
|
990
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
461
|
|
Unrealized net capital gains and losses, after-tax
|
|
|
|
|
|
|
|
$
|
(870)
|
|
(1)
Included in the
fair value of derivative securities are $(2) million classified as assets
and $18 million classified as liabilities.
10
Change in unrealized net capital gains and losses
The change in unrealized net
capital gains and losses for the three months ended March 31, 2010 is as
follows:
($ in millions)
|
|
|
Fixed income securities
|
$
|
1,275
|
Equity securities
|
|
192
|
Short-term investments
|
|
--
|
Derivative instruments
|
|
5
|
Total
|
|
1,472
|
Amounts recognized for:
|
|
|
Insurance reserves
|
|
--
|
DAC and DSI
|
|
(264)
|
Decrease in amounts recognized
|
|
(264)
|
Deferred income taxes
|
|
(422)
|
Increase in unrealized net capital gains and losses
|
$
|
786
|
Portfolio monitoring
The Company has a comprehensive portfolio monitoring
process to identify and evaluate each fixed income and equity security whose
carrying value may be other-than-temporarily impaired
.
For each fixed income security in an unrealized loss
position, the Company assesses whether management with the appropriate
authority
has made a decision to sell or whether
it is more likely than not the Company will be required to sell the security
before recovery of the amortized cost basis for reasons such as liquidity,
contractual or regulatory purposes. If a
security meets either of these criteria, the securitys decline in fair value
is deemed other than temporary and is recorded in earnings.
If the Company has not made the decision to sell the
fixed income security and it is not more likely than not the Company will be
required to sell the fixed income security before recovery of its amortized
cost basis, the Company evaluates if it expects to receive cash flows
sufficient to recover the entire amortized cost basis of the security by
comparing the estimated recovery value calculated by discounting the best
estimate of future cash flows at the securitys original or current effective
rate, as appropriate, with the amortized cost of the security. If the Company does not expect to receive
cash flows sufficient to recover the entire amortized cost basis of the fixed
income security, the credit loss component of the impairment is recorded in
earnings, with the remaining amount of the unrealized loss deemed to be related
to other factors and recognized in OCI.
For equity securities,
the Company considers various factors, including whether the Company has the
intent and ability to hold the equity security for a period of time sufficient
to recover its cost basis. Where the
Company lacks the intent and ability to hold to recovery, or believes the
recovery period is extended, the equity securitys decline in fair value is
considered other than temporary and is recorded in earnings. For equity securities managed by a third
party, the Company has contractually retained its decision making authority as
it pertains to selling equity securities that are in an unrealized loss
position.
The Companys portfolio
monitoring process includes a quarterly review of all securities through a
screening process which identifies instances where the fair value compared to
amortized cost for fixed income securities and cost for equity securities is
below established thresholds, and also includes the monitoring of other
criteria such as ratings, ratings downgrades or payment defaults. The securities identified, in addition to
other securities for which the Company may have a concern, are evaluated for
potential other-than-temporary impairment using all reasonably available
information relevant to the collectability or recovery of the security. Inherent in the Companys evaluation of
other-than-temporary impairment for these fixed income and equity securities
are assumptions and estimates about the financial condition of the issue or
issuer and its future earnings potential.
Some of the factors considered in evaluating whether a decline in fair
value is other than temporary are: 1) the length of time and extent to which
the fair value has been less than amortized cost for fixed income securities,
or cost for equity securities; 2) the financial condition, near-term and
long-term prospects of the issue or issuer, including relevant industry specific
market conditions and trends, geographic location and implications of rating
agency actions and offering prices; and 3) the specific reasons that a security
is in a significant unrealized loss position, including overall market
conditions which could affect liquidity.
11
The following table summarizes
the gross unrealized losses and fair value of fixed income and equity
securities by the length of time that individual securities have been in a
continuous unrealized loss position.
($ in millions)
|
|
Less
than 12 months
|
|
12
months or more
|
|
Total
|
|
|
Number
|
|
Fair
|
|
Unrealized
|
|
Number
|
|
Fair
|
|
Unrealized
|
|
unrealized
|
|
|
of
issues
|
|
value
|
|
losses
|
|
of
issues
|
|
value
|
|
losses
|
|
losses
|
At March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
and agencies
|
|
46
|
$
|
1,486
|
$
|
(20)
|
|
1
|
$
|
2
|
$
|
--
|
$
|
(20)
|
Municipal
|
|
556
|
|
2,499
|
|
(61)
|
|
752
|
|
4,909
|
|
(712)
|
|
(773)
|
Corporate
|
|
327
|
|
4,169
|
|
(105)
|
|
322
|
|
4,136
|
|
(394)
|
|
(499)
|
Foreign
government
|
|
58
|
|
524
|
|
(7)
|
|
3
|
|
10
|
|
(2)
|
|
(9)
|
RMBS
|
|
233
|
|
889
|
|
(10)
|
|
439
|
|
2,490
|
|
(1,394)
|
|
(1,404)
|
CMBS
|
|
7
|
|
97
|
|
(5)
|
|
221
|
|
1,487
|
|
(807)
|
|
(812)
|
ABS
|
|
42
|
|
440
|
|
(17)
|
|
157
|
|
1,369
|
|
(450)
|
|
(467)
|
Redeemable
preferred stock
|
|
1
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
Total fixed
income securities
(1)
|
|
1,270
|
|
10,104
|
|
(225)
|
|
1,895
|
|
14,403
|
|
(3,759)
|
|
(3,984)
|
Equity securities
|
|
509
|
|
530
|
|
(44)
|
|
14
|
|
284
|
|
(42)
|
|
(86)
|
Total fixed
income and equity securities
|
|
1,779
|
$
|
10,634
|
$
|
(269)
|
|
1,909
|
$
|
14,687
|
$
|
(3,801)
|
$
|
(4,070)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade fixed income securities
|
|
1,168
|
$
|
9,477
|
$
|
(187)
|
|
1,429
|
$
|
11,440
|
$
|
(2,156)
|
$
|
(2,343)
|
Below investment grade fixed income securities
|
|
102
|
|
627
|
|
(38)
|
|
466
|
|
2,963
|
|
(1,603)
|
|
(1,641)
|
Total fixed
income securities
|
|
1,270
|
$
|
10,104
|
$
|
(225)
|
|
1,895
|
$
|
14,403
|
$
|
(3,759)
|
$
|
(3,984)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
and agencies
|
|
38
|
$
|
3,523
|
$
|
(16)
|
|
--
|
$
|
--
|
$
|
--
|
$
|
(16)
|
Municipal
|
|
761
|
|
3,646
|
|
(123)
|
|
747
|
|
5,024
|
|
(817)
|
|
(940)
|
Corporate
|
|
399
|
|
5,072
|
|
(178)
|
|
421
|
|
5,140
|
|
(669)
|
|
(847)
|
Foreign
government
|
|
50
|
|
505
|
|
(15)
|
|
1
|
|
1
|
|
--
|
|
(15)
|
RMBS
|
|
387
|
|
1,092
|
|
(23)
|
|
453
|
|
2,611
|
|
(1,607)
|
|
(1,630)
|
CMBS
|
|
25
|
|
232
|
|
(4)
|
|
259
|
|
1,790
|
|
(951)
|
|
(955)
|
ABS
|
|
39
|
|
352
|
|
(20)
|
|
173
|
|
1,519
|
|
(530)
|
|
(550)
|
Redeemable
preferred stock
|
|
1
|
|
--
|
|
--
|
|
1
|
|
21
|
|
(1)
|
|
(1)
|
Total fixed
income securities
|
|
1,700
|
|
14,422
|
|
(379)
|
|
2,055
|
|
16,106
|
|
(4,575)
|
|
(4,954)
|
Equity securities
|
|
1,665
|
|
1,349
|
|
(113)
|
|
28
|
|
450
|
|
(89)
|
|
(202)
|
Total fixed
income and equity securities
|
|
3,365
|
$
|
15,771
|
$
|
(492)
|
|
2,083
|
$
|
16,556
|
$
|
(4,664)
|
$
|
(5,156)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade fixed income securities
|
|
1,587
|
$
|
13,891
|
$
|
(293)
|
|
1,561
|
$
|
13,127
|
$
|
(2,848)
|
$
|
(3,141)
|
Below investment grade fixed income securities
|
|
113
|
|
531
|
|
(86)
|
|
494
|
|
2,979
|
|
(1,727)
|
|
(1,813)
|
Total fixed
income securities
|
|
1,700
|
$
|
14,422
|
$
|
(379)
|
|
2,055
|
$
|
16,106
|
$
|
(4,575)
|
$
|
(4,954)
|
(1)
Gross unrealized losses resulting from factors other
than credit on fixed income securities with other-than-temporary impairments
for which the Company has recorded a credit loss in earnings total $8 million
for the less than 12 month category and $688 million for the 12 months or
greater category.
As of March 31, 2010, $1.18
billion of unrealized losses are related to securities with an unrealized loss
position less than 20% of cost or amortized cost, the degree of which suggests
that these securities do not pose a high risk of being other-than-temporarily
impaired. Of the $1.18 billion, $921
million are related to unrealized losses on investment grade fixed income
securities. Investment grade is defined
as a security having a rating of Aaa, Aa, A or Baa from Moodys, a rating of
AAA, AA, A or BBB from S&P, Fitch, Dominion or Realpoint, a rating of aaa,
aa, a or bbb from A.M. Best, or a comparable internal rating if an
externally provided rating is not available, which is consistent with the
National Association of Insurance Commissioners (NAIC) rating. Unrealized losses on investment grade
securities are principally related to rising interest rates or changes in
credit spreads since the securities were acquired.
As of March 31, 2010,
the remaining $2.89 billion of unrealized losses are related to securities in
unrealized loss positions greater than or equal to 20% of cost or amortized
cost. I
nvestment grade securities
comprising $1.42 billion of these unrealized losses were evaluated based on
factors such as discounted cash flows, the financial condition and near-term
and long-term prospects of the issue or issuer and were determined to have
adequate
12
resources to
fulfill contractual obligations, such as recent financings or bank loans, cash
flows from operations, collateral or the position of a subsidiary with respect
to its parents bankruptcy. Of
the $2.89 billion, $1.45 billion are related to below investment grade fixed
income securities and $17 million are related to equity securities. Of these amounts, $1.38 billion of the below
investment grade fixed income securities had been in an unrealized loss position
for a period of twelve or more consecutive months as of March 31,
2010. Unrealized losses on below
investment grade securities are principally related to RMBS, ABS and CMBS and
were the result of wider credit spreads than at initial purchase which was
largely due to the impact of macroeconomic conditions and credit market
deterioration on real estate valuations.
Securities in an unrealized loss position were
evaluated based on
discounted cash flows and credit ratings, as well as the performance of the
underlying collateral relative to the securities positions in the securities
respective capital structure. RMBS and
ABS in an unrealized loss position were evaluated with credit enhancements from
bond insurers where applicable.
Municipal bonds in an unrealized loss position were evaluated based on
the quality of the underlying security, as well as with credit enhancements
from bond insurers, where applicable.
Unrealized losses on equity securities are
primarily related to equity market fluctuations.
As of March 31, 2010, the
Company has not made a decision to sell and it is not more likely than not the
Company will be required to sell fixed income securities with unrealized losses
before recovery of the amortized cost basis.
As of March 31, 2010, the Company had the intent and ability to
hold the equity securities with unrealized losses for a period of time
sufficient for them to recover.
Limited
partnership impairment
As of March 31, 2010 and December 31, 2009, the
carrying value of equity method limited partnership interests totaled $1.69
billion and $1.64 billion, respectively.
The Company recognizes an impairment loss in value for equity method
investments when evidence demonstrates that it is other-than-temporarily
impaired. Evidence of a loss in value
that is other than temporary may include the absence of an ability to recover
the carrying amount of the investment or the inability of the investee to
sustain an earnings potential that would justify the carrying amount of the
investment. The Company had no
write-downs for the three months ended March 31, 2010 and had write-downs
of $10 million for the three months ended March 31, 2009, related to
equity method limited partnership interests.
As of March 31, 2010 and December 31, 2009, the carrying value
for cost method limited partnership interests was $1.11 billion and $1.10
billion, respectively.
To determine if an other-than-temporary
impairment has occurred, the Company evaluates whether an impairment indicator
has occurred in the period that may have a significant adverse effect on the
carrying value of the investment.
Impairment indicators may include: actual recent cash flows received
being significantly less than expected cash flows; reduced valuations based on
financing completed at a lower value; completed sale of a material underlying
investment at a price significantly lower than expected; significantly reduced
valuations of the investments held by limited partnerships; or any other
adverse events since the last financial statements received that might affect
the fair value of the investees capital.
Additionally, the Company uses a screening process to identify those
investments whose net asset value is below established thresholds for certain
periods of time as well as investments that are performing below expectations,
for further impairment consideration. If
a cost method limited partnership is deemed other-than-temporarily impaired,
the carrying value is written down to fair value, generally estimated to be
equivalent to the reported net asset value of the underlying funds. The Company had write-downs of $24 million
and $187 million for the three months ended March 31, 2010 and 2009,
respectively, related to cost method investments that were
other-than-temporarily impaired.
5. Fair Value of
Assets and Liabilities
Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement
date. The
hierarchy for inputs used in determining fair value
maximizes the use of observable inputs and minimizes the use of unobservable
inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on
the
Condensed Consolidated Statements of Financial
Position at fair value are categorized in the fair value hierarchy based on the
observability of inputs to the valuation techniques as follows:
Level 1:
Assets and liabilities whose values are based on
unadjusted quoted prices for identical assets or liabilities in an active
market that the Company can access.
13
Level 2:
Assets and liabilities whose values are
based on the following:
(a)
Quoted prices for similar assets or liabilities in active markets;
(b)
Quoted prices for identical or similar assets or liabilities in markets that
are not active; or
(c) Valuation models whose inputs are
observable, directly or indirectly, for substantially the full term of the
asset or liability.
Level 3:
Assets and liabilities whose values are
based on prices or valuation techniques that require inputs that are both unobservable
and significant to the overall fair value measurement. Unobservable inputs reflect the Companys
estimates of the assumptions that market participants would use in valuing the
assets and liabilities.
The availability of observable
inputs
varies by instrument. In situations where fair value is based on
internally developed pricing models or inputs that are unobservable in the
market, the determination of fair value requires more judgment. The degree of judgment exercised by the
Company in determining fair value is typically greatest for instruments
categorized in Level 3. In many
instances, valuation inputs used to measure fair value fall into different
levels of the fair value hierarchy. The
category level in the fair value hierarchy is determined based on the lowest
level input that is significant to the fair value measurement in its
entirety. The Company uses prices and
inputs that are current as of the measurement date, including during periods of
market disruption. In periods of market
disruption, the ability to observe prices and inputs may be reduced for many
instruments.
The Company has two types of situations where
investments are classified as Level 3 in the fair value hierarchy. The first is where quotes continue to be
received from independent third-party valuation service providers and all
significant inputs are market observable; however, there has been a significant
decrease in the volume and level of activity for the asset when compared to
normal market activity such that the degree of market observability has
declined to a point where categorization as a Level 3 measurement is considered
appropriate. Among the indicators
considered in determining whether a significant decrease in the volume and
level of activity for a specific asset has occurred include the level of new
issuances in the primary market, trading volume in the secondary market, level
of credit spreads over historical levels, bid-ask spread, and price consensus
among market participants and sources.
The second situation where
the Company has classified securities in Level 3 is where specific inputs
significant to the fair value estimation models are not market observable. This has occurred in two primary
categories. The first is for broker quotes. The second is for ARS backed by student loans
for which a key assumption, the anticipated date liquidity will return to this
market, is not market observable.
Certain assets are not carried at
fair value on a recurring basis, including investments such as mortgage loans,
limited partnership interests, bank loans and policy loans. Accordingly, such investments are only
included in the fair value hierarchy disclosure when the investment is subject
to remeasurement at fair value after initial recognition and the resulting
remeasurement is reflected in the condensed consolidated financial
statements. In addition, equity options
embedded in fixed income securities are not disclosed in the hierarchy with
free-standing derivatives as the embedded derivatives are presented with the
host contract in fixed income securities. As of March 31, 2010, 73.5% of
total assets are measured at fair value and 0.5% of total liabilities are
measured at fair value.
In determining fair value, the
Company principally uses the market approach which generally utilizes market
transaction data for the same or similar instruments. To a lesser extent, the Company uses the
income approach which involves determining fair values from discounted cash
flow methodologies. For the majority of
Level 2 and Level 3 valuations, a combination of market and income approaches
is used.
Summary of significant valuation techniques for
assets and liabilities measured at fair value on a recurring basis
Level 1
measurements
·
Fixed income securities:
Comprise U.S. Treasuries.
Valuation is based on unadjusted quoted prices for identical assets in
active markets that the Company can access.
·
Equity securities:
Comprise
actively traded, exchange-listed U.S. and international equity securities.
Valuation is based on unadjusted quoted prices for identical assets in active
markets that the Company can access.
14
·
Short-term:
Comprise
actively traded money market funds that have daily quoted net asset values for
identical assets that the Company can access.
·
Separate account assets:
Comprise actively traded mutual funds that have daily quoted net asset
values for identical assets that the Company can access. Net asset values for the actively traded
mutual funds in which the separate account assets are invested are obtained
daily from the fund managers.
Level 2
measurements
·
Fixed income securities:
U.S. government and agencies:
The primary inputs to the valuation include quoted prices for identical
or similar assets in markets that are not active, contractual cash flows,
benchmark yields and credit spreads.
Municipal:
The primary inputs
to the valuation include quoted prices for identical or similar assets in
markets that are not active, contractual cash flows, benchmark yields and
credit spreads.
Corporate, including privately placed:
The primary inputs to the valuation include quoted prices for identical
or similar assets in markets that are not active, contractual cash flows,
benchmark yields and credit spreads.
Also includes privately placed securities valued using a discounted cash
flow model that is widely accepted in
the financial services industry and uses market observable inputs and inputs
derived principally from, or corroborated by, observable market data. The primary inputs to the discounted
cash flow model include an interest rate curve, as well as published credit
spreads for similar assets in markets that are not active that incorporate the
credit quality and industry sector of the issuer.
Foreign government:
The primary
inputs to the valuation include quoted prices for identical or similar assets
in markets that are not active, contractual cash flows, benchmark yields and
credit spreads.
RMBS - U.S. government sponsored entities (U.S. Agency),
Prime residential mortgage-backed securities (Prime) and Alt-A residential
mortgage-backed securities (Alt-A); ABS - auto and student loans:
The primary inputs to the valuation include quoted prices for identical
or similar assets in markets that are not active, contractual cash flows,
benchmark yields, prepayment speeds, collateral performance and credit spreads.
Redeemable preferred stock:
The primary inputs to the valuation include quoted prices for identical
or similar assets in markets that are not active, contractual cash flows,
benchmark yields, underlying stock prices and credit spreads.
CMBS:
The primary
inputs to the valuation include quoted prices for identical or similar assets
in markets that are not active, contractual cash flows, benchmark yields,
collateral performance and credit spreads.
·
Equity securities
: The primary
inputs to the valuation include quoted prices for identical or similar assets
in markets that are not active.
·
Short-term:
The primary
inputs to the valuation include quoted prices for identical or similar assets
in markets that are not active, contractual cash flows, benchmark yields and
credit spreads. For certain short-term
investments, amortized cost is used as the best estimate of fair value.
·
Other investments:
Free-standing
exchange listed derivatives that are not actively traded are valued based on
quoted prices for identical instruments in markets that are not active.
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 spreads 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.
15
Level 3 measurements
·
Fixed income securities:
Municipal:
Auction rate securities (ARS) primarily backed by student loans that
have become illiquid due to failures in the auction market are valued using a
discounted cash flow model that is
widely accepted in the financial services industry and uses significant non-market observable inputs, including estimates
of future coupon rates if auction failures continue, maturity assumptions and
illiquidity premium. Also includes
municipal bonds that are not rated by third party credit rating agencies but
are generally rated by the NAIC, in addition to other high-yield municipal
bonds. The primary inputs to the
valuation of these municipal bonds include quoted prices for identical or
similar assets in markets that exhibit less liquidity relative to those markets
supporting Level 2 fair value measurements, contractual cash flows, benchmark
yields and credit spreads.
Corporate, including privately placed:
Valued based on non-binding broker quotes. Also includes
equity-indexed notes which are valued using a discounted cash flow model that is widely accepted in the financial services
industry and uses significant
non-market observable inputs,
such as volatility. Other inputs
include an interest rate curve, as well as published credit spreads for similar
assets that incorporate the credit quality and industry sector of the issuer.
RMBS - Subprime residential mortgage-backed
securities (Subprime) and Alt-A:
The primary
inputs to the valuation include quoted prices for identical or similar assets
in markets that exhibit less liquidity relative to those markets supporting
Level 2 fair value measurements, contractual cash flows, benchmark yields,
prepayment speeds, collateral performance and credit spreads. Also includes certain Subprime and Alt-A that
are valued based on non-binding broker quotes.
Due to the reduced availability of actual market prices or relevant
observable inputs as a result of the decrease in liquidity that has been
experienced in the market for these securities, Subprime and certain Alt-A are
categorized as Level 3.
Foreign
government:
Valued based on non-binding broker quotes.
CMBS:
The primary inputs to the valuation include quoted prices for identical
or similar assets in markets that exhibit less liquidity relative to those
markets supporting Level 2 fair value measurements, contractual cash flows,
benchmark yields, collateral performance and credit spreads. Also includes CMBS that are valued based on
non-binding broker quotes. Due to the
reduced availability of actual market prices or relevant observable inputs as a
result of the decrease in liquidity that has been experienced in the market for
these securities, certain CMBS are categorized as Level 3.
ABS - Collateralized debt obligations (CDO):
Valued based on non-binding broker quotes received from brokers who are
familiar with the investments. Due to
the reduced availability of actual market prices or relevant observable inputs
as a result of the decrease in liquidity that has been experienced in the
market for these securities, all CDO are categorized as Level 3.
ABS -
student loans and other:
The primary inputs to the
valuation include quoted prices for identical or similar assets in markets that
exhibit less liquidity relative to those markets supporting Level 2 fair value
measurements, contractual cash flows, benchmark yields, prepayment speeds,
collateral performance and credit spreads.
Also includes ABS that are valued based on non-binding broker quotes. Due to the reduced availability of actual
market prices or relevant observable inputs as a result of the decrease in
liquidity that has been experienced in the market for these securities, certain
ABS are categorized as Level 3.
·
Other investments:
Certain OTC
derivatives, such as interest rate caps and floors, certain credit default
swaps and OTC options (including swaptions), are valued using models that are
widely accepted in the financial services industry. Non-market observable inputs such as
volatility assumptions may be significant to the valuation of the
instruments. Other primary inputs
include interest rate yield curves and credit spreads.
·
Contractholder funds:
Derivatives embedded in certain annuity contracts are valued internally
using models widely accepted in the financial services industry that determine a single best estimate of fair
value for the embedded derivatives within a block of contractholder
liabilities. The models use
stochastically determined cash flows based on the contractual elements of
embedded derivatives and other applicable
16
market data. These are
categorized as Level 3 as a result of the significance of non-market observable inputs.
Assets
and liabilities measured at fair value on a non-recurring basis
Mortgage
loans written-down to fair value in connection with recognizing
other-than-temporary impairments are valued based on the fair value of the
underlying collateral. Limited partnership
interests written-down to fair value in connection with recognizing
other-than-temporary impairments are valued using net asset values and other
sources.
The following table summarizes the
Companys assets and liabilities measured at fair value on a recurring and
non-recurring basis as of March 31, 2010:
($ in millions)
|
|
Quoted
prices
in active
markets for
identical
assets
|
|
Significant
other
observable
inputs
|
|
Significant
unobservable
inputs
|
|
Counterparty
and cash
collateral
|
|
Balance
as of
March 31,
|
|
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
netting
|
|
2010
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government and agencies
|
$
|
4,550
|
$
|
3,872
|
$
|
--
|
|
|
$
|
8,422
|
|
Municipal
|
|
--
|
|
17,666
|
|
2,482
|
|
|
|
20,148
|
|
Corporate
|
|
--
|
|
32,322
|
|
2,177
|
|
|
|
34,499
|
|
Foreign
government
|
|
--
|
|
3,314
|
|
--
|
|
|
|
3,314
|
|
RMBS
|
|
--
|
|
7,033
|
|
2,079
|
|
|
|
9,112
|
|
CMBS
|
|
--
|
|
1,322
|
|
1,130
|
|
|
|
2,452
|
|
ABS
|
|
--
|
|
894
|
|
2,403
|
|
|
|
3,297
|
|
Redeemable
preferred stock
|
|
--
|
|
38
|
|
2
|
|
|
|
40
|
|
Total fixed income securities
|
|
4,550
|
|
66,461
|
|
10,273
|
|
|
|
81,284
|
|
Equity securities
|
|
3,568
|
|
167
|
|
72
|
|
|
|
3,807
|
|
Short-term investments
|
|
275
|
|
2,207
|
|
--
|
|
|
|
2,482
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives
|
|
--
|
|
653
|
|
58
|
$
|
(276)
|
|
435
|
|
Separate account assets
|
|
9,059
|
|
--
|
|
--
|
|
|
|
9,059
|
|
Other assets
|
|
--
|
|
--
|
|
2
|
|
|
|
2
|
|
Total recurring basis assets
|
|
17,452
|
|
69,488
|
|
10,405
|
|
(276)
|
|
97,069
|
|
Non-recurring basis
(1)
|
|
--
|
|
--
|
|
197
|
|
|
|
197
|
|
Total
assets at fair value
|
$
|
17,452
|
$
|
69,488
|
$
|
10,602
|
$
|
(276)
|
$
|
97,266
|
|
% of total assets at
fair value
|
|
17.9 %
|
|
71.5 %
|
|
10.9 %
|
|
(0.3) %
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder funds:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives embedded in annuity contracts
|
$
|
--
|
$
|
(220)
|
$
|
86
|
|
|
$
|
(134)
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives
|
|
(1)
|
|
(548)
|
|
(96)
|
$
|
238
|
|
(407)
|
|
Total
liabilities at fair value
|
$
|
(1)
|
$
|
(768)
|
$
|
(10)
|
$
|
238
|
$
|
(541)
|
|
% of total liabilities
at fair value
|
|
0.2 %
|
|
142.0 %
|
|
1.8 %
|
|
(44.0) %
|
|
100.0%
|
|
(1)
|
Includes
$147 million of mortgage loans and $50 million of limited
partnership interests written-down to fair value in connection with
recognizing other-than-temporary impairments.
|
17
The following table summarizes the
Companys assets and liabilities measured at fair value on a recurring and
non-recurring basis as of December 31, 2009:
($ in millions)
|
|
Quoted
prices
in active
markets for
identical
assets
|
|
Significant
other
observable
inputs
|
|
Significant
unobservable
inputs
|
|
Counterparty
and cash
collateral
|
|
Balance
as of
December 31,
|
|
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
netting
|
|
2009
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government and agencies
|
$
|
4,415
|
$
|
3,121
|
$
|
--
|
|
|
$
|
7,536
|
|
Municipal
|
|
--
|
|
18,574
|
|
2,706
|
|
|
|
21,280
|
|
Corporate
|
|
--
|
|
30,874
|
|
2,241
|
|
|
|
33,115
|
|
Foreign
government
|
|
--
|
|
3,177
|
|
20
|
|
|
|
3,197
|
|
RMBS
|
|
--
|
|
6,316
|
|
1,671
|
|
|
|
7,987
|
|
CMBS
|
|
--
|
|
1,182
|
|
1,404
|
|
|
|
2,586
|
|
ABS
|
|
--
|
|
1,025
|
|
2,001
|
|
|
|
3,026
|
|
Redeemable
preferred stock
|
|
--
|
|
37
|
|
2
|
|
|
|
39
|
|
Total fixed income securities
|
|
4,415
|
|
64,306
|
|
10,045
|
|
|
|
78,766
|
|
Equity securities
|
|
4,821
|
|
134
|
|
69
|
|
|
|
5,024
|
|
Short-term investments
|
|
278
|
|
2,778
|
|
--
|
|
|
|
3,056
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives
|
|
--
|
|
882
|
|
146
|
$
|
(482)
|
|
546
|
|
Separate account assets
|
|
9,072
|
|
--
|
|
--
|
|
|
|
9,072
|
|
Other assets
|
|
--
|
|
--
|
|
2
|
|
|
|
2
|
|
Total recurring basis assets
|
|
18,586
|
|
68,100
|
|
10,262
|
|
(482)
|
|
96,466
|
|
Non-recurring basis
(1)
|
|
--
|
|
--
|
|
235
|
|
|
|
235
|
|
Total
assets at fair value
|
$
|
18,586
|
$
|
68,100
|
$
|
10,497
|
$
|
(482)
|
$
|
96,701
|
|
% of total assets at
fair value
|
|
19.2%
|
|
70.4%
|
|
10.9%
|
|
(0.5)%
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder funds:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives embedded in annuity contracts
|
$
|
--
|
$
|
(217)
|
$
|
(110)
|
|
|
$
|
(327)
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives
|
|
(2)
|
|
(596)
|
|
(91)
|
$
|
276
|
|
(413)
|
|
Total
liabilities at fair value
|
$
|
(2)
|
$
|
(813)
|
$
|
(201)
|
$
|
276
|
$
|
(740)
|
|
% of total liabilities
at fair value
|
|
0.3%
|
|
109.9%
|
|
27.1%
|
|
(37.3)%
|
|
100.0%
|
|
(1)
|
Includes
$211 million of mortgage loans and $24 million of limited
partnership interests written-down to fair value in connection with
recognizing other-than-temporary impairments.
|
18
The following table presents the
rollforward of Level 3 assets and liabilities held at fair value on a recurring
basis during the three-month period ended March 31, 2010.
($ in millions)
|
|
|
|
Total
realized and
unrealized gains (losses)
included in:
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of
December 31,
2009
|
|
Net
income
(1)
|
|
OCI on
Statement of
Financial
Position
|
|
Purchases,
sales,
issuances and
settlements,
net
|
|
Transfers
into Level 3
|
|
Transfers
out
of Level 3
|
|
Balance
as
of March 31,
2010
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
|
$
|
2,706
|
$
|
(16)
|
$
|
37
|
$
|
(216)
|
$
|
--
|
$
|
(29)
|
$
|
2,482
|
|
Corporate
|
|
2,241
|
|
(27)
|
|
75
|
|
(11)
|
|
12
|
|
(113)
|
|
2,177
|
|
Foreign
government
|
|
20
|
|
--
|
|
--
|
|
(20)
|
|
--
|
|
--
|
|
--
|
|
RMBS
|
|
1,671
|
|
(58)
|
|
163
|
|
303
|
|
--
|
|
--
|
|
2,079
|
|
CMBS
|
|
1,404
|
|
(34)
|
|
108
|
|
(163)
|
|
24
|
|
(209)
|
|
1,130
|
|
ABS
|
|
2,001
|
|
15
|
|
93
|
|
331
|
|
--
|
|
(37)
|
|
2,403
|
|
Redeemable
preferred stock
|
|
2
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
2
|
|
Total fixed income securities
|
|
10,045
|
|
(120)
|
|
476
|
|
224
|
|
36
|
|
(388)
|
|
10,273
|
|
Equity securities
|
|
69
|
|
--
|
|
3
|
|
4
|
|
--
|
|
(4)
|
|
72
|
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives, net
|
|
55
|
|
(133)
|
|
--
|
|
40
|
|
--
|
|
--
|
|
(38)
|
(2)
|
Other assets
|
|
2
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
2
|
|
Total recurring Level 3 assets
|
$
|
10,171
|
$
|
(253)
|
$
|
479
|
$
|
268
|
$
|
36
|
$
|
(392)
|
$
|
10,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder
funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives embedded in annuity contracts
|
$
|
(110)
|
$
|
194
|
$
|
--
|
$
|
2
|
$
|
--
|
$
|
--
|
$
|
86
|
|
Total recurring Level 3 liabilities
|
$
|
(110)
|
$
|
194
|
$
|
--
|
$
|
2
|
$
|
--
|
$
|
--
|
$
|
86
|
|
(1)
|
The effect to net income
totals $(59) million and is reported in the Condensed Consolidated Statements
of Operations as follows: $(286) million in realized capital gains and
losses, $32 million in net investment income, $(1) million in
interest credited to contractholder funds and $(194) million in life and
annuity contract benefits.
|
(2)
|
Comprises $58 million of assets and $(96) million of
liabilities.
|
Transfers
between level categorizations may occur due to changes in the availability of
market observable inputs, which generally are caused by changes in market
conditions such as liquidity, trading volume or bid-ask spreads. Transfers between level categorizations may
also occur due to changes in the valuation source. For example, in situations where a fair value
quote is not provided by the Companys independent third-party valuation
service provider and as a result the price is stale or has been replaced with a
broker quote, the security is transferred into Level 3. Transfers in and out of level categorizations
are reported as having occurred at the beginning of the quarter in which the
transfer occurred. Therefore, for all
transfers into Level 3, all realized and changes in unrealized gains and losses
in the quarter of transfer are reflected in the Level 3 rollforward table.
There
were no transfers between Level 1 and Level 2 during the three months ended March 31,
2010.
During
the three months ended March 31, 2010, certain CMBS were transferred into
Level 2 from Level 3 as a result of increased liquidity in the market and the
availability of market observable quoted prices for similar assets. When
transferring these securities into Level 2, the Company does not change the
source of fair value estimates or modify the estimates received from
independent third-party valuation service providers or the internal valuation
approach. Accordingly, for securities
included within this group, there was no change in fair value resulting in a
realized or unrealized gain or loss.
Transfers into Level 3 during the three months ended March 31,
2010 included situations where a fair value quote is not provided by the
Companys independent third-party valuation service provider and as a result
the price is stale or has been replaced with a broker quote resulting in the
security being classified as Level 3.
Transfers out of Level 3 during the three-months ended March 31,
2010 also included situations where a broker quote was used in
19
the prior period
and a fair value quote is now available from the Companys independent
third-party valuation service provider.
A quote utilizing the new pricing source is not available as of the
prior period, and any gains or losses related to the change in valuation source
for individual securities are not significant.
The
following table provides the total gains and (losses) included in net income
for Level 3 assets and liabilities still held at March 31, 2010.
($ in millions)
|
|
|
|
Assets
|
|
|
|
Fixed income securities:
|
|
|
|
Municipal
|
$
|
(13)
|
|
Corporate
|
|
(28)
|
|
Foreign government
|
|
--
|
|
RMBS
|
|
(58)
|
|
CMBS
|
|
(23)
|
|
ABS
|
|
1
|
|
Redeemable preferred stock
|
|
--
|
|
Total
fixed income securities
|
|
(121)
|
|
Equity securities
|
|
--
|
|
Other investments:
|
|
|
|
Free-standing derivatives, net
|
|
(85)
|
|
Other assets
|
|
--
|
|
Total recurring Level 3 assets
|
$
|
(206)
|
|
|
|
|
|
Liabilities
|
|
|
|
Contractholder
funds:
|
|
|
|
Derivatives embedded in annuity contracts
|
$
|
194
|
|
Total recurring Level 3 liabilities
|
$
|
194
|
|
The amounts in the table above represent gains and
losses included in net income for the period of time that the asset or
liability was determined to be in Level 3.
These gains and losses total $(12) million and are reported in the Condensed
Consolidated Statements of Operations as follows: $(237) million in
realized capital gains and losses, $31 million in net investment income,
and $(194) million in life and annuity contract benefits.
20
The following table presents the
rollforward of Level 3 assets and liabilities held at fair value on a recurring
basis during the three-month period ended March 31, 2009.
($ in millions)
|
|
|
|
Total
realized and
unrealized gains (losses)
included in:
|
|
|
|
|
|
|
|
Total
gains (losses)
included in
|
|
|
Balance
as of
December 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
March 31,
2009
|
|
net
income
for assets and
liabilities
still held at
March 31,
2009
(3)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
|
$
|
2,463
|
$
|
1
|
$
|
(34)
|
$
|
9
|
$
|
(44)
|
$
|
2,395
|
$
|
1
|
Corporate
|
|
10,195
|
|
(50)
|
|
52
|
|
(326)
|
|
(53)
|
|
9,818
|
|
(49)
|
RMBS
|
|
2,988
|
|
(4)
|
|
(324)
|
|
(143)
|
|
(11)
|
|
2,506
|
|
(12)
|
CMBS
|
|
457
|
|
(34)
|
|
(81)
|
|
(5)
|
|
438
|
|
775
|
|
(17)
|
ABS
|
|
1,714
|
|
(140)
|
|
18
|
|
(136)
|
|
(77)
|
|
1,379
|
|
(140)
|
Redeemable
preferred stock
|
|
2
|
|
--
|
|
--
|
|
--
|
|
--
|
|
2
|
|
--
|
Total fixed income securities
|
|
17,819
|
|
(227)
|
|
(369)
|
|
(601)
|
|
253
|
|
16,875
|
|
(217)
|
Equity securities
|
|
74
|
|
--
|
|
(4)
|
|
3
|
|
--
|
|
73
|
|
--
|
Other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives, net
|
|
(101)
|
|
6
|
|
--
|
|
(8)
|
|
--
|
|
(103)
|
(2)
|
8
|
Other assets
|
|
1
|
|
2
|
|
--
|
|
--
|
|
--
|
|
3
|
|
2
|
Total
recurring Level 3 assets
|
$
|
17,793
|
$
|
(219)
|
$
|
(373)
|
$
|
(606)
|
$
|
253
|
$
|
16,848
|
$
|
(207)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractholder
funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives embedded in annuity contracts
|
$
|
(265)
|
$
|
(25)
|
$
|
--
|
$
|
(1)
|
$
|
--
|
$
|
(291)
|
$
|
(25)
|
Total
recurring Level 3 liabilities
|
$
|
(265)
|
$
|
(25)
|
$
|
--
|
$
|
(1)
|
$
|
--
|
$
|
(291)
|
$
|
(25)
|
(1)
|
The effect to net income
totals $(244) million and is reported in the Condensed Consolidated
Statements of Operations as follows: $(268) million in realized capital
gains and losses, $50 million in net investment income, $1 million
in interest credited to contractholder funds, and $25 million in life
and annuity contract benefits.
|
(2)
|
Comprises
$69 million of assets and $(172) million of liabilities.
|
(3)
|
The
amounts represent gains and losses included in net income for the period of
time that the asset or liability was determined to be in Level 3. These gains
and losses total $(232) million and are reported in the Condensed
Consolidated Statements of Operations as follows: $(257) million in
realized capital gains and losses, $50 million in net investment income,
and $25 million in life and annuity contract benefits.
|
Presented
below are the carrying values and fair
value
estimates of financial instruments not carried at fair value.
Financial assets
($ in millions)
|
|
March 31,
2010
|
|
December 31,
2009
|
|
|
|
Carrying
value
|
|
Fair
value
|
|
Carrying
value
|
|
Fair
value
|
|
Mortgage loans
|
$
|
7,639
|
$
|
6,355
|
$
|
7,935
|
$
|
6,336
|
|
Limited partnership interests - cost basis
|
|
1,112
|
|
1,139
|
|
1,103
|
|
1,098
|
|
Bank loans
|
|
406
|
|
392
|
|
420
|
|
391
|
|
The fair
value of mortgage loans is based on discounted contractual cash flows or, if
the loans are impaired due to credit reasons, the fair value of collateral less
costs to sell. Risk adjusted discount
rates are selected using current rates at which similar loans would be made to
borrowers with similar characteristics, using similar types of properties as
collateral. The fair value of limited
partnership interests accounted for on the cost basis is determined using
reported net
asset
values of the underlying
funds. The fair value of bank loans,
which are reported in other
21
investments
on the Condensed Consolidated Statements of Financial Position, are valued
based on broker quotes from brokers familiar with the loans and current market
conditions.
Financial liabilities
($ in
millions)
|
|
March 31,
2010
|
|
December 31,
2009
|
|
|
|
Carrying
value
|
|
Fair
value
|
|
Carrying
value
|
|
Fair
value
|
|
Contractholder funds on investment contracts
|
$
|
39,290
|
$
|
38,179
|
$
|
40,943
|
$
|
39,328
|
|
Long-term debt
|
|
5,910
|
|
6,108
|
|
5,910
|
|
6,016
|
|
Liability for collateral
|
|
481
|
|
481
|
|
658
|
|
658
|
|
The fair value of contractholder
funds on investment contracts is based on the terms of the underlying contracts
utilizing prevailing market rates for similar contracts adjusted for credit
risk. Deferred annuities included in
contractholder funds are valued using discounted cash flow models which
incorporate market value margins, which are based on the cost of holding
economic capital, and the Companys own credit risk. Immediate annuities without life
contingencies and fixed rate funding agreements are valued at the present value
of future benefits using market implied interest rates which include the
Companys own credit risk.
The fair
value of long-term debt is based on market observable data (such as the fair
value of the debt when traded as an asset) or, in certain cases, is determined
using discounted cash flow
calculations
based on current interest
rates for instruments with comparable terms and considers the Companys own
credit risk. The liability for
collateral is valued at carrying value due to its short-term nature.
6. Derivative
Financial
Instruments
The Company primarily uses
derivatives for risk management and asset replication. In addition, the Company has derivatives
embedded in non-derivative host contracts, which are required to be separated
from the host contracts and accounted for at fair value as derivative
instruments. With the exception of
non-hedge derivatives used for asset replication and non-hedge embedded
derivatives, all of the Companys derivatives are evaluated for their ongoing
effectiveness as either accounting hedge or non-hedge derivative financial
instruments on at least a quarterly basis.
The Company does not use derivatives for trading purposes. Non-hedge accounting is generally used for portfolio
level hedging strategies where the terms of the individual hedged items do not
meet the strict homogeneity requirements to permit the application of hedge
accounting.
The Company primarily uses
derivatives to partially mitigate potential adverse impacts from changes in
risk-free interest rates, negative equity market valuations and increases in
credit spreads. Property-Liability uses
interest rate swaption contracts and exchange traded options on Treasury
futures to offset potential declining fixed income market values resulting from
potential rising interest rates.
Property-Liability also uses interest rate swaps to mitigate municipal
bond interest rate risk within the municipal bond portfolio. Exchange traded equity put options are
utilized by Property-Liability for overall equity portfolio protection from
significant declines in equity market values below a targeted level. Equity index futures are used by
Property-Liability to offset valuation losses in the equity portfolio during
periods of declining equity market values.
Credit default swaps are typically used to mitigate the credit risk
within the Property-Liability fixed income portfolio.
Portfolio duration
management
is a risk management strategy that is principally
employed by Property-Liability wherein, depending on the current portfolio
duration relative to a designated target and the expectations of future
interest rate movements, the Company uses financial futures and interest rate
swaps to change the duration of the portfolio in order to mitigate the economic
effect that interest rates would otherwise have on the fair value of its fixed
income securities.
Property-Liability
uses futures to hedge the market
risk related to deferred compensation liability contracts and forward contracts
to hedge foreign currency risk
.
Allstate
Financial uses foreign currency swaps primarily to reduce the foreign currency
risk associated with issuing foreign currency denominated funding agreements
and holding foreign currency denominated investments.
Credit default swaps are also typically used to mitigate the credit risk
within the Allstate Financial fixed income portfolio.
Asset-liability m
anagement is a risk
management strategy that is principally employed by Allstate Financial to
balance the respective interest-rate sensitivities of its assets and
liabilities. Depending upon the
attributes of the
22
assets
acquired
and liabilities issued, derivative instruments such as
interest rate swaps, caps, floors and futures are acquired to change the
interest rate characteristics of existing assets and liabilities to ensure the
relationship is maintained within specified ranges and to reduce exposure to
rising or
falling
interest rates. Allstate Financial uses financial futures and
interest rate swaps
to hedge
anticipated asset purchases and liability issuances
and financial futures and
options for hedging
the Companys
equity exposure contained in equity indexed annuity product contracts that
offer equity returns to contractholders
. In
addition, Allstate Financial uses interest rate swaps to hedge interest rate
risk inherent in funding agreements.
When derivatives
meet specific criteria, they may be designated as accounting hedges and
accounted for as fair value, cash flow, foreign currency fair value or foreign
currency cash flow hedges. Allstate
Financial designates certain of its interest rate and
foreign
currency
swap contracts and
certain investment risk transfer reinsurance agreements as fair value hedges
when the hedging instrument is highly effective in offsetting the risk of
changes in the fair value of the hedged item.
Allstate Financial designates certain of its foreign currency swap
contracts as cash flow hedges when the hedging instrument is highly effective
in offsetting the exposure of variations in cash flows for the hedged risk that
could affect net income. Amounts are
reclassified to net investment income or realized capital gains and losses as
the hedged item affects net income.
Asset replication refers
to the synthetic creation of assets through the use of derivatives and
primarily investment grade host bonds to replicate securities that are either
unavailable in the cash markets or more economical to acquire in synthetic
form. The Company replicates fixed
income securities using a combination of a credit default swap and one or more
highly rated fixed income securities to synthetically replicate the economic
characteristics of one or more cash market securities. The
Company also creates synthetic exposure to equity markets through the use of
exchange traded equity index future contracts and an investment grade host
bond.
The Companys primary embedded
derivatives
are
conversion
options in fixed income securities, which provide the Company with the right to
convert the instrument into a predetermined number of shares of common stock;
equity options in Allstate Financial annuity product contracts, which provide
equity returns to contractholders; and equity-indexed notes containing equity
call options, which provide a coupon payout that is determined using one or
more equity-based indices.
The notional amounts specified in
the contracts
are
used to calculate the exchange
of contractual payments under the agreements and are generally not
representative of the potential for gain or loss on these agreements. However, the notional amounts specified in
selling protection credit default swaps represent the maximum amount of
potential loss, assuming no recoveries.
Fair value, which is equal to the
carrying value, is the
estimated
amount
that the Company would receive (pay) to terminate the derivative contracts at
the reporting date. The carrying value
amounts for OTC derivatives have been further adjusted for the effects, if any,
of legally enforceable master netting agreements and are presented on a net
basis in the Condensed Consolidated Statements of Financial Position. For certain exchange traded derivatives, the
exchange requires margin deposits as well as daily cash settlements of margin
accounts. As of March 31, 2010, the
Company pledged $19 million of securities and cash in the form of margin
deposits.
The net impact to pre-tax income
for derivatives
includes
valuation
and settlements of derivatives. For
those derivatives which qualify for fair value hedge accounting, net income
includes the changes in the fair value of the hedged risk, and therefore
reflects any hedging ineffectiveness.
For cash flow hedges, gains and losses amortized from accumulated
other comprehensive
income are reported in net income. For
embedded derivatives in convertible fixed income securities and equity-indexed
notes, net income includes the change in fair value of the embedded derivative
and accretion income related to the host instrument. For non-hedge derivatives, net income
includes changes in fair value and accrued periodic settlements.
23
The following table
provides a summary of the volume
and fair value positions of derivative instruments as well as
their reporting location in the Condensed Consolidated Statements of Financial
Position at March 31, 2010.
($ in
millions, except number of contracts)
|
|
Asset
derivatives
|
|
|
|
|
|
Volume
(1)
|
|
|
|
|
|
|
|
|
|
Balance sheet location
|
|
Notional
amount
|
|
Number
of
contracts
|
|
Fair
value,
net
|
|
Gross
asset
|
|
Gross
liability
|
|
Derivatives designated as accounting hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
Other investments
|
$
|
63
|
|
n/a
|
$
|
(6)
|
$
|
--
|
$
|
(6)
|
|
Foreign currency swap agreements
|
|
Other investments
|
|
41
|
|
n/a
|
|
3
|
|
3
|
|
--
|
|
Foreign
currency and interest rate swap agreements
|
|
Other investments
|
|
288
|
|
n/a
|
|
28
|
|
28
|
|
--
|
|
Total
|
|
|
$
|
392
|
|
n/a
|
$
|
25
|
$
|
31
|
$
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap agreements
|
|
Other investments
|
$
|
1,457
|
|
n/a
|
$
|
36
|
$
|
45
|
$
|
(9)
|
|
Interest
rate swaption agreements
|
|
Other investments
|
|
4,000
|
|
n/a
|
|
12
|
|
12
|
|
--
|
|
Interest
rate cap and floor agreements
|
|
Other investments
|
|
251
|
|
n/a
|
|
5
|
|
5
|
|
--
|
|
Financial
futures contracts and options
|
|
Other investments
|
|
n/a
|
|
15,000
|
|
5
|
|
5
|
|
--
|
|
Equity and index contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options,
financial futures and warrants
(2)
|
|
Other investments
|
|
55
|
|
38,250
|
|
379
|
|
379
|
|
--
|
|
Options,
financial futures and warrants
|
|
Other assets
|
|
n/a
|
|
347
|
|
--
|
|
--
|
|
--
|
|
Foreign currency contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency swap agreements
|
|
Other investments
|
|
54
|
|
n/a
|
|
5
|
|
5
|
|
--
|
|
Foreign
currency forwards and options
|
|
Other investments
|
|
182
|
|
n/a
|
|
6
|
|
7
|
|
(1)
|
|
Embedded
derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion options in fixed income securities
|
|
Fixed income securities
|
|
903
|
|
n/a
|
|
298
|
|
303
|
|
(5)
|
|
Equity-indexed call options in fixed income
securities
|
|
Fixed income securities
|
|
475
|
|
n/a
|
|
85
|
|
85
|
|
--
|
|
Other embedded derivative financial instruments
|
|
Other investments
|
|
1,000
|
|
n/a
|
|
2
|
|
2
|
|
--
|
|
Credit default contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Default Swaps -- Buying Protection
|
|
Other investments
|
|
214
|
|
n/a
|
|
(4)
|
|
1
|
|
(5)
|
|
Credit Default Swaps -- Selling Protection
|
|
Other investments
|
|
294
|
|
n/a
|
|
(33)
|
|
--
|
|
(33)
|
|
Other
contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other contracts
|
|
Other investments
|
|
46
|
|
n/a
|
|
--
|
|
--
|
|
--
|
|
Other contracts
|
|
Other assets
|
|
6
|
|
n/a
|
|
2
|
|
2
|
|
--
|
|
Total
|
|
|
$
|
8,937
|
|
53,597
|
$
|
798
|
$
|
851
|
$
|
(53)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivative assets
|
|
|
$
|
9,329
|
|
53,597
|
$
|
823
|
$
|
882
|
$
|
(59)
|
|
(1)
|
Volume for OTC
derivative contracts is represented by their notional amounts. Volume for
exchange traded derivatives is represented by the number of contracts which
is the basis on which they are traded. (n/a = not applicable)
|
(2)
|
In addition to the number of
contracts presented in the table, the Company held 1,352,432 stock warrants.
Stock warrants can be converted to cash upon sale of those instruments or
exercised for shares of common stock.
|
24
($ in millions, except number of
contracts)
|
|
Liability
derivatives
|
|
|
|
|
|
Volume
(1)
|
|
|
|
|
|
|
|
|
|
Balance sheet location
|
|
Notional
amount
|
|
Number
of
contracts
|
|
Fair
value,
net
|
|
Gross
asset
|
|
Gross
liability
|
|
Derivatives designated as accounting hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
Other liabilities & accrued expenses
|
$
|
4,019
|
|
n/a
|
$
|
(214)
|
$
|
--
|
$
|
(214)
|
|
Foreign currency swap agreements
|
|
Other liabilities & accrued expenses
|
|
161
|
|
n/a
|
|
(17)
|
|
1
|
|
(18)
|
|
Foreign
currency and interest rate swap agreements
|
|
Other liabilities & accrued expenses
|
|
267
|
|
n/a
|
|
82
|
|
82
|
|
--
|
|
Foreign
currency and interest rate swap agreements
|
|
Contractholder funds
|
|
--
|
|
n/a
|
|
13
|
|
13
|
|
--
|
|
Total
|
|
|
$
|
4,447
|
|
n/a
|
$
|
(136)
|
$
|
96
|
$
|
(232)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
Other liabilities & accrued expenses
|
$
|
7,252
|
|
n/a
|
$
|
(7)
|
$
|
67
|
$
|
(74)
|
|
Interest rate swaption agreements
|
|
Other liabilities & accrued expenses
|
|
7,000
|
|
n/a
|
|
33
|
|
33
|
|
--
|
|
Interest rate cap and floor agreements
|
|
Other liabilities & accrued expenses
|
|
3,502
|
|
n/a
|
|
(29)
|
|
1
|
|
(30)
|
|
Financial futures contracts and options
|
|
Other liabilities & accrued expenses
|
|
n/a
|
|
727
|
|
--
|
|
--
|
|
--
|
|
Equity
and index contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options,
financial futures and warrants
|
|
Other liabilities & accrued expenses
|
|
60
|
|
20,747
|
|
(180)
|
|
3
|
|
(183)
|
|
Foreign
currency contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency swap agreements
|
|
Other liabilities & accrued expenses
|
|
49
|
|
n/a
|
|
3
|
|
3
|
|
--
|
|
Foreign currency forwards and options
|
|
Other liabilities & accrued expenses
|
|
193
|
|
n/a
|
|
--
|
|
4
|
|
(4)
|
|
Embedded
derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed accumulation benefits
|
|
Contractholder funds
|
|
1,125
|
|
n/a
|
|
(56)
|
|
--
|
|
(56)
|
|
Guaranteed withdrawal benefits
|
|
Contractholder funds
|
|
808
|
|
n/a
|
|
(32)
|
|
--
|
|
(32)
|
|
Equity-indexed options in life and annuity product
contracts
|
|
Contractholder funds
|
|
4,282
|
|
n/a
|
|
(220)
|
|
--
|
|
(220)
|
|
Other embedded derivative financial instruments
|
|
Contractholder funds
|
|
85
|
|
n/a
|
|
(2)
|
|
--
|
|
(2)
|
|
Credit
default contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Default Swaps -- Buying Protection
|
|
Other liabilities & accrued expenses
|
|
758
|
|
n/a
|
|
(15)
|
|
6
|
|
(21)
|
|
Credit Default Swaps -- Selling Protection
|
|
Other liabilities & accrued expenses
|
|
672
|
|
n/a
|
|
(39)
|
|
8
|
|
(47)
|
|
Total
|
|
|
$
|
25,786
|
|
21,474
|
$
|
(544)
|
$
|
125
|
$
|
(669)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivative liabilities
|
|
|
$
|
30,233
|
|
21,474
|
$
|
(680)
|
$
|
221
|
$
|
(901)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives
|
|
|
$
|
39,562
|
|
75,071
|
$
|
143
|
|
|
|
|
|
(1)
|
Volume for OTC derivative
contracts is represented by their notional amounts. Volume for exchange
traded derivatives is represented by the number of contracts which is the
basis on which they are traded. (n/a = not applicable)
|
25
The following
table provides a summary of the volume
and fair value positions of derivative instruments as well as
their reporting location in the Consolidated Statements of Financial Position
at December 31, 2009.
($ in
millions, except number of contracts)
|
|
Asset
derivatives
|
|
|
|
|
|
Volume
(1)
|
|
|
|
|
|
|
|
|
|
Balance sheet location
|
|
Notional
amount
|
|
Number
of
contracts
|
|
Fair
value,
net
|
|
Gross
asset
|
|
Gross
liability
|
|
Derivatives designated as accounting hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
Other investments
|
$
|
45
|
|
n/a
|
$
|
(3)
|
$
|
--
|
$
|
(3)
|
|
Foreign currency swap agreements
|
|
Other investments
|
|
23
|
|
n/a
|
|
(2)
|
|
--
|
|
(2)
|
|
Total
|
|
|
$
|
68
|
|
n/a
|
$
|
(5)
|
$
|
--
|
$
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as accounting hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap agreements
|
|
Other investments
|
$
|
1,206
|
|
n/a
|
$
|
49
|
$
|
62
|
$
|
(13)
|
|
Interest
rate swaption agreements
|
|
Other investments
|
|
8,500
|
|
n/a
|
|
95
|
|
95
|
|
--
|
|
Interest
rate cap and floor agreements
|
|
Other investments
|
|
52
|
|
n/a
|
|
2
|
|
2
|
|
--
|
|
Financial
futures contracts and options
|
|
Other investments
|
|
n/a
|
|
30,000
|
|
12
|
|
12
|
|
--
|
|
Financial
futures contracts and options
|
|
Other assets
|
|
n/a
|
|
404
|
|
--
|
|
--
|
|
--
|
|
Equity and index contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options,
financial futures and warrants
(2)
|
|
Other investments
|
|
62
|
|
43,850
|
|
435
|
|
435
|
|
--
|
|
Options,
financial futures and warrants
|
|
Other assets
|
|
n/a
|
|
102
|
|
--
|
|
--
|
|
--
|
|
Foreign currency contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency swap agreements
|
|
Other investments
|
|
53
|
|
n/a
|
|
1
|
|
1
|
|
--
|
|
Foreign
currency forwards and options
|
|
Other investments
|
|
476
|
|
n/a
|
|
5
|
|
8
|
|
(3)
|
|
Embedded
derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion options in fixed income securities
|
|
Fixed income securities
|
|
936
|
|
n/a
|
|
312
|
|
316
|
|
(4)
|
|
Equity-indexed call options in fixed income
securities
|
|
Fixed income securities
|
|
475
|
|
n/a
|
|
89
|
|
89
|
|
--
|
|
Other embedded derivative financial instruments
|
|
Other investments
|
|
1,000
|
|
n/a
|
|
2
|
|
2
|
|
--
|
|
Credit default contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Default Swaps -- Buying Protection
|
|
Other investments
|
|
329
|
|
n/a
|
|
(6)
|
|
2
|
|
(8)
|
|
Credit Default Swaps -- Selling Protection
|
|
Other investments
|
|
93
|
|
n/a
|
|
(8)
|
|
2
|
|
(10)
|
|
Other
contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other contracts
|
|
Other investments
|
|
75
|
|
n/a
|
|
--
|
|
--
|
|
--
|
|
Other contracts
|
|
Other assets
|
|
6
|
|
n/a
|
|
2
|
|
2
|
|
--
|
|
Total
|
|
|
$
|
13,263
|
|
74,356
|
$
|
990
|
$
|
1,028
|
$
|
(38)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivative assets
|
|
|
$
|
13,331
|
|
74,356
|
$
|
985
|
$
|
1,028
|
$
|
(43)
|
|
(1)
|
Volume for OTC
derivative contracts is represented by their notional amounts. Volume for
exchange traded derivatives is represented by the number of contracts which
is the basis on which they are traded. (n/a = not applicable)
|
(2)
|
In addition to the number of
contracts presented in the table, the Company held 101,255 stock rights and
1,352,432 stock warrants. Stock rights and stock warrants can be converted to
cash upon sale of those instruments or exercised for shares of common stock.
|
26
($ in millions, except number of contracts)
|
|
Liability derivatives
|
|
|
|
|
|
Volume
(1)
|
|
|
|
|
|
|
|
|
|
Balance sheet location
|
|
Notional
amount
|
|
Number
of
contracts
|
|
Fair
value,
net
|
|
Gross
asset
|
|
Gross
liability
|
|
Derivatives designated as accounting hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
Other liabilities & accrued expenses
|
$
|
2,443
|
|
n/a
|
$
|
(230)
|
$
|
--
|
$
|
(230)
|
|
Foreign currency swap agreements
|
|
Other liabilities & accrued expenses
|
|
179
|
|
n/a
|
|
(18)
|
|
3
|
|
(21)
|
|
Foreign
currency and interest rate swap agreements
|
|
Other liabilities & accrued expenses
|
|
870
|
|
n/a
|
|
231
|
|
231
|
|
--
|
|
Foreign
currency and interest rate swap agreements
|
|
Contractholder funds
|
|
--
|
|
n/a
|
|
44
|
|
44
|
|
--
|
|
Total
|
|
|
$
|
3,492
|
|
n/a
|
$
|
27
|
$
|
278
|
$
|
(251)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
Other liabilities & accrued expenses
|
$
|
6,187
|
|
n/a
|
$
|
28
|
$
|
68
|
$
|
(40)
|
|
Interest rate swaption agreements
|
|
Other liabilities & accrued expenses
|
|
2,000
|
|
n/a
|
|
34
|
|
34
|
|
--
|
|
Interest rate cap and floor agreements
|
|
Other liabilities & accrued expenses
|
|
3,896
|
|
n/a
|
|
(16)
|
|
9
|
|
(25)
|
|
Equity
and index contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options,
financial futures and warrants
|
|
Other liabilities & accrued expenses
|
|
45
|
|
21,098
|
|
(214)
|
|
3
|
|
(217)
|
|
Foreign
currency contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency swap agreements
|
|
Other liabilities & accrued expenses
|
|
54
|
|
n/a
|
|
3
|
|
3
|
|
--
|
|
Foreign currency forwards and options
|
|
Other liabilities & accrued expenses
|
|
185
|
|
n/a
|
|
2
|
|
2
|
|
--
|
|
Embedded
derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed accumulation benefits
|
|
Contractholder funds
|
|
1,113
|
|
n/a
|
|
(66)
|
|
--
|
|
(66)
|
|
Guaranteed withdrawal benefits
|
|
Contractholder funds
|
|
810
|
|
n/a
|
|
(41)
|
|
--
|
|
(41)
|
|
Equity-indexed options in life and annuity product
contracts
|
|
Contractholder funds
|
|
4,321
|
|
n/a
|
|
(217)
|
|
--
|
|
(217)
|
|
Other embedded derivative financial instruments
|
|
Contractholder funds
|
|
85
|
|
n/a
|
|
(3)
|
|
--
|
|
(3)
|
|
Credit
default contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Default Swaps -- Buying Protection
|
|
Other liabilities & accrued expenses
|
|
839
|
|
n/a
|
|
(40)
|
|
5
|
|
(45)
|
|
Credit Default Swaps -- Selling Protection
|
|
Other liabilities & accrued expenses
|
|
1,195
|
|
n/a
|
|
(65)
|
|
7
|
|
(72)
|
|
Total
|
|
|
$
|
20,730
|
|
21,098
|
$
|
(595)
|
$
|
131
|
$
|
(726)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivative liabilities
|
|
|
$
|
24,222
|
|
21,098
|
$
|
(568)
|
$
|
409
|
$
|
(977)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives
|
|
|
$
|
37,553
|
|
95,454
|
$
|
417
|
|
|
|
|
|
(1)
|
Volume for OTC derivative
contracts is represented by their notional amounts. Volume for exchange
traded derivatives is represented by the number of contracts which is the
basis on which they are traded. (n/a = not applicable)
|
The following table provides a
summary of the
impacts
of the Companys foreign
currency contracts in cash flow hedging relationships in the Condensed
Consolidated Statements of Operations and the Condensed Consolidated Statements
of Financial Position for the three-month periods ended March 31. Amortization of net gains from accumulated
other comprehensive income related to cash flow hedges is expected to be less
than $1 million during the next twelve months.
($ in millions)
Effective
portion
|
|
2010
|
|
2009
|
|
Gain recognized in OCI on derivatives during the
period
|
$
|
6
|
$
|
4
|
|
(Loss) gain recognized in OCI on derivatives during
the term of the hedging relationship
|
$
|
(18)
|
$
|
20
|
|
Gain reclassified from AOCI into income (net
investment income)
|
$
|
1
|
$
|
1
|
|
Gain reclassified from AOCI into income (realized
capital gains and losses)
|
$
|
--
|
$
|
--
|
|
Ineffective portion and amount excluded from
effectiveness testing
|
|
|
|
|
|
Gain recognized in income on derivatives (realized
capital gains and losses)
|
$
|
--
|
$
|
--
|
|
27
The
following table presents gains and losses from valuation, settlements and hedge
ineffectiveness reported on derivatives used in fair value hedging
relationships and derivatives not designated as accounting hedging instruments
in the Condensed Consolidated Statements of Operations.
($ in millions)
|
|
Three
months ended March 31, 2010
|
|
|
Net
investment
income
|
|
Realized
capital
gains and
losses
|
|
Life and
annuity
contract
benefits
|
|
Interest
credited to
contractholder
funds
|
|
Operating
costs and
expenses
|
|
Total
gain
(loss)
recognized
in net
income on
derivatives
|
Derivatives in fair value accounting hedging
relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
(41)
|
$
|
--
|
$
|
--
|
$
|
(1)
|
$
|
--
|
$
|
(42)
|
Foreign
currency and interest rate contracts
|
|
--
|
|
--
|
|
--
|
|
(24)
|
|
--
|
|
(24)
|
Subtotal
|
|
(41)
|
|
--
|
|
--
|
|
(25)
|
|
--
|
|
(66)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
contracts
|
|
--
|
|
(156)
|
|
--
|
|
--
|
|
--
|
|
(156)
|
Equity and
index contracts
|
|
--
|
|
(39)
|
|
--
|
|
34
|
|
6
|
|
1
|
Embedded
derivative financial instruments
|
|
--
|
|
(13)
|
|
20
|
|
(2)
|
|
--
|
|
5
|
Foreign
currency contracts
|
|
--
|
|
17
|
|
--
|
|
--
|
|
(5)
|
|
12
|
Credit
default contracts
|
|
--
|
|
6
|
|
--
|
|
--
|
|
--
|
|
6
|
Subtotal
|
|
--
|
|
(185)
|
|
20
|
|
32
|
|
1
|
|
(132)
|
Total
|
$
|
(41)
|
$
|
(185)
|
$
|
20
|
$
|
7
|
$
|
1
|
$
|
(198)
|
|
|
Three months ended March 31, 2009
|
|
|
Net
investment
income
|
|
Realized
capital
gains and
losses
|
|
Life and
annuity
contract
benefits
|
|
Interest
credited to
contractholder
funds
|
|
Operating
costs and
expenses
|
|
Total
gain
(loss)
recognized
in net
income on
derivatives
|
Derivatives in fair value accounting hedging
relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
7
|
$
|
4
|
$
|
--
|
$
|
(12)
|
$
|
--
|
$
|
(1)
|
Foreign
currency and interest rate contracts
|
|
--
|
|
(1)
|
|
--
|
|
(30)
|
|
--
|
|
(31)
|
Subtotal
|
|
7
|
|
3
|
|
--
|
|
(42)
|
|
--
|
|
(32)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as accounting hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
contracts
|
|
--
|
|
39
|
|
--
|
|
--
|
|
--
|
|
39
|
Equity and
index contracts
|
|
--
|
|
47
|
|
--
|
|
(23)
|
|
(13)
|
|
11
|
Embedded
derivative financial instruments
|
|
--
|
|
(23)
|
|
(23)
|
|
(14)
|
|
--
|
|
(60)
|
Foreign
currency contracts
|
|
--
|
|
1
|
|
--
|
|
--
|
|
--
|
|
1
|
Credit
default contracts
|
|
--
|
|
28
|
|
--
|
|
--
|
|
--
|
|
28
|
Subtotal
|
|
--
|
|
92
|
|
(23)
|
|
(37)
|
|
(13)
|
|
19
|
Total
|
$
|
7
|
$
|
95
|
$
|
(23)
|
$
|
(79)
|
$
|
(13)
|
$
|
(13)
|
28
The
following table provides a summary of the changes in fair value of the Companys
fair value hedging relationships in the Condensed Consolidated
Statements
of Operations.
($ in millions)
|
|
Three months ended March 31, 2010
|
|
|
Gain (loss) on derivatives
|
|
Gain (loss) on hedged risk
|
Location of gain or (loss) recognized
in net income on derivatives
|
|
Interest
rate
contracts
|
|
Foreign
currency &
interest rate
contracts
|
|
Contractholder
funds
|
|
Investments
|
Interest
credited to contractholder funds
|
$
|
(1)
|
|
$
|
(33)
|
|
$
|
34
|
|
$
|
--
|
Net investment income
|
|
(13)
|
|
|
--
|
|
|
--
|
|
|
13
|
Realized capital gains and losses
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
Total
|
$
|
(14)
|
|
$
|
(33)
|
|
$
|
34
|
|
$
|
13
|
|
|
Three months ended March 31, 2009
|
|
|
Gain (loss) on derivatives
|
|
Gain (loss) on hedged risk
|
Location of gain or (loss) recognized
in net income on derivatives
|
|
Interest
rate
contracts
|
|
Foreign
currency &
interest rate
contracts
|
|
Contractholder
funds
|
|
Investments
|
Interest credited to
contractholder funds
|
$
|
(26)
|
|
$
|
(35)
|
|
$
|
61
|
|
$
|
--
|
Net investment
income
|
|
40
|
|
|
--
|
|
|
--
|
|
|
(40)
|
Realized capital
gains and losses
|
|
4
|
|
|
(1)
|
|
|
--
|
|
|
--
|
Total
|
$
|
18
|
|
$
|
(36)
|
|
$
|
61
|
|
$
|
(40)
|
The Company manages its exposure to
credit risk by utilizing highly rated counterparties, establishing risk control
limits, executing legally enforceable master netting agreements (MNAs) and
obtaining collateral where appropriate.
The Company uses MNAs for OTC derivative transactions, including
interest rate swap, foreign currency swap, interest rate cap, interest rate
floor, credit default swap, forward and certain option agreements (including
swaptions). These agreements permit
either party to net payments due for transactions covered by the
agreements. Under the provisions of the
agreements, collateral is either pledged or obtained when certain predetermined
exposure limits are exceeded. As of March 31,
2010, counterparties pledged $38 million in cash and $5 million in securities
to the Company, and the Company pledged $4 million in cash and $192 million in
securities to counterparties which includes $140 million of collateral posted
under MNAs for contracts containing credit-risk-contingent provisions that are
in a liability position and $56 million of collateral posted under MNAs for
contracts without credit-risk-contingent liabilities. The Company has not incurred any losses on
derivative financial instruments due to counterparty nonperformance. Other derivatives including futures and
certain option contracts are traded on organized exchanges, which require
margin deposits and guarantee the execution of trades, thereby mitigating any
potential credit risk associated with transactions executed on organized
exchanges.
Counterparty credit exposure
represents the Companys potential loss if all of the counterparties
concurrently fail to perform under the contractual terms of the contracts and
all collateral, if any, becomes worthless.
This exposure is measured by the fair value of OTC derivative contracts
with a positive fair value at the reporting date reduced by the effect, if any,
of legally enforceable master netting agreements.
The
following table summarizes the
counterparty
credit exposure by
counterparty credit rating as it relates to interest rate
swap
, foreign currency swap, interest rate cap, interest rate
floor, credit default swap, forward and certain option agreements (including
swaptions).
|
($ in millions)
|
|
March 31, 2010
|
|
December 31, 2009
|
|
Rating
(1)
|
|
Number
of
counter-
parties
|
|
Notional
amount
(2)
|
|
Credit
exposure
(2)
|
|
Exposure,
net of
collateral
(2)
|
|
Number
of
counter-
parties
|
|
Notional
amount
(2)
|
|
Credit
exposure
(2)
|
|
Exposure,
net of
collateral
(2)
|
|
AA-
|
|
3
|
|
$
|
5,725
|
|
$
|
33
|
|
$
|
16
|
|
|
2
|
|
$
|
3,269
|
|
$
|
26
|
|
$
|
1
|
|
|
A+
|
|
2
|
|
|
6,482
|
|
|
23
|
|
|
3
|
|
|
5
|
|
|
12,359
|
|
|
204
|
|
|
57
|
|
|
A
|
|
3
|
|
|
4,192
|
|
|
14
|
|
|
11
|
|
|
3
|
|
|
2,551
|
|
|
62
|
|
|
30
|
|
|
A-
|
|
1
|
|
|
115
|
|
|
25
|
|
|
25
|
|
|
1
|
|
|
145
|
|
|
23
|
|
|
23
|
|
|
Total
|
|
9
|
|
$
|
16,514
|
|
$
|
95
|
|
$
|
55
|
|
|
11
|
|
$
|
18,324
|
|
$
|
315
|
|
$
|
111
|
|
(1)
Rating is the lower of S&P or Moodys ratings.
(2)
Only OTC derivatives with a net positive fair value
are included for each counterparty.
Market risk
is the risk that the Company will incur losses due to adverse changes in market
rates and prices. Market risk exists for
all of the derivative financial instruments the Company currently holds, as
these instruments
29
may
become less valuable due to adverse changes in market conditions. To limit this risk, the Companys senior
management has established risk control limits.
In addition, changes in fair value of the derivative financial
instruments that the Company uses for risk management purposes are generally
offset by the change in the fair value or cash flows of the hedged risk
component of the related assets, liabilities or forecasted transactions.
Certain
of the Companys derivative instruments contain credit-risk-contingent
termination events, cross-default provisions and credit support annex
agreements. Credit-risk-contingent
termination events allow the counterparties to terminate the derivative on
certain dates if AICs, ALICs or
Allstate Life Insurance Company of New Yorks (ALNY)
financial strength credit
ratings by Moodys or S&P fall below a certain level or in the event AIC,
ALIC or ALNY are no longer rated by both Moodys and S&P.
Credit-risk-contingent cross-default provisions allow the counterparties to
terminate the derivative instruments if the Company defaults by pre-determined
threshold amounts on certain debt instruments.
Credit-risk-contingent credit support annex agreements
specify the amount of collateral the Company
must
post to counterparties based on
AICs, ALICs or ALNY
s financial strength credit ratings by Moodys or
S&P, or in the event AIC, ALIC or ALNY are no longer rated by both Moodys
and S&P.
The following summarizes the fair
value of
derivative instruments
with
termination, cross-default or collateral credit-risk-contingent features that
are in a liability position, as well as the fair value of assets and collateral
that are netted against the liability in accordance with provisions within
legally enforceable MNAs.
($ in
millions)
|
|
March
31, 2010
|
|
December
31, 2009
|
|
Gross liability fair value
of contracts containing credit-risk-contingent features
|
$
|
411
|
$
|
429
|
|
Gross asset fair value of contracts containing
credit-risk-contingent features and subject to MNAs
|
|
(231)
|
|
(265)
|
|
Collateral posted under
MNAs for contracts containing credit-risk-contingent features
|
|
(140)
|
|
(122)
|
|
Maximum amount of
additional exposure for contracts with credit-risk-contingent features if all
features were triggered concurrently
|
$
|
40
|
$
|
42
|
|
Credit derivatives - selling protection
Credit
default swaps (CDS)
are
utilized for selling credit protection against a specified credit event. A credit default swap is a derivative
instrument, representing an agreement between two parties to exchange the
credit risk of a specified entity (or a group of entities), or an index based
on the credit risk of a group of entities (all commonly referred to as the reference
entity or a portfolio of reference
entities
),
for a periodic premium. In selling
protection, CDS
are
used to replicate fixed income
securities and to complement the cash market when credit exposure to certain
issuers is not available or when the derivative alternative is less expensive
than the cash market alternative. CDS
typically have a five-year term.
30
The following table shows the CDS
notional amounts by credit rating and fair value of protection sold as of March 31,
2010:
($ in
millions)
|
|
Notional
amount
|
|
|
|
|
|
AA
|
|
A
|
|
BBB
|
|
BB
and
lower
|
|
Total
|
|
Fair
value
|
|
Single name
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade
corporate debt
|
$
|
55
|
$
|
134
|
$
|
121
|
$
|
30
|
$
|
340
|
$
|
(9)
|
|
High yield debt
|
|
--
|
|
--
|
|
--
|
|
16
|
|
16
|
|
(1)
|
|
Municipal
|
|
165
|
|
--
|
|
--
|
|
--
|
|
165
|
|
(9)
|
|
Subtotal
|
|
220
|
|
134
|
|
121
|
|
46
|
|
521
|
|
(19)
|
|
Baskets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade
corporate debt
|
|
--
|
|
--
|
|
--
|
|
65
|
|
65
|
|
(28)
|
|
First-to-default
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade
corporate debt
|
|
--
|
|
15
|
|
15
|
|
--
|
|
30
|
|
--
|
|
Municipal
|
|
--
|
|
100
|
|
--
|
|
--
|
|
100
|
|
(28)
|
|
Subtotal
|
|
--
|
|
115
|
|
15
|
|
65
|
|
195
|
|
(56)
|
|
Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade
corporate debt
|
|
6
|
|
66
|
|
170
|
|
8
|
|
250
|
|
3
|
|
Total
|
$
|
226
|
$
|
315
|
$
|
306
|
$
|
119
|
$
|
966
|
$
|
(72)
|
|
The following table shows the CDS
notional amounts by credit rating and fair value of protection sold as of December 31,
2009:
($ in millions)
|
|
Notional amount
|
|
|
|
|
|
AA
|
|
A
|
|
BBB
|
|
BB and
lower
|
|
Total
|
|
Fair
value
|
|
Single name
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade corporate debt
|
$
|
63
|
$
|
86
|
$
|
84
|
$
|
30
|
$
|
263
|
$
|
(12)
|
|
High yield debt
|
|
--
|
|
--
|
|
--
|
|
10
|
|
10
|
|
--
|
|
Municipal
|
|
135
|
|
--
|
|
--
|
|
--
|
|
135
|
|
(10)
|
|
Subtotal
|
|
198
|
|
86
|
|
84
|
|
40
|
|
408
|
|
(22)
|
|
Baskets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade corporate debt
|
|
--
|
|
--
|
|
--
|
|
65
|
|
65
|
|
(27)
|
|
First-to-default
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade corporate debt
|
|
--
|
|
45
|
|
15
|
|
--
|
|
60
|
|
--
|
|
Municipal
|
|
20
|
|
135
|
|
--
|
|
--
|
|
155
|
|
(28)
|
|
Subtotal
|
|
20
|
|
180
|
|
15
|
|
65
|
|
280
|
|
(55)
|
|
Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade corporate debt
|
|
14
|
|
159
|
|
408
|
|
19
|
|
600
|
|
4
|
|
Total
|
$
|
232
|
$
|
425
|
$
|
507
|
$
|
124
|
$
|
1,288
|
$
|
(73)
|
|
In selling protection with CDS, the
Company sells credit protection on an identified single name, a basket of names
in a first-to-default (FTD) structure or a specific tranche of a basket, or
credit derivative index (CDX) that is generally investment grade, and in
return receives periodic premiums through expiration or termination of the
agreement. With single name CDS, this
premium or credit spread generally corresponds to the difference between the
yield on the referenced entitys public fixed maturity cash instruments and
swap rates, at the time the agreement
31
is executed. With a FTD basket or a tranche of a basket,
because of the additional credit risk inherent in a basket of named credits,
the premium generally corresponds to a high proportion of the sum of the credit
spreads of the names in the basket and the correlation between the names. CDX index is
utilized to take a position on
multiple (generally 125) reference entities.
Credit events are typically
defined as bankruptcy, failure to pay, or restructuring, depending on the
nature of the reference credit. If a
credit event occurs, the Company settles with the counterparty, either through
physical settlement or cash settlement.
In a physical settlement, a reference asset is delivered by the buyer of
protection to the Company, in exchange for cash payment at par, whereas in a
cash settlement, the Company pays the difference between par and the prescribed
value of the reference asset. When a
credit event occurs in a single name or FTD basket (for FTD, the first credit
event occurring for any one name in the basket), the contract terminates at
time of settlement. When a credit event occurs in a tranche of a basket, there
is no immediate impact to the Company until cumulative losses in the basket
exceed the contractual subordination. To
date, realized losses have not exceeded the subordination. For CDX index, the reference entitys name
incurring the credit event is removed from the index while the contract
continues until expiration. The maximum
payout on a CDS is the contract notional amount. A physical settlement may afford the Company
with recovery rights as the new owner of the asset.
The Company monitors risk
associated with credit derivatives through individual name credit limits at both
a credit derivative and a combined cash instrument/credit derivative
level. The ratings of individual names
for which protection has been sold are also monitored.
7. 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 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 insurance claims and claims expense, net of
reinsurance recoverables, is appropriately established in the aggregate and
adequate to cover the ultimate net cost of reported and unreported claims
arising from losses which had occurred by the date of the Condensed
Consolidated Statements of Financial Position based on available facts,
technology, laws and regulations.
8. Reinsurance
Property-liability insurance
premiums earned and life and annuity premiums and contract charges have been
reduced by the reinsurance premium ceded amounts shown in the following table:
($ in millions)
|
|
Three
months ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Property-liability
insurance premiums earned
|
$
|
268
|
$
|
265
|
|
Life
and annuity premiums and contract charges
|
|
191
|
|
204
|
|
32
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.
($ in millions)
|
|
Three
months ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Property-liability
insurance claims and claims expense
|
$
|
80
|
$
|
111
|
|
Life and annuity
contract benefits
|
|
130
|
|
461
|
|
Interest credited to
contractholder funds
|
|
7
|
|
6
|
|
9.
Company
Restructuring
The Company undertakes various
programs to reduce expenses. These
programs generally involve a reduction in staffing levels, and in certain
cases, office closures.
Restructuring and related
charges include employee termination and relocation benefits, and
post
-exit rent expenses in connection with these programs, and
non-cash charges resulting from pension benefit payments made to agents in
connection with the 1999 reorganization of Allstates multiple agency programs
to a single exclusive agency program. In
the first quarter of 2010, restructuring programs primarily relate to Allstate
Protections claim office consolidations and realignment of litigation
services. The expenses related to these
activities are included in the Condensed Consolidated Statements of Operations
as restructuring and related charges, and totaled $11 million and $45 million
during the three-month period ended March 31, 2010 and 2009, respectively.
The following table presents
changes
in the
restructuring
liability during the
three-month period ended March 31, 2010.
($ in millions)
|
|
Employee
costs
|
|
Exit
costs
|
|
Total
liability
|
|
Balance at December 31, 2009
|
$
|
45
|
$
|
6
|
$
|
51
|
|
Expense incurred
|
|
8
|
|
--
|
|
8
|
|
Adjustments to liability
|
|
(5)
|
|
--
|
|
(5)
|
|
Payments applied against liability
|
|
(3)
|
|
(1)
|
|
(4)
|
|
Balance at March 31, 2010
|
$
|
45
|
$
|
5
|
$
|
50
|
|
The payments applied against the liability for employee
costs primarily reflect severance costs, and the payments for exit costs
generally consist of post-exit rent expenses and contract termination
penalties. As of March 31, 2010,
the cumulative amount incurred to date for active programs totaled $161 million
for employee costs and $45 million for exit costs.
10. Guarantees and
Contingent Liabilities
State facility assessments
The Company is required to
participate in assigned risk plans, reinsurance facilities and joint
underwriting associations in various states that provide insurance coverage to
individuals or entities that otherwise are unable to 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 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 $160 million at March 31,
33
2010. The obligations associated with these fixed
income securities expire at various dates during the next five years.
Related to the disposal through
reinsurance of substantially all of Allstate Financials variable annuity
business to The Prudential Insurance Company of America, a subsidiary of
Prudential Financial, Inc. (collectively Prudential) in 2006, the
Company and its consolidated subsidiaries, ALIC and ALNY, have agreed to
indemnify Prudential for certain pre-closing contingent liabilities (including
extra-contractual liabilities of ALIC and ALNY and liabilities specifically
excluded from the transaction) that ALIC and ALNY have agreed to retain. In addition, the Company, ALIC and ALNY will
each indemnify Prudential for certain post-closing liabilities that may arise
from the acts of ALIC, ALNY and their agents, including in connection with 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. Management does not believe this agreement
will have a material adverse effect on results of operations, cash flows or
financial position of the Company.
The Company provides residual value
guarantees on Company leased automobiles.
If all outstanding leases were terminated effective March 31, 2010,
the Companys maximum obligation pursuant to these guarantees, assuming the
automobiles have no residual value, would be $11 million at March 31,
2010. The remaining term of each residual
value guarantee is equal to the term of the underlying lease that ranges from
less than one year to three years.
Historically, the Company has not made any material payments pursuant to
these guarantees.
In the normal course of business,
the Company provides standard indemnifications to contractual counterparties in
connection with numerous transactions, including acquisitions and
divestitures. The types of
indemnifications typically provided include indemnifications for breaches of
representations and warranties, taxes and certain other liabilities, such as
third party lawsuits. The
indemnification clauses are often standard contractual terms and are entered
into in the normal course of business based on an assessment that the risk of
loss would be remote. The terms of the
indemnifications vary in duration and nature.
In many cases, the maximum obligation is not explicitly stated and the
contingencies triggering the obligation to indemnify have not occurred and are
not expected to occur. Consequently, the
maximum amount of the obligation under such indemnifications is not
determinable. Historically, the Company has not made any material payments
pursuant to these obligations.
The aggregate liability balance
related to all guarantees was not material as of March 31, 2010.
Regulation and Compliance
The Company is subject to changing
social, economic and regulatory conditions.
From time to time, regulatory authorities or legislative bodies seek to
influence and restrict premium rates, require premium refunds to policyholders,
require reinstatement of terminated policies, restrict the ability of insurers
to cancel or non-renew policies, require insurers to continue to write new
policies or limit their ability to write new policies, limit insurers ability
to change coverage terms or to impose underwriting standards, impose additional
regulations regarding agent and broker compensation, and otherwise expand
overall regulation of insurance products and the insurance industry. The Company has established procedures and
policies to facilitate compliance with laws and regulations, to foster prudent
business operations, and to support financial reporting. The Company routinely reviews its practices
to validate compliance with laws and regulations and with internal procedures
and policies. As a result of these
reviews, from time to time the Company may decide to modify some of its
procedures and policies. Such
modifications, and the reviews that led to them, may be accompanied by payments
being made and costs being incurred. The
ultimate changes and eventual effects of these actions on the Companys
business, if any, are uncertain.
A multi-state market conduct
examination of Allstates claims handling practices is in process and Florida,
Illinois, Iowa, and New York are serving as the lead states. The official notice of the examination was
issued by the Illinois Department of Insurance (formerly Illinois Division of
Insurance) on March 30, 2009.
34
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 multi-state class actions in which the applicable law(s) for
the claims at issue is in dispute and therefore unclear; and the current
challenging legal environment faced by large corporations and insurance
companies.
·
The outcome of these matters may be affected by
decisions
, verdicts, and settlements, and the
timing of such decisions, verdicts, and
settlements
, in other
individual
and class action lawsuits that involve
the Company, other insurers, or other entities and by other legal,
governmental, and regulatory actions that involve the Company, other insurers,
or other entities. The outcome may also be affected by future state or federal
legislation, the timing or substance of which cannot be predicted.
·
In the lawsuits, plaintiffs
seek a
variety
of
remedies
including equitable relief
in the form of injunctive and other remedies and monetary relief in the form of
contractual and extra-contractual damages.
In some cases, the monetary damages sought 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 appropriate accounting guidance when making accrual
and disclosure decisions. When assessing
reasonably possible and probable outcomes, the Company bases its decisions on
its assessment of the ultimate outcome following all appeals.
·
Due to the complexity and
scope of the matters
disclosed
in the 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, if any,
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 extra-contractual damages. The Company denies these allegations and
continues to vigorously defend the pending lawsuits. Management believes that
the
35
ultimate liability arising from
these lawsuits 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.
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
discovery stage and Allstate is vigorously defending it.
The Company is vigorously defending
a number of matters filed in the aftermath of Hurricane Katrina, including
individual lawsuits and two statewide putative class actions in Louisiana. These matters are in various stages of
development. The lawsuits and
developments in litigation arising from the hurricanes include the following:
·
The Company has 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 (GCOP)
or that the GCOP they received was not adequate to compensate them for the
entire costs of a general contractor.
The plaintiffs also alleged that Allstate incorrectly calculated
depreciation on property losses. The
Court granted partial summary judgment and dismissed the claim challenging the
method of calculating depreciation. In October 2008,
the Court heard plaintiffs motion to certify three subclasses: the first class
would impose a three trade rule meaning any time three or more trades are
reflected on the estimate, GCOP must be paid; the second class encompassed the
alleged miscalculation of GCOP when both general and specialty contractors are
involved; and the third class sought to impose on the Company statutory
penalties for its alleged breach of contract with regard to the first two
subclasses. At the October 2008
hearing, the Court denied plaintiffs motion on the certification of the first
and third subclasses referred to above.
The Court took under advisement the plaintiffs motion for certification
of the second subclass. On April 6,
2010, the Court issued its ruling denying plaintiffs motion to certify the
second subclass. Plaintiffs had until April 20,
2010 to file a petition for interlocutory appeal of the denial of class
certification and did not file by the end of that day. The case should now proceed at the trial
court on the named plaintiffs individual claims only. Once the trial court enters a final judgment
on plaintiffs individual claims (either as a result of a dispositive motion or
a trial on the merits), plaintiffs will have the right to appeal the trial
courts rulings, including the denial of class certification.
·
The Louisiana Attorney General filed a putative class
action lawsuit in state court against Allstate and other insurers on behalf of
Road Home fund recipients alleging that the insurers have failed to pay all
damages owed under their policies. The
insurers removed the matter to federal court.
The district court denied plaintiffs motion to remand the matter to
state court and the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit)
affirmed that ruling. The defendants
filed a motion to dismiss and the plaintiffs filed a motion to remand the
claims involving a Road Home subrogation agreement. In March 2009, the district court denied
the States request that its claims be remanded to state court. As for the defendant insurers motion, the
judge granted it in part and denied it in part.
Dismissal of all of the extra-contractual claims, including the bad
faith and breach of fiduciary duty claims, was granted. Dismissal also was granted of all claims
based on the Valued Policy Law and all flood loss claims based on the levee
breaches finding that the insurers flood exclusions precluded coverage. The remaining claims are for breach of
contract and for declaratory relief on the alleged underpayment of claims by
the insurers. The judge did not dismiss
the class action allegations. The
defendants also had moved to dismiss the complaint on grounds that the State
had no standing to bring the lawsuit as an assignee of insureds because of
anti-assignment language in the insurers policies. The judge denied the defendants motion for
reconsideration on the assignment issue but found the matter was ripe for
consideration by the federal appellate court.
The defendants have filed a petition for permission to appeal to the
Fifth Circuit. The Fifth Circuit has
accepted review. After the Fifth Circuit
accepted review, plaintiffs filed a motion to remand the case to state court,
asserting that the class claims on which federal jurisdiction was premised have
now effectively been dismissed as a result of a ruling in a related case. The Fifth Circuit has denied the motion for
remand, without prejudice to plaintiffs right to refile the motion for remand
after the Fifth Circuit disposes of the pending appeal. The Fifth Circuit has tentatively scheduled
oral argument during the week of July 5, 2010.
36
Allstate is vigorously defending a
lawsuit involving worker classification issues.
This lawsuit is a certified class action challenging a state wage and
hour law. In December 2009, the
liability phase of the case was tried and a decision is pending. In this case, plaintiffs seek monetary
relief, such as penalties and liquidated damages, and non-monetary relief, such
as injunctive relief.
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 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 U.S. Court of Appeals for the Third Circuit (Third Circuit) issued
an order in December 2007 stating that the notice of appeal was not taken
from a final order within the meaning of the federal law and thus not
appealable at this time. In March 2008,
the Third Circuit decided that the appeal should not summarily be dismissed and
that the question of whether the matter is appealable at this time will be
addressed by the Third Circuit along with the merits of the appeal. In July 2009, the Third Circuit vacated
the decision which granted the Companys summary judgment motions, remanded the
cases to the trial court for additional discovery, and directed that the cases
be reassigned to another trial court judge.
In January 2010, the cases were assigned to a new judge for further
proceedings in the trial court.
·
A putative nationwide class action has also
been filed by former employee agents alleging various violations of ERISA
, including a worker classification
issue. These plaintiffs are challenging
certain amendments to the Agents Pension Plan and are seeking to have exclusive
agent independent contractors treated as employees for benefit purposes.
This matter was dismissed
with
prejudice by the trial
court, was the subject of further proceedings on appeal, and was reversed and
remanded to the trial court in 2005. In June 2007,
the court granted the Companys motion to dismiss the case.
Following plaintiffs filing of a notice of appeal,
the U.S. Court of Appeals for the Third Circuit issued an order in December 2007
stating that the notice of appeal was not taken from a final order within the
meaning of the federal law and thus not appealable at this time. In March 2008,
the Third Circuit decided that the appeal should not summarily be dismissed and
that the question of whether the matter is appealable at this time will be
addressed by the Third Circuit along with the merits of the appeal. In July 2009, the Third Circuit vacated
the decision which granted the Companys motion to dismiss the case, remanded
the case to the trial court for additional discovery, and directed that the
case be reassigned to another trial court judge. In January 2010, the case was assigned
to a new judge for further proceedings in the trial court.
In 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.
In New Mexico, Allstate is defending a certified
class action challenging the method by which Allstate discloses installment
fees. The class members are limited to New Mexico policyholders based on the
trial courts acceptance of plaintiffs amended complaint. 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.
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
37
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.
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, if any, as they are resolved over time
is not likely to have a material effect on the operating results, cash flows or
financial position of the Company.
Shareholder demand letter
On April 16, 2009, Allstate
received the Service Employees International Union (SEIU) Pension Plans
Master Trusts shareholder demand for board action concerning the Companys
past executive compensation practices.
The Company believes that as many as 28 other companies may have
received similar letters from the SEIU.
The SEIU correspondence has been referred to Allstates Board of
Directors for its consideration and disposition.
Asbestos and environmental
Allstates reserves for asbestos
claims were $1.16 billion and $1.18 billion, net of reinsurance recoverables of
$587 million and $600 million, at March 31, 2010 and December 31,
2009, respectively. Reserves for
environmental claims were $197 million and $198 million, net of reinsurance
recoverables of $49 million and $49 million, at March 31, 2010 and December 31,
2009, respectively. Approximately 61% and 62% of the total net asbestos and
environmental reserves at March 31, 2010 and December 31, 2009,
respectively, were for incurred but not reported estimated losses.
Management believes its net loss
reserves for asbestos, environmental and other discontinued lines exposures are
appropriately established based on available facts, technology, laws and
regulations. However, establishing net
loss reserves for asbestos, environmental and other discontinued lines claims
is subject to uncertainties that are 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 collectability 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 clean-up 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.
38
11
. Income Taxes
A reconciliation of the statutory federal income tax
rate to the effective income tax rate on income from operations for the three
months ended March 31 is as follows:
($ in
millions)
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
federal income tax rate expense (benefit)
|
$
|
37
|
|
35.0 %
|
$
|
(46)
|
|
(35.0) %
|
|
Tax-exempt
income
|
|
(50)
|
|
(47.3)
|
|
(69)
|
|
(52.6)
|
|
Dividends
received deduction
|
|
(4)
|
|
(3.7)
|
|
(4)
|
|
(2.9)
|
|
(Increase) decrease in cash surrender value of
company-owned life insurance
|
|
(1)
|
|
(0.4)
|
|
4
|
|
3.2
|
|
State
income taxes
|
|
3
|
|
2.4
|
|
4
|
|
3.1
|
|
Other
|
|
2
|
|
1.7
|
|
--
|
|
--
|
|
Valuation allowance
|
|
--
|
|
--
|
|
254
|
|
193.6
|
|
Effective
income tax rate (benefit) expense
|
$
|
(13)
|
|
(12.3) %
|
$
|
143
|
|
109.4 %
|
|
Income tax expense for the first quarter of 2009 included expense of $254
million attributable to an increase in the valuation allowance relating to the
deferred tax asset on capital losses.
12
. Components of Net Periodic Pension and
Postretirement Benefit Costs
The components of net periodic cost
for the Companys pension and postretirement benefit plans are as follows:
($ in millions)
|
|
Three months ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Pension benefits
|
|
|
|
|
|
Service cost
|
$
|
38
|
$
|
32
|
|
Interest cost
|
|
80
|
|
82
|
|
Expected return on plan assets
|
|
(83)
|
|
(99)
|
|
Amortization of:
|
|
|
|
|
|
Prior service credit
|
|
(1)
|
|
(1)
|
|
Net actuarial loss
|
|
40
|
|
4
|
|
Settlement loss
|
|
13
|
|
16
|
|
Net periodic pension cost
|
$
|
87
|
$
|
34
|
|
|
|
|
|
|
|
Postretirement benefits
|
|
|
|
|
|
Service cost
|
$
|
3
|
$
|
4
|
|
Interest cost
|
|
10
|
|
14
|
|
Amortization of:
|
|
|
|
|
|
Prior service credit
|
|
(6)
|
|
--
|
|
Net actuarial gain
|
|
(5)
|
|
(8)
|
|
Net periodic postretirement cost
|
$
|
2
|
$
|
10
|
|
39
13. Business Segments
Summarized revenue data for each of
the Companys business segments are as follows:
($ in millions)
|
|
Three months ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Revenues
|
|
|
|
|
|
Property-Liability
|
|
|
|
|
|
Property-liability insurance premiums earned
|
|
|
|
|
|
Standard auto
|
$
|
4,137
|
$
|
4,164
|
|
Non-standard auto
|
|
234
|
|
246
|
|
Total auto
|
|
4,371
|
|
4,410
|
|
Homeowners
|
|
1,516
|
|
1,535
|
|
Other personal lines
|
|
616
|
|
638
|
|
Allstate Protection
|
|
6,503
|
|
6,583
|
|
Discontinued Lines and Coverages
|
|
--
|
|
(1)
|
|
Total property-liability insurance premiums earned
|
|
6,503
|
|
6,582
|
|
Net investment income
|
|
304
|
|
344
|
|
Realized capital gains and losses
|
|
(190)
|
|
(314)
|
|
Total Property-Liability
|
|
6,617
|
|
6,612
|
|
|
|
|
|
|
|
Allstate Financial
|
|
|
|
|
|
Life and annuity premiums and contract charges
|
|
|
|
|
|
Traditional life insurance
|
|
106
|
|
100
|
|
Immediate annuities with life contingencies
|
|
27
|
|
34
|
|
Accident and health
|
|
156
|
|
112
|
|
Total life and annuity premiums
|
|
289
|
|
246
|
|
Interest-sensitive life insurance
|
|
242
|
|
226
|
|
Fixed annuities
|
|
13
|
|
12
|
|
Total contract charges
|
|
255
|
|
238
|
|
Total life and annuity premiums and contract charges
|
|
544
|
|
484
|
|
Net investment income
|
|
731
|
|
819
|
|
Realized capital gains and losses
|
|
(162)
|
|
(43)
|
|
Total Allstate Financial
|
|
1,113
|
|
1,260
|
|
|
|
|
|
|
|
Corporate and Other
|
|
|
|
|
|
Service fees
|
|
3
|
|
3
|
|
Net investment income
|
|
15
|
|
13
|
|
Realized capital gains and losses
|
|
4
|
|
(2)
|
|
Total Corporate and Other before reclassification of service fees
|
|
22
|
|
14
|
|
Reclassification of service fees
(1)
|
|
(3)
|
|
(3)
|
|
Total Corporate and Other
|
|
19
|
|
11
|
|
Consolidated revenues
|
$
|
7,749
|
$
|
7,883
|
|
(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.
40
Summarized financial performance
data for each of the Companys reportable segments are as follows:
($ in millions)
|
|
Three months ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Net income
|
|
|
|
|
|
Property-Liability
|
|
|
|
|
|
Underwriting income
|
|
|
|
|
|
Allstate Protection
|
$
|
75
|
$
|
214
|
|
Discontinued Lines and Coverages
|
|
(4)
|
|
(6)
|
|
Total underwriting income
|
|
71
|
|
208
|
|
Net investment income
|
|
304
|
|
344
|
|
Income tax expense on operations
|
|
(88)
|
|
(136)
|
|
Realized capital gains and losses, after-tax
|
|
(123)
|
|
(316)
|
|
Property-Liability net income
|
|
164
|
|
100
|
|
|
|
|
|
|
|
Allstate Financial
|
|
|
|
|
|
Life and annuity premiums and contract charges
|
|
544
|
|
484
|
|
Net investment income
|
|
731
|
|
819
|
|
Periodic settlements and accruals on non-hedge derivative financial
instruments
|
|
17
|
|
1
|
|
Contract benefits and interest credited to contractholder funds
|
|
(905)
|
|
(929)
|
|
Operating costs and expenses and amortization of deferred policy
acquisition costs
|
|
(178)
|
|
(230)
|
|
Restructuring and related charges
|
|
--
|
|
(18)
|
|
Income tax expense on operations
|
|
(70)
|
|
(42)
|
|
Operating income
|
|
139
|
|
85
|
|
Realized capital gains and losses, after-tax
|
|
(105)
|
|
(170)
|
|
DAC and DSI (amortization) accretion related to realized capital gains
and losses, after-tax
|
|
(2)
|
|
(19)
|
|
DAC and DSI unlocking related to realized capital gains and losses,
after-tax
|
|
(18)
|
|
(224)
|
|
Reclassification of periodic settlements and accruals on non-hedge
financial instruments, after-tax
|
|
(11)
|
|
(1)
|
|
Gain on disposition of operations, after-tax
|
|
1
|
|
2
|
|
Allstate Financial net income (loss)
|
|
4
|
|
(327)
|
|
|
|
|
|
|
|
Corporate and Other
|
|
|
|
|
|
Service fees
(1)
|
|
3
|
|
3
|
|
Net investment income
|
|
15
|
|
13
|
|
Operating costs and expenses
(1)
|
|
(100)
|
|
(93)
|
|
Income tax benefit on operations
|
|
32
|
|
32
|
|
Operating loss
|
|
(50)
|
|
(45)
|
|
Realized capital gains and losses, after-tax
|
|
2
|
|
(2)
|
|
Corporate and Other net loss
|
|
(48)
|
|
(47)
|
|
Consolidated net income (loss)
|
$
|
120
|
$
|
(274)
|
|
(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.
41
14. Other
Comprehensive Income
The components of
other comprehensive income (loss) on a pre
-
ta
x and after-tax
basis are as follows:
($ in millions)
|
|
Three
months ended March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
Pre-tax
|
|
Tax
|
|
After-
tax
|
|
Pre-tax
|
|
Tax
|
|
After-
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
net holding gains and losses arising during the period, net of related
offsets
|
$
|
1,086
|
$
|
(379)
|
$
|
707
|
$
|
39
|
$
|
(90)
|
$
|
(51)
|
|
Less:
reclassification adjustment of realized capital gains and losses
|
|
(122)
|
|
43
|
|
(79)
|
|
(34)
|
|
12
|
|
(22)
|
|
Unrealized
net capital gains and losses
|
|
1,208
|
|
(422)
|
|
786
|
|
73
|
|
(102)
|
|
(29)
|
|
Unrealized
foreign currency translation adjustments
|
|
22
|
|
(8)
|
|
14
|
|
(12)
|
|
4
|
|
(8)
|
|
Unrecognized
pension and other postretirement benefit cost
|
|
26
|
|
(9)
|
|
17
|
|
(1)
|
|
--
|
|
(1)
|
|
Other
comprehensive income (loss)
|
$
|
1,256
|
$
|
(439)
|
|
817
|
$
|
60
|
$
|
(98)
|
|
(38)
|
|
Net
income (loss)
|
|
|
|
|
|
120
|
|
|
|
|
|
(274)
|
|
Comprehensive
income (loss)
|
|
|
|
|
$
|
937
|
|
|
|
|
$
|
(312)
|
|
42
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of
The
Allstate Corporation
Northbrook,
IL 60062
We
have reviewed the accompanying condensed consolidated statement of financial
position of The Allstate Corporation and subsidiaries (the Company) as of March 31,
2010, and the related condensed consolidated statements of operations and cash
flows for the three-month periods ended March 31, 2010 and 2009. 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,
2009, and the related consolidated statements of operations, comprehensive
income, shareholders equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 25, 2010, which report
includes an explanatory paragraph relating to a change in the Companys
recognition and presentation for other-than-temporary impairments of debt
securities in 2009, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated statement
of financial position as of December 31, 2009 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
April 28,
2010
43
Item 2.
|
MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
|
OVERVIEW
The following
discussion highlights significant factors influencing the consolidated financial
position and results of operations of The Allstate Corporation (referred to in
this document as we, our, us, the Company or Allstate). It should be read in conjunction with the
condensed consolidated financial statements and notes thereto found under Part I.
Item 1. contained herein, and with the discussion, analysis, consolidated
financial statements and notes thereto in Part I. Item 1. and Part II.
Item 7. and Item 8. of The Allstate Corporation Annual Report on Form 10-K
for 2009. 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.
Allstate
is focused on three priorities: improve
customer loyalty, reinvent protection and retirement for the consumer and grow
our businesses.
HIGHLIGHTS
·
|
Consolidated net income was $120 million in the first quarter of 2010
compared to a net loss of $274 million in the first quarter of 2009. Net
income per diluted share was $0.22 in the first quarter of 2010 compared to
net loss per diluted share of $0.51 in the first quarter of 2009.
|
·
|
Property-Liability net income was $164 million in the first quarter of
2010 compared to $100 million in the first quarter of 2009.
|
·
|
The Property-Liability combined ratio was 98.9 in the first quarter of
2010 compared to 96.8 in the first quarter of 2009.
|
·
|
Allstate Financial had net income of $4 million in the first quarter of
2010 compared to a net loss of $327 million in the first quarter of 2009.
|
·
|
Total revenues were $7.75 billion in the first quarter of 2010 compared
to $7.88 billion in the first quarter of 2009.
|
·
|
Property-Liability premiums earned in the first quarter of 2010 totaled
$6.50 billion, a decrease of 1.2% from $6.58 billion in the first quarter of
2009.
|
·
|
Net realized capital losses were $348 million in the first quarter of
2010 compared to $359 million in the first quarter of 2009.
|
·
|
Investments as of March 31, 2010 totaled $100.22 billion, an
increase of 0.4% from $99.83 billion as of December 31, 2009. Net
investment income in the first quarter of 2010 was $1.05 billion, a decrease
of 10.7% from $1.18 billion in the first quarter of 2009.
|
·
|
Book value per
diluted share (ratio of shareholders equity to total shares outstanding and
dilutive potential shares outstanding) was $32.26 as of March 31, 2010,
an increase of 42.4% from $22.65 as of March 31, 2009 and an increase of
4.6% from $30.84 as of December 31, 2009.
|
·
|
For the twelve
months ended March 31, 2010, return on the average of beginning and
ending period shareholders equity was 8.4%, an increase of 22.5 points from
(14.1)% for the twelve months ended
March 31, 2009.
|
·
|
At
March 31, 2010, we had $17.56 billion in capital. This total included
$3.05 billion in deployable invested assets at the parent holding company
level.
|
44
Item 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 2010 AND 2009
|
CONSOLIDATED NET INCOME (LOSS)
($ in millions)
|
|
Three
months ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Revenues
|
|
|
|
|
|
Property-liability
insurance premiums
|
$
|
6,503
|
$
|
6,582
|
|
Life
and annuity premiums and contract charges
|
|
544
|
|
484
|
|
Net
investment income
|
|
1,050
|
|
1,176
|
|
Realized
capital gains and losses:
|
|
|
|
|
|
Total
other-than-temporary impairment losses
|
|
(250)
|
|
(725)
|
|
Portion
of loss recognized in other comprehensive income
|
|
(5)
|
|
--
|
|
Net
other-than-temporary impairment losses recognized in earnings
|
|
(255)
|
|
(725)
|
|
Sales
and other realized capital gains and losses
|
|
(93)
|
|
366
|
|
Total
realized capital gains and losses
|
|
(348)
|
|
(359)
|
|
Total
revenues
|
|
7,749
|
|
7,883
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
Property-liability
insurance claims and claims expense
|
|
(4,
792
)
|
|
(4,720)
|
|
Life
and annuity contract benefits
|
|
(
442
)
|
|
(387)
|
|
Interest
credited to contractholder funds
|
|
(
463
)
|
|
(579)
|
|
Amortization
of deferred policy acquisition costs
|
|
(1,
014
)
|
|
(1,397)
|
|
Operating
costs and expenses
|
|
(
829
)
|
|
(801)
|
|
Restructuring
and related charges
|
|
(11)
|
|
(45)
|
|
Interest
expense
|
|
(92
)
|
|
(88)
|
|
Total
costs and expenses
|
|
(7,643)
|
|
(8,
017)
|
|
|
|
|
|
|
|
Gain
on disposition of operations
|
|
1
|
|
3
|
|
Income
tax benefit (expense)
|
|
13
|
|
(143)
|
|
Net income (loss)
|
$
|
120
|
$
|
(274)
|
|
|
|
|
|
|
|
Property-Liability
|
$
|
164
|
$
|
100
|
|
Allstate
Financial
|
|
4
|
|
(327)
|
|
Corporate
and Other
|
|
(48)
|
|
(47)
|
|
Net
income (loss)
|
$
|
120
|
$
|
(274)
|
|
45
Item
2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
|
PROPERTY-LIABILITY
HIGHLIGHTS
·
|
Premiums
written, an operating measure that is defined and reconciled to premiums
earned in the Property-Liability Operations section of the MD&A,
decreased 0.2% to $6.26 billion in the first quarter of 2010 from $6.27
billion in the first quarter of 2009.
|
|
Allstate brand
standard auto premiums written increased 1.1% to $4.02 billion in the first
quarter of 2010 from $3.98 billion in the first quarter of 2009.
|
|
Allstate brand
homeowners premiums written increased 1.5% to $1.19 billion in the first quarter
of 2010 from $1.17 billion in the first quarter of 2009.
|
|
Encompass brand
premiums written decreased 21.3% to $263 million in the first quarter of 2010
from $334 million in the first quarter of 2009.
|
·
|
Premium
operating measures and statistics contributing to overall Allstate brand
standard auto premiums written increase were the following:
|
|
1.5% decrease in
policies in force (PIF) as of March 31, 2010 compared to
March 31, 2009
|
|
0.2 point
increase in the six month renewal ratio to 88.8% in the first quarter of 2010
compared to 88.6% in the first quarter of 2009
|
|
3.0% increase in
the six month policy term average gross premium before reinsurance to $443 in
the first quarter of 2010 from $430 in the first quarter of 2009
|
|
10.9% decrease
in new issued applications in the first quarter of 2010 compared to the first
quarter of 2009
|
·
|
Premium
operating measures and statistics contributing to overall Allstate brand
homeowners premiums written increase were the following:
|
|
4.1% decrease in
PIF as of March 31, 2010 compared to March 31, 2009
|
|
0.5 point
increase in the twelve month renewal ratio to 88.0% in the first quarter of
2010 compared to 87.5% in the first quarter of 2009
|
|
7.0% increase in
the twelve month policy term average gross premium before reinsurance to $921
in the first quarter of 2010 from $861 in the first quarter of 2009
|
|
6.3% decrease in
new issued applications in the first quarter of 2010 compared to the first
quarter of 2009
|
|
$6 million
decrease in catastrophe reinsurance costs to $135 million in the first
quarter of 2010 from $141 million in the first quarter of 2009
|
·
|
Factors
comprising the Allstate brand
standard auto loss ratio increase of 0.6 points to 69.4 in the first quarter
of 2010 from 68.8 in the first quarter of 2009 were the following:
|
|
0.1% decrease in standard auto claim frequency
(rate of claim occurrence per policy in
force) for property damage in the
first quarter of 2010 compared to the first quarter of 2009
|
|
5.4% increase in standard auto claim frequency for bodily injury in the
first quarter of 2010 compared to the first quarter of 2009
|
|
0.4% increase in auto claim severities for property damage in the first
quarter of 2010 compared to the first quarter of 2009
|
|
1.3% decrease in auto claim severities
(average cost per claim) for bodily injury in the first quarter of 2010 compared to the first quarter
of 2009
|
·
|
Factors
comprising the Allstate brand homeowners loss ratio, which includes
catastrophes, increase of 4.8 points to 87.5 in the first quarter of 2010
from 82.7 in the first quarter of 2009 were the following:
|
|
9.6 percentage
point increase in the effect of catastrophe losses to 37.1 points in the
first quarter of 2010 compared to 27.5 points in the first quarter of 2009
|
|
5.1% increase in
homeowner claim frequency, excluding catastrophes, in the first quarter of
2010 compared to the first quarter of 2009
|
|
2.1% decrease in
claim severity, excluding catastrophes, in the first quarter of 2010 compared
to the first quarter of 2009
|
·
|
Factors comprising the $132 million increase in catastrophe losses to
$648 million in the first quarter of
2010 compared to $516 million in the first quarter of 2009 were the
following:
|
|
$15 million of
favorable reserve reestimates in the first quarter of 2010 compared to $60
million favorable reserve reestimates in the first quarter of 2009
|
|
11 events with $663
million of losses in the first quarter of 2010 compared to 14 events with
losses of $576 million in the first quarter of 2009
|
|
|
|
46
Item
2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
|
·
|
Factors
comprising prior year reserve reestimates of $23 million favorable in the
first quarter of 2010 compared to $55 million favorable in the first quarter
of 2009 included:
|
|
Prior year
reserve reestimates related to auto, homeowners and other personal lines in
the first quarter of 2010 contributed $5 million unfavorable, $8 million
favorable and $22 million favorable, respectively, compared to prior year
reserve reestimates in the first quarter of 2009 of $35 million favorable,
$32 million favorable and $9 million unfavorable, respectively
|
|
prior year
reserve reestimates in the first quarter of 2010 and 2009 are largely
attributable to prior year catastrophes
|
·
|
Property-Liability
underwriting income of $71 million in the first quarter of 2010 compared to
$208 million in the first quarter of 2009 included the following primary
contributing factors:
|
|
Allstate brand standard auto loss ratio increased 0.6 points to 69.4 in
the first quarter of 2010 from 68.8 in the first quarter of 2009
|
|
Allstate brand
homeowners loss ratio, which includes catastrophes, increased 4.8 points to
87.5 in the first quarter of 2010 from 82.7 in the first quarter of 2009
|
|
Underwriting income,
a measure not based on accounting principles generally accepted in
the United States of
America (GAAP), is defined below.
|
·
|
Property-Liability
investments as of March 31, 2010 were $34.81 billion, an increase of
0.8% from $34.53 billion as of December 31, 2009. Net investment income
was $304 million in the first quarter of 2010, a decrease of 11.6% from $344
million in the first quarter of 2009.
|
·
|
Net realized capital losses were $190 million
in the first quarter of 2010 compared to $314 million in the first quarter of
2009.
|
|
|
|
PROPERTY-LIABILITY
OPERATIONS
Overview
Our Property-Liability operations consist
of two business segments: Allstate Protection and Discontinued Lines and
Coverages. Allstate Protection comprises
two brands, the Allstate brand and Encompass
®
brand.
Allstate Protection is principally engaged in the sale of personal
property and casualty insurance, primarily private passenger auto and
homeowners insurance, to individuals in the United States and Canada. Discontinued Lines and Coverages includes
results from insurance coverage that we no longer write and results for certain
commercial and other businesses in run-off.
These segments are consistent with the groupings of financial
information that management uses to evaluate performance and to determine the
allocation of resources.
Underwriting income, a
measure that is not based on GAAP and is reconciled to net income below,
is calculated as premiums earned, less
claims and claims expense (losses), amortization of deferred policy
acquisition costs (DAC), operating costs and expenses and restructuring and
related charges, as determined using GAAP.
We use this measure in our evaluation of results of operations to
analyze the profitability of the Property-Liability insurance operations
separately from investment results. It
is also an integral component of incentive compensation. It is useful for investors to evaluate the
components of income separately and in the aggregate when reviewing
performance. Net income is the GAAP
measure most directly comparable to underwriting income. Underwriting income should not be considered
as a substitute for net income and does not reflect the overall profitability
of the business.
The table below
includes GAAP operating ratios we use to measure our profitability. We believe that they enhance an 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
as a percentage of premiums earned.
|
47
Item 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 2010 AND 2009
|
We have also
calculated the following impacts of specific items on the GAAP operating ratios
because of the volatility of these items between fiscal periods.
·
|
Effect of
catastrophe losses on combined ratio - the percentage of catastrophe losses
included in claims and claims expense to premiums earned. This ratio includes
prior year reserve reestimates of catastrophe losses.
|
·
|
Effect of prior
year reserve reestimates on combined ratio - the percentage of prior year
reserve reestimates included in claims and claims expense to premiums earned.
This ratio includes prior year reserve reestimates of catastrophe losses.
|
·
|
Effect of
restructuring and related charges on combined ratio - the percentage of
restructuring and related charges to premiums earned.
|
·
|
Effect of
Discontinued Lines and Coverages on combined ratio - the ratio of claims and
claims expense and other costs and expenses in the Discontinued Lines and Coverages
segment to Property-Liability premiums earned. The sum of the effect of
Discontinued Lines and Coverages on the combined ratio and the Allstate
Protection combined ratio is equal to the Property-Liability combined ratio.
|
Summarized
financial data, a reconciliation of underwriting income to net income and GAAP
operating ratios for our Property-Liability operations are presented in the
following table.
($ in millions, except ratios)
|
|
Three
months ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Premiums
written
|
$
|
6,258
|
$
|
6,269
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
Premiums
earned
|
$
|
6,503
|
$
|
6,582
|
|
Net
investment income
|
|
304
|
|
344
|
|
Realized
capital gains and losses
|
|
(190)
|
|
(314)
|
|
Total
revenues
|
|
6,617
|
|
6,612
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
Claims
and claims expense
|
|
(4,792)
|
|
(4,720)
|
|
Amortization
of DAC
|
|
(925)
|
|
(949)
|
|
Operating
costs and expenses
|
|
(704)
|
|
(678)
|
|
Restructuring
and related charges
|
|
(11)
|
|
(27)
|
|
Total
costs and expenses
|
|
(6,432)
|
|
(6,374)
|
|
|
|
|
|
|
|
Income
tax expense
|
|
(21)
|
|
(138)
|
|
Net income
|
$
|
164
|
$
|
100
|
|
|
|
|
|
|
|
Underwriting income
|
$
|
71
|
$
|
208
|
|
Net
investment income
|
|
304
|
|
344
|
|
Income
tax expense on operations
|
|
(88)
|
|
(136)
|
|
Realized
capital gains and losses, after-tax
|
|
(123)
|
|
(316)
|
|
Net income
|
$
|
164
|
$
|
100
|
|
|
|
|
|
|
|
Catastrophe
losses
(1)
|
$
|
648
|
$
|
516
|
|
|
|
|
|
|
|
GAAP operating ratios
|
|
|
|
|
|
Claims
and claims expense ratio
|
|
73.7
|
|
71.7
|
|
Expense
ratio
|
|
25.2
|
|
25.1
|
|
Combined
ratio
|
|
98.9
|
|
96.8
|
|
Effect
of catastrophe losses on combined ratio
(1)
|
|
10.0
|
|
7.8
|
|
Effect
of prior year reserve reestimates on combined ratio
(1)
|
|
(0.4)
|
|
(0.8)
|
|
Effect
of restructuring and related charges on combined ratio
|
|
0.2
|
|
0.4
|
|
Effect
of Discontinued Lines and Coverages on combined ratio
|
|
0.1
|
|
0.1
|
|
(1)
Prior year reserve reestimates included in
catastrophe losses totaled $15 million favorable in the three months ended
March 31, 2010 compared to $60 million favorable in the three months ended
March 31, 2009.
48
Item
2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
|
Premiums written
, an operating measure, is the amount of
premiums charged for policies issued during a fiscal period. Premiums earned is a GAAP measure. Premiums are considered earned and are
included in the financial results on a pro-rata basis over the policy period. The portion of premiums written applicable to
the unexpired terms of the policies is recorded as unearned premiums on our
Condensed Consolidated Statements of Financial Position.
A reconciliation of
premiums written to premiums earned is shown in the following table.
($ in millions)
|
|
Three
months ended
March 31
|
|
|
|
2010
|
|
2009
|
|
Premiums written:
|
|
|
|
|
|
Allstate
Protection
|
$
|
6,258
|
$
|
6,270
|
|
Discontinued
Lines and Coverages
|
|
|
|
(1)
|
|
Property-Liability
premiums written
|
|
6,258
|
|
6,269
|
|
Decrease
in unearned premiums
|
|
245
|
|
337
|
|
Other
|
|
|
|
(24)
|
|
Property-Liability
premiums earned
|
$
|
6,503
|
$
|
6,582
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
Allstate
Protection
|
$
|
6,503
|
$
|
6,583
|
|
Discontinued
Lines and Coverages
|
|
|
|
(1)
|
|
Property-Liability
|
$
|
6,503
|
$
|
6,582
|
|
ALLSTATE
PROTECTION SEGMENT
Premiums written by brand
are shown in the following table.
($ in millions)
|
|
Three
months ended March 31,
|
|
|
|
Allstate
brand
|
|
Encompass
brand
|
|
Allstate
Protection
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Standard
auto
|
$
|
4,023
|
$
|
3,978
|
$
|
160
|
$
|
204
|
$
|
4,183
|
$
|
4,182
|
|
Non-standard
auto
|
|
237
|
|
241
|
|
3
|
|
8
|
|
240
|
|
249
|
|
Homeowners
|
|
1,189
|
|
1,171
|
|
80
|
|
97
|
|
1,269
|
|
1,268
|
|
Other
personal lines
(1)
|
|
546
|
|
546
|
|
20
|
|
25
|
|
566
|
|
571
|
|
Total
|
$
|
5,995
|
$
|
5,936
|
$
|
263
|
$
|
334
|
$
|
6,258
|
$
|
6,270
|
|
(1)
Other personal lines include commercial, condominium,
renters, involuntary auto and other personal lines.
Allstate brand premiums written, excluding Allstate
Canada, by the direct channel increased 26.7% to $185 million in the first
quarter of 2010 from $146 million in the first quarter of 2009. The direct channel includes call centers and
the internet.
Premiums earned by brand are shown in the following
table.
($ in millions)
|
|
Three
months ended March 31,
|
|
|
|
Allstate
brand
|
|
Encompass
brand
|
|
Allstate
Protection
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Standard
auto
|
$
|
3,943
|
$
|
3,917
|
$
|
194
|
$
|
247
|
$
|
4,137
|
$
|
4,164
|
|
Non-standard
auto
|
|
230
|
|
237
|
|
4
|
|
9
|
|
234
|
|
246
|
|
Homeowners
|
|
1,416
|
|
1,417
|
|
100
|
|
118
|
|
1,516
|
|
1,535
|
|
Other
personal lines
|
|
592
|
|
610
|
|
24
|
|
28
|
|
616
|
|
638
|
|
Total
|
$
|
6,181
|
$
|
6,181
|
$
|
322
|
$
|
402
|
$
|
6,503
|
$
|
6,583
|
|
49
Item
2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
|
Premium operating measures and statistics that are
used to analyze the business are calculated and described below. Measures and statistics presented for
Allstate brand exclude Allstate Canada, loan protection and specialty auto.
·
|
PIF: Policy
counts are based on items rather than customers. A multi-car customer would
generate multiple item (policy) counts, even if all cars were insured under
one policy.
|
·
|
Average
premium-gross written: Gross premiums written divided by issued item count.
Gross premiums written include the impacts from discounts and surcharges; and
exclude the impacts from mid-term premium adjustments, ceded reinsurance
premiums, 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.
|
Standard auto premiums written
totaled $4.18 billion in the first
quarter of 2010 and were comparable to the first quarter of 2009.
|
|
Three
months ended March 31,
|
|
|
|
Allstate
brand
|
|
Encompass
brand
|
|
Standard
Auto
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
PIF
(thousands)
|
|
17,581
|
|
17,843
|
|
802
|
|
1,042
|
|
Average
premium-gross written
(1)
|
$
|
443
|
$
|
430
|
$
|
996
|
$
|
956
|
|
Renewal
ratio (%)
(1)
|
|
88.8
|
|
88.6
|
|
68.6
|
|
70.3
|
|
(1)
Policy term is six months for Allstate brand and twelve
months for Encompass brand.
Allstate brand standard auto premiums written totaled
$4.02 billion in the first quarter of 2010, an increase of 1.1% from $3.98
billion in the first quarter of 2009.
Contributing to the Allstate brand standard auto premiums written
increase in the first quarter of 2010 compared to the first quarter of 2009
were the following:
|
decrease in PIF
as of March 31, 2010 compared to March 31, 2009, due to fewer
policies available to renew
|
|
10.9% decrease
in new issued applications on a countrywide basis to 464 thousand in the
first quarter of 2010 from 521 thousand in the first quarter of 2009 driven
by Florida and California, due to in part to rate actions that were approved
in 2009 in these markets and other actions to improve profitability.
Excluding Florida and California, new issued applications on a countrywide
basis increased 5.2% to 366 thousand in the first quarter of 2010 from 348
thousand in the first quarter of 2009, with new issued application increases
in 36 states, most of which offer an auto discount (the Preferred Package
Discount) for the high lifetime value customer segment.
|
|
increase in
average gross premium in the first quarter of 2010 compared to the first
quarter of 2009, primarily due to rate changes, partially offset by customers
electing to change coverage levels of their policy
|
|
increase of 0.2
in the renewal ratio in the first quarter of 2010 compared to the first
quarter of 2009
|
50
Item
2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
|
Rate changes that are indicated based on loss trend
analysis to achieve a targeted return will continue to be pursued. The
following table shows the rate changes that were approved for standard auto and
does not include rating plan enhancements, including the introduction of
discounts and surcharges, that result in no change in the overall rate level in
the state. These rate changes do not
reflect initial rates filed for insurance subsidiaries initially writing
business in a state.
|
|
Three
months ended March 31,
|
|
|
|
#
of States
|
|
Countrywide(%)
(1)
|
|
State
Specific(%)
(2) (3)
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Allstate
brand
|
|
8
|
|
18
(4)
|
|
0.3
|
|
0.9
|
|
2.9
|
|
3.3
|
|
Encompass
brand
|
|
6
|
|
24
|
|
1.5
|
|
3.7
|
|
7.1
|
|
8.1
|
|
(1)
Represents the impact in the states where rate
changes were approved during the three months ended March 31, 2010 and
2009, 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 ended March 31, 2010 and
2009, respectively, as a percentage of its respective 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 $59 million in
the three months ended March 31, 2010 compared to $178 million in the
three months ended March 31, 2009.
(4)
Includes Washington D.C.
Non-s
tandard auto premiums written
totaled $240 million in the first
quarter of 2010, a decrease of 3.6% from $249 million in the first quarter of
2009.
|
|
Three months ended March 31,
|
|
|
|
Allstate
brand
|
|
Encompass
brand
|
|
Non-Standard
Auto
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
PIF
(thousands)
|
|
724
|
|
750
|
|
14
|
|
33
|
|
Average
premium-gross written
|
$
|
619
|
$
|
615
|
$
|
441
|
$
|
490
|
|
Renewal
ratio (%)
|
|
71.8
|
|
71.6
|
|
48.7
|
|
68.3
|
|
Allstate brand non-standard auto premiums written
totaled $237 million in the first quarter of 2010, a decrease of 1.7% from $241
million in the first quarter of 2009.
Contributing to the Allstate brand non-standard auto premiums written decrease in the first quarter
of 2010 compared to the first quarter of 2009 were the following:
|
decrease in PIF as of
March 31, 2010 compared to March 31, 2009, due to a decline in the
number of polices available to renew
|
|
2.9% decrease in new
issued applications to 99 thousand in the first quarter of 2010 from 102
thousand in the first quarter of 2009
|
|
increase in average
gross premium in the first quarter of 2010 compared to the first quarter of
2009
|
|
increase in the renewal
ratio in the first quarter of 2010 compared to the first quarter of 2009
|
Rate changes that
are indicated based on loss trend analysis to achieve a targeted return will
continue to be pursued. The following table shows the rate changes that were
approved for non-standard auto and does not include rating plan enhancements,
including the introduction of discounts and surcharges, that result in no
change in the overall rate level in the state.
These rate changes do not reflect initial rates filed for insurance
subsidiaries initially writing business in a state.
|
|
Three
months ended March 31,
|
|
|
|
#
of States
|
|
Countrywide(%)
(1)
|
|
State
Specific(%)
(2) (3)
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Allstate
brand
|
|
1
|
|
4
|
|
0.9
|
|
0.1
|
|
22.1
|
|
1.6
|
|
Encompass
brand
|
|
--
|
|
1
|
|
--
|
|
0.9
|
|
--
|
|
31.7
|
|
(1)
Represents the
impact in the states where rate changes were approved during the three months
ended March 31, 2010 and 2009, 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
ended March 31, 2010 and 2009, respectively, as a percentage of its
respective 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 $8 million in
the three months ended March 31, 2010 compared to $2 million in the three months
ended March 31, 2009.
51
Item
2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
|
Homeowners premiums written
totaled $1.27 billion in the first quarter of 2010 and were comparable to the
first quarter of 2009. Excluding the
cost of catastrophe reinsurance, premiums written declined 0.4% in the first
quarter of 2010 compared to the first quarter of 2009.
|
|
Three
months ended March 31,
|
|
|
|
Allstate
brand
|
|
Encompass
brand
|
|
Homeowners
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
PIF
(thousands)
|
|
6,886
|
|
7,181
|
|
354
|
|
431
|
|
Average
premium-gross written (12 months)
|
$
|
921
|
$
|
861
|
$
|
1,299
|
$
|
1,251
|
|
Renewal
ratio (%)
|
|
88.0
|
|
87.5
|
|
77.3
|
|
79.4
|
|
Allstate
brand homeowners premiums written totaled $1.19 billion in the first quarter of 2010, an increase of 1.5%
from $1.17 billion in the first
quarter of 2009. Contributing to the
Allstate brand homeowners premiums written increase in the first quarter of
2010 compared to the first quarter of 2009 were the following:
|
decrease in PIF
of 4.1% as of March 31, 2010 compared to March 31, 2009, due to
fewer policies available to renew and fewer new issued applications
|
|
6.3% decrease in
new issued applications to 119 thousand in the first quarter of 2010 from 127
thousand in the first quarter of 2009
|
|
increase in
average gross premium in the first quarter of 2010 compared to the first
quarter of 2009, primarily due to rate changes
|
|
increase in the
renewal ratio in the first quarter of 2010 compared to the first quarter of
2009
|
|
decrease in the net
cost of our catastrophe reinsurance program in the first quarter of 2010
compared to the first quarter of 2009
|
As of March 2010, an
increased Home and Auto discount is now available in 29 states. This has successfully shifted our mix of new
business towards multi-line customers.
Rate changes that are
indicated based on loss trend analysis to achieve a targeted return will
continue to be pursued. The following table shows the rate changes that were
approved for homeowners, including rate changes approved based on our net cost
of reinsurance, and does not include rating plan enhancements, including the
introduction of discounts and surcharges, that result in no change in the
overall rate level in the state.
|
|
Three
months ended March 31,
|
|
|
|
#
of States
|
|
Countrywide(%)
(1)
|
|
State
Specific(%)
(2) (3)
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Allstate
brand
|
|
6
|
|
14
|
|
0.9
|
|
2.5
|
|
7.4
|
|
7.4
|
|
Encompass
brand
|
|
5
|
|
18
|
|
0.7
|
|
1.6
|
|
5.2
|
|
6.7
|
|
(1)
Represents the
impact in the states where rate changes were approved during the three months
ended March 31, 2010 and 2009, 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
ended March 31, 2010 and 2009, respectively, as a percentage of its
respective total prior year-end premiums written in those states.
(3)
Based on historical premiums written in
those states, rate changes approved for homeowners totaled $54 million in the
three months ended March 31, 2010 compared to $160 million in the three
months ended March 31, 2009.
52
Item 2.
MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
Underwriting
results
are shown
in the following table.
($ in
millions)
|
|
Three
months ended
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Premiums
written
|
$
|
6,258
|
|
$
|
6,270
|
|
|
|
|
|
|
|
|
Premiums
earned
|
$
|
6,503
|
|
$
|
6,583
|
|
Claims
and claims expense
|
|
(4,790)
|
|
|
(4,717)
|
|
Amortization
of DAC
|
|
(925)
|
|
|
(949)
|
|
Other
costs and expenses
|
|
(702)
|
|
|
(676)
|
|
Restructuring
and related charges
|
|
(11)
|
|
|
(27)
|
|
Underwriting
income
|
$
|
75
|
|
$
|
214
|
|
Catastrophe losses
|
$
|
648
|
|
$
|
516
|
|
|
|
|
|
|
|
|
Underwriting income (loss) by line of business
|
|
|
|
|
|
|
Standard auto
|
$
|
213
|
|
$
|
258
|
|
Non-standard auto
|
|
15
|
|
|
19
|
|
Homeowners
|
|
(192)
|
|
|
(85)
|
|
Other
personal lines
|
|
39
|
|
|
22
|
|
Underwriting income
|
$
|
75
|
|
$
|
214
|
|
|
|
|
|
|
|
|
Underwriting income (loss) by brand
|
|
|
|
|
|
|
Allstate brand
|
$
|
118
|
|
$
|
207
|
|
Encompass brand
|
|
(43)
|
|
|
7
|
|
Underwriting income
|
$
|
75
|
|
$
|
214
|
|
Allstate Protection experienced underwriting income of $75 million
during the first quarter of 2010 compared to $214 million in the first quarter
of 2009 primarily due to increases in homeowners underwriting loss and
decreases in standard auto underwriting income.
Homeowners underwriting loss increased 125.9% to an underwriting loss of
$192 million in the first quarter of 2010 from an underwriting loss of $85
million in the first quarter of 2009, primarily due to higher catastrophes
losses and increases in homeowner claim frequency excluding catastrophes,
partially offset by lower severities.
Standard auto underwriting income decreased 17.4% to $213 million in the
first quarter of 2010 from $258 million in the first quarter of 2009, primarily
due to increases in auto claim frequency and severity, partially offset by
higher premiums earned.
Catastrophe losses
in the first
quarter of 2010 were $648 million as detailed in the table below. This compares to catastrophe losses in the
first quarter of 2009 of $516 million.
We
define a catastrophe as an event that produces pre-tax losses before
reinsurance in excess of $1 million and involves multiple first party
policyholders, or an event that produces a number of claims in excess of a
preset, per-event threshold of average claims in a specific area, occurring
within a certain amount of time following the event. Catastrophes are caused by various natural
events including high winds, winter storms, tornadoes, hailstorms, wildfires,
tropical storms, hurricanes, earthquakes and volcanoes. We are also exposed to man-made catastrophic
events, such as certain acts of terrorism or industrial accidents. The nature and level of catastrophes in any
future period cannot be reliably predicted.
53
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
2010 AND 2009
Catastrophe losses
related to events that occurred by the size of the event are shown in the
following table.
($ in millions)
|
|
Three
months ended
March 31,
2010
|
|
|
Number
of events
|
|
|
|
Claims
and
claims
expense
|
|
|
|
Combined
ratio
impact
|
|
Average
catastrophe
loss per event
|
Size of catastrophe
|
|
|
|
|
|
|
|
|
|
|
|
|
$101 million to
$250 million
|
|
2
|
|
18.2%
|
$
|
400
|
|
61.7%
|
|
6.1
|
$
|
200
|
$50 million to $100
million
|
|
2
|
|
18.2
|
|
123
|
|
19.0
|
|
1.9
|
|
62
|
Less than $50 million
|
|
7
|
|
63.6
|
|
140
|
|
21.6
|
|
2.2
|
|
20
|
Total
|
|
11
|
|
100.0%
|
|
663
|
|
102.3
|
|
10.2
|
|
60
|
Prior year reserve reestimates
|
|
|
|
|
|
(15)
|
|
(2.3)
|
|
(0.2)
|
|
|
Total catastrophe losses
|
|
|
|
|
$
|
648
|
|
100.0%
|
|
10.0
|
|
|
Catastrophe losses
incurred by the type of event are shown in the following table
.
($ in millions)
|
|
Three
months ended
March 31,
|
|
|
2010
|
|
2009
|
|
|
|
|
Number
of
events
|
|
|
|
Number
of events
|
Tornadoes
|
$
|
--
|
|
--
|
$
|
119
|
|
1
|
Wind/Hail
|
|
379
|
|
6
|
|
322
|
|
10
|
Other events
|
|
284
|
|
5
|
|
135
|
|
3
|
Prior year reserve
reestimates
|
|
(15)
|
|
|
|
(60)
|
|
|
Total catastrophe losses
|
$
|
648
|
|
11
|
$
|
516
|
|
14
|
54
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
2010 AND 2009
Combined ratio
Loss
ratios are a measure of profitability.
Loss ratios by product, and expense and combined ratios by brand, are
shown in the following table. These
ratios are defined in the Property-Liability Operations section of the
MD&A.
|
|
Three
months ended March 31,
|
|
|
Loss
ratio
(1)
|
|
Effect
of
catastrophe
losses on the
loss ratio
|
|
Effect
of
pre-tax
reserve
reestimates
on the
combined
ratio
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Allstate brand loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard
auto
|
|
69.4
|
|
68.8
|
|
0.7
|
|
1.6
|
|
(0.1)
|
|
(0.7)
|
|
Non-standard
auto
|
|
68.7
|
|
68.4
|
|
0.4
|
|
0.8
|
|
(1.3)
|
|
(0.4)
|
|
Homeowners
|
|
87.5
|
|
82.7
|
|
37.1
|
|
27.5
|
|
(0.4)
|
|
(1.2)
|
|
Other personal lines
|
|
63.5
|
|
66.1
|
|
7.3
|
|
7.7
|
|
(3.9)
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Allstate brand loss ratio
|
|
73.0
|
|
71.7
|
|
9.7
|
|
8.1
|
|
(0.6)
|
|
(0.7)
|
|
Allstate brand expense ratio
|
|
25.1
|
|
25.0
|
|
|
|
|
|
|
|
|
|
Allstate brand combined ratio
|
|
98.1
|
|
96.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Encompass brand loss ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard auto
|
|
76.8
|
|
74.1
|
|
1.0
|
|
0.8
|
|
5.2
|
|
(2.4)
|
|
Non-standard auto
|
|
100.0
|
|
66.7
|
|
--
|
|
--
|
|
--
|
|
--
|
|
Homeowners
|
|
103.0
|
|
61.9
|
|
46.0
|
|
10.2
|
|
(2.0)
|
|
(12.7)
|
|
Other personal lines
|
|
91.7
|
|
78.6
|
|
12.5
|
|
--
|
|
4.2
|
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Encompass brand loss ratio
|
|
86.4
|
|
70.7
|
|
15.8
|
|
3.5
|
|
2.8
|
|
(4.2)
|
|
Encompass brand expense ratio
|
|
27.0
|
|
27.6
|
|
|
|
|
|
|
|
|
|
Encompass brand combined ratio
|
|
113.4
|
|
98.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allstate Protection loss ratio
|
|
73.6
|
|
71.6
|
|
10.0
|
|
7.8
|
|
(0.4)
|
|
(0.9)
|
|
Allstate Protection expense ratio
|
|
25.2
|
|
25.1
|
|
|
|
|
|
|
|
|
|
Allstate Protection combined ratio
|
|
98.8
|
|
96.7
|
|
|
|
|
|
|
|
|
|
(1)
Ratios
are calculated using the premiums earned for the respective line of business.
Standard auto loss ratio
for the Allstate brand increased 0.6
points in the first quarter of 2010 compared to the first quarter of 2009 due
to higher claim frequencies. In the
first quarter of 2010, claim frequencies in the bodily injury and physical
damage coverages have increased compared to the first quarter of 2009, but
remain within historical norms. Bodily
injury and physical damage coverages severity results increased in line with
historical Consumer Price Index (CPI) trends.
Non-standard auto loss ratio
for the Allstate brand increased 0.3
points in the first quarter of 2010 compared to the first quarter of 2009 due
to higher claim frequencies, partially offset by favorable reserve
reestimates. Bodily injury and physical
damage coverages severity results increased in line with historical CPI trends.
Homeowners loss ratio
for the Allstate brand
increased 4.8 points to 87.5 in the first quarter of 2010 from 82.7 in the
first quarter of 2009 due to higher catastrophe losses and higher frequencies
excluding catastrophes, partially offset by lower severities
.
Frequencies excluding
catastrophes increased in the first quarter of 2010 compared to the first
quarter of 2009, in part, due to inclement weather in the first quarter of
2010, including an increase in freeze related claims, driven by winter weather.
55
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
2010 AND 2009
Expense ratio
for Allstate
Protection increased 0.1 points in the first quarter of 2010 compared to the
first quarter of 2009. Restructuring
costs decreased 0.2 points in the first quarter of 2010 compared to the first
quarter of 2009, driven by prior year accruals for reorganization of the
Business Insurance sales and support model.
Excluding restructuring, the expense ratio for Allstate Protection
increased 0.3 points in the first quarter of 2010 compared to the first quarter
of 2009. Improved operational
efficiencies were offset by increased investments in marketing, pension costs
and lower earned premium.
The impact of specific costs and expenses on the expense ratio are
included in the following table.
|
|
Three
months ended March 31,
|
|
|
Allstate
brand
|
|
Encompass
brand
|
|
Allstate
Protection
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Amortization of DAC
|
|
14.0
|
|
14.2
|
|
18.5
|
|
18.6
|
|
14.2
|
|
14.4
|
Other costs and expenses
|
|
11.0
|
|
10.4
|
|
7.8
|
|
8.4
|
|
10.8
|
|
10.3
|
Restructuring
and related charges
|
|
0.1
|
|
0.4
|
|
0.7
|
|
0.6
|
|
0.2
|
|
0.4
|
Total expense ratio
|
|
25.1
|
|
25.0
|
|
27.0
|
|
27.6
|
|
25.2
|
|
25.1
|
Reserve
reestimates
The tables below shows Allstate Protection
net reserves representing the estimated cost of outstanding claims as they were
recorded at the beginning of years 2010 and 2009, and the effect of reestimates
in each year.
($ in
millions)
|
|
January 1
reserves
|
|
|
2010
|
|
2009
|
Auto
|
$
|
10,606
|
$
|
10,220
|
Homeowners
|
|
2,399
|
|
2,824
|
Other personal lines
|
|
2,145
|
|
2,207
|
Total Allstate
Protection
|
$
|
15,150
|
$
|
15,251
|
($ in millions, except ratios)
|
|
Three
months ended
March 31,
|
|
|
2010
|
|
|
2009
|
|
|
Reserve
reestimate
(1) (2)
|
|
Effect
on
combined
ratio
(2)
|
|
|
Reserve
reestimate
(1) (2)
|
|
Effect
on
combined
ratio
(2)
|
|
Auto
|
$
|
5
|
|
|
0.1
|
|
$
|
(35
|
)
|
|
(0.5
|
)
|
Homeowners
|
|
(8
|
)
|
|
(0.1
|
)
|
|
(32
|
)
|
|
(0.5
|
)
|
Other
personal lines
|
|
(22
|
)
|
|
(0.4
|
)
|
|
9
|
|
|
0.1
|
|
Total
Allstate Protection
(3)
|
$
|
(25
|
)
|
|
(0.4
|
)
|
$
|
(58
|
)
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allstate
brand
|
$
|
(34
|
)
|
|
(0.5
|
)
|
$
|
(41
|
)
|
|
(0.6
|
)
|
Encompass
brand
|
|
9
|
|
|
0.1
|
|
|
(17
|
)
|
|
(0.3
|
)
|
Total
Allstate Protection
(3)
|
$
|
(25
|
)
|
|
(0.4
|
)
|
$
|
(58
|
)
|
|
(0.9
|
)
|
(1)
Favorable reserve
reestimates are shown in parentheses.
|
|
(2)
Discontinued Lines and Coverages segment
reserve reestimates in the three months ended March 31, 2010 totaled $2
million unfavorable compared to $3 million unfavorable in the three months
ended March 31, 2009. The effect
on the combined ratio totaled 0.1 in the three months ended March 31,
2009. There was no effect on the
combined ratio in the three months ended March 31, 2010.
|
|
(3)
Reserve reestimates included in
catastrophe losses totaled $15 million favorable in the three months ended
March 31, 2010 compared to $60 million favorable in the three months
ended March 31, 2009.
|
56
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
2010 AND 2009
DISCONTINUED
LINES AND COVERAGES SEGMENT
Overview
The Discontinued Lines and Coverages segment includes
results from insurance coverage that we no longer write and results for certain
commercial and other businesses in run-off.
Our exposure to asbestos, environmental and other discontinued lines
claims is reported in this segment. We
have assigned management of this segment to a designated group of professionals
with expertise in claims handling, policy coverage interpretation, exposure
identification and reinsurance collection.
As part of its responsibilities, this group is also regularly engaged in
policy buybacks, settlements and reinsurance assumed and ceded commutations.
Summarized
underwriting results are presented in the following table.
($ in
millions)
|
|
Three months ended
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Premiums written
|
$
|
--
|
|
$
|
(1)
|
|
|
|
|
|
|
|
|
Premiums earned
|
$
|
--
|
|
$
|
(1)
|
|
Claims and
claims expense
|
|
(2)
|
|
|
(3)
|
|
Operating costs
and expenses
|
|
(2)
|
|
|
(2)
|
|
Underwriting
loss
|
$
|
(4)
|
|
$
|
(6)
|
|
PROPERTY-LIABILITY
INVESTMENT RESULTS
Net
investment income
decreased 11.6% or $40 million to $304 million in the first quarter of 2010
compared to $344 million in the first quarter of 2009. The decrease was primarily due to lower yields and duration shortening
actions taken to protect the portfolio from rising interest rates,
partially offset by higher average asset balances. Net investment income was $326 million and
$324 million in the third and fourth quarter of 2009, respectively.
Net
realized capital gains and losses
are presented in the following table.
($ in
millions)
|
|
Three months ended
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Impairment
write-downs
|
$
|
(79)
|
|
$
|
(256)
|
|
Change in intent
write-downs
|
|
(9)
|
|
|
(72)
|
|
Net other-than-temporary impairment losses
recognized in earnings
|
|
(88)
|
|
|
(328)
|
|
Sales
|
|
41
|
|
|
50
|
|
Valuation of
derivative instruments
|
|
(101)
|
|
|
20
|
|
Settlements of
derivative instruments
|
|
(49)
|
|
|
6
|
|
EMA limited
partnership income
|
|
7
|
|
|
(62)
|
|
Realized capital
gains and losses, pre-tax
|
|
(190)
|
|
|
(314)
|
|
Income tax
benefit (expense)
|
|
67
|
|
|
(2)
|
|
Realized capital
gains and losses, after-tax
|
$
|
(123)
|
|
$
|
(316)
|
|
For a further
discussion of net realized capital gains and losses, see the Investments
section of the MD&A.
57
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
2010 AND 2009
ALLSTATE FINANCIAL HIGHLIGHTS
·
Net income was $4 million in the first
quarter of 2010 compared to a net loss of $327 million in the first quarter of
2009.
·
During the first quarter of 2010,
amortization deceleration (credit to income) of $12 million was recorded
related to
our annual
comprehensive review of the DAC and deferred sales inducement costs (DSI)
balances and assumptions for our interest-sensitive life, fixed annuities and
other investment contracts. This compares to DAC and DSI amortization
acceleration of $322 million in the first quarter of 2009.
·
Net realized capital losses totaled $162
million in the first quarter of 2010 compared to $43 million in the first
quarter of 2009.
·
Investments as of March 31, 2010 totaled $62.34 billion,
reflecting an increase in carrying value of $120 million from $62.22 billion as
of December 31, 2009. Net
investment income decreased 10.7% to $731 million in the first quarter of 2010
from $819 million in the first quarter of 2009.
·
Contractholder fund deposits for the first quarter of 2010 totaled $938
million compared to $1.40 billion in the first quarter of 2009.
ALLSTATE
FINANCIAL SEGMENT
Summary
analysis
Summarized financial data is presented in the
following table.
($ in millions)
|
|
Three
months ended
March 31,
|
|
|
2010
|
|
2009
|
Revenues
|
|
|
|
|
|
|
Life
and annuity premiums and contract charges
|
$
|
544
|
|
$
|
484
|
|
Net
investment income
|
|
731
|
|
|
819
|
|
Realized
capital gains and losses
|
|
(162
|
)
|
|
(43
|
)
|
Total
revenues
|
|
1,113
|
|
|
1,260
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
Life
and annuity contract benefits
|
|
(442
|
)
|
|
(387
|
)
|
Interest
credited to contractholder funds
|
|
(463
|
)
|
|
(579
|
)
|
Amortization
of DAC
|
|
(89
|
)
|
|
(448
|
)
|
Operating
costs and expenses
|
|
(120
|
)
|
|
(121
|
)
|
Restructuring
and related charges
|
|
--
|
|
|
(18
|
)
|
Total
costs and expenses
|
|
(1,114
|
)
|
|
(1,553
|
)
|
|
|
|
|
|
|
|
Gain
on disposition of operations
|
|
1
|
|
|
3
|
|
Income
tax benefit (expense)
|
|
4
|
|
|
(37
|
)
|
Net
income (loss)
|
$
|
4
|
|
$
|
(327
|
)
|
|
|
|
|
|
|
|
Investments
at March 31
|
$
|
62,336
|
|
$
|
59,576
|
|
Net income
in
the first quarter of 2010 was $4 million compared to a net loss of $327 million in the same period
of 2009. The improvement of $331 million
was primarily due to lower amortization of DAC and interest credited to
contractholder funds, and increased premiums and contract charges, partially
offset by higher net realized capital losses, lower net investment income and
increased life and annuity contract benefits.
Additionally, the first quarter of 2009 included $142 million of income
tax expense related to an increase in the deferred tax asset valuation
allowance.
Effective
March 31, 2010, we will no longer wholesale or provide distribution
support to banks and broker-dealers.
Although we will continue to service inforce contracts sold through
these channels, we will no longer solicit new sales through our direct
relationships with banks or broker-dealers.
Certain of our master brokerage agencies and independent agents may
continue to wholesale our products to banks and broker-dealers through their
relationships. These distribution
channels have primarily been used to sell deferred fixed annuities and
interest-sensitive life insurance. In
2009, contract charges on products
58
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
2010 AND 2009
sold through these
distribution channels were $44 million and contractholder deposits were $896
million. In the first quarter of 2010,
contract charges on products sold through these distribution channels were $11
million and contractholder deposits were $102 million. As of March 31, 2010, contractholder
funds associated with these distribution channels totaled $17.96 billion.
Analysis of revenues
Total revenues decreased 11.7% or $147 million in the
first quarter of 2010 compared to the same period of 2009 due to higher net
realized capital losses and lower net investment income, partially offset by
increased premiums and contract charges.
Life and annuity premiums and contract charges
Premiums
represent
revenues generated from traditional life insurance, immediate annuities with
life contingencies, and accident and health insurance products that have
significant mortality or morbidity risk.
Contract charges are revenues generated from interest-sensitive and
variable life insurance and fixed annuities for which deposits are classified
as contractholder funds or separate account liabilities. Contract charges are assessed against the
contractholder account values for maintenance, administration, cost of
insurance and surrender prior to contractually specified dates. As a result, changes in contractholder funds
are considered in the evaluation of growth and as indicators of future levels
of revenues.
The following
table summarizes life and annuity premiums and contract charges by product.
($ in millions)
|
|
Three
months ended
March 31,
|
|
|
2010
|
|
|
2009
|
|
Premiums
|
|
|
|
|
|
|
Traditional
life insurance
|
$
|
106
|
|
$
|
100
|
|
Immediate annuities with life contingencies
|
|
27
|
|
|
34
|
|
Accident
and health
|
|
156
|
|
|
112
|
|
Total premiums
|
|
289
|
|
|
246
|
|
|
|
|
|
|
|
|
Contract charges
|
|
|
|
|
|
|
Interest-sensitive
life insurance
|
|
242
|
|
|
226
|
|
Fixed
annuities
|
|
13
|
|
|
12
|
|
Total contract charges
(1)
|
|
255
|
|
|
238
|
|
|
|
|
|
|
|
|
Life and annuity premiums and contract charges
|
$
|
544
|
|
$
|
484
|
|
(1)
Total contract charges for the first quarter of 2010
and 2009 include contract charges related to the cost of insurance totaling
$156 million and $152 million, respectively.
|
Total premiums increased 17.5% in the first quarter of
2010 compared to the same period of 2009 primarily due to higher sales of
accident and health insurance, with a large portion of the increase resulting
from a new large employer case sold through the Allstate Workplace Division.
Total contract charges increased 7.1% in the first
quarter of 2010 compared to the same period of 2009 primarily due to higher
contract charges on interest-sensitive life insurance products resulting from
increases in certain policy administration fees and higher rates charged for
the cost of insurance.
59
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
2010 AND 2009
Contractholder funds
represent interest-bearing liabilities
arising from the sale of individual and institutional products, such as
interest-sensitive life insurance, fixed annuities, funding agreements and bank
deposits. The balance of contractholder
funds is equal to the cumulative deposits received and interest credited to the
contractholder less cumulative contract maturities, benefits, surrenders,
withdrawals and contract charges for mortality or administrative expenses. The following table shows the changes in
contractholder funds.
($ in millions)
|
|
Three
months ended
March 31,
|
|
|
2010
|
|
2009
|
Contractholder funds, beginning balance
|
$
|
52,582
|
|
$
|
58,413
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
Fixed
annuities
|
|
291
|
|
|
635
|
|
Interest-sensitive
life insurance
|
|
395
|
|
|
342
|
|
Bank
and other deposits
|
|
252
|
|
|
427
|
|
Total
deposits
|
|
938
|
|
|
1,404
|
|
|
|
|
|
|
|
|
Interest credited
|
|
462
|
|
|
531
|
|
|
|
|
|
|
|
|
Maturities, benefits, withdrawals and other adjustments
|
|
|
|
|
|
|
Maturities
and retirements of institutional products
|
|
(954
|
)
|
|
(1,951
|
)
|
Benefits
|
|
(395
|
)
|
|
(450
|
)
|
Surrenders
and partial withdrawals
|
|
(1,248
|
)
|
|
(1,213
|
)
|
Contract
charges
|
|
(241
|
)
|
|
(221
|
)
|
Net
transfers from separate accounts
|
|
2
|
|
|
4
|
|
Fair
value hedge adjustments for institutional products
|
|
(123
|
)
|
|
(48
|
)
|
Other
adjustments
(1)
|
|
4
|
|
|
152
|
|
Total
maturities, benefits, withdrawals and other adjustments
|
|
(2,955
|
)
|
|
(3,727
|
)
|
Contractholder funds, ending balance
|
$
|
51,027
|
|
$
|
56,621
|
|
(1)
The table above illustrates the changes in
contractholder funds, which are presented gross of reinsurance recoverables
on the Condensed Consolidated Statements of Financial Position. The table above is intended to supplement our
discussion and analysis of revenues, which are presented net of reinsurance
on the Condensed Consolidated Statements of Operations. As a result, the net change in
contractholder funds associated with products reinsured to third parties is
reflected as a component of the other adjustments line.
|
Contractholder
funds decreased 3.0% and 3.1% in the first quarter of 2010 and 2009,
respectively. Average contractholder
funds decreased 9.9% in the first quarter of 2010 compared to the same period
of 2009.
Contractholder
deposits decreased 33.2% in the first quarter of 2010 compared to the same
period of 2009 due to lower deposits on fixed annuities and Allstate Bank
products. Deposits on fixed annuities
decreased 54.2% in the first quarter of 2010 compared to the same period of
2009 due to pricing actions to improve returns on new business and reduce our
concentration in spread based products.
Bank and other deposits declined 41.0% as a result of a temporary
savings account promotion offered in the prior year period.
Maturities
and retirements of institutional products decreased 51.1% to $954 million in
the first quarter of 2010 from $1.95 billion in the same period of 2009. The prior year period included the retirement
of $1.36 billion of extendible institutional market obligations, all of which
were retired during 2009.
Surrenders and partial
withdrawals on deferred fixed annuities, interest-sensitive life insurance
products and Allstate Bank products (including maturities of certificates of
deposit) increased 2.9% to $1.25 billion in the first quarter of 2010 from
$1.21 billion in the same period of 2009 due to higher surrenders and partial
withdrawals on market value adjusted annuities, partially offset by lower
surrenders and partial withdrawals on Allstate Bank products and traditional
fixed annuities. The annualized
surrender and partial withdrawal rate on deferred fixed annuities,
interest-sensitive life insurance products and Allstate Bank products, based on
the beginning of period contractholder funds, was 11.7% in the first quarter of
2010 compared to 11.1% in the same period of 2009.
60
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
2010 AND 2009
Net investment income
decreased 10.7% or $88
million to $731 million
in the first quarter of
2010 from $819 million in the same period of 2009 primarily due to lower yields
and actions to reduce the portfolios exposure to commercial real estate, along
with reduced average asset balances
. Net investment income was $744 million and
$737 million in the third and fourth quarter of 2009, respectively.
Net
realized capital gains and losses
are presented in the following table.
($ in millions)
|
|
Three
months ended
March 31,
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Impairment
write-downs
|
$
|
(144
|
)
|
$
|
(357
|
)
|
Change
in intent write-downs
|
|
(23
|
)
|
|
(33
|
)
|
Net
other-than-temporary impairment
losses
recognized in earnings
|
|
(167
|
)
|
|
(390
|
)
|
Sales
|
|
44
|
|
|
359
|
|
Valuation
of derivative instruments
|
|
(54
|
)
|
|
83
|
|
Settlements
of derivative instruments
|
|
19
|
|
|
(18
|
)
|
EMA
limited partnership income
|
|
(4
|
)
|
|
(77
|
)
|
Realized
capital gains and losses, pre-tax
|
|
(162
|
)
|
|
(43
|
)
|
Income
tax benefit (expense)
|
|
57
|
|
|
(127
|
)
|
Realized
capital gains and losses, after-tax
|
$
|
(105
|
)
|
$
|
(170
|
)
|
For further discussion of realized capital gains and
losses, see the Investments section of the MD&A.
Analysis of costs
and expenses
Total costs and expenses decreased 28.3% or $439
million in the first quarter of 2010 compared to the same period of 2009 due
primarily to lower amortization of DAC and interest credited to contractholder
funds, partially offset by higher life and annuity contract benefits.
Life and annuity contract
benefits
increased 14.2%
or $55 million in the first quarter of 2010 compared to the same period of 2009
due to higher contract benefits on accident and health insurance and
interest-sensitive life insurance. The
increase in contract benefits on accident and health insurance business was
proportionate to the growth in premiums.
The higher contract benefits on interest-sensitive life insurance were
primarily due to unfavorable mortality experience in 2010.
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
$139 million in both the first quarter of 2010 and 2009. The benefit spread by product group is
disclosed in the following table.
($ in millions)
|
|
Three
months ended
March 31,
|
|
|
2010
|
|
2009
|
Life
insurance
|
$
|
88
|
|
$
|
103
|
|
Accident
and health
|
|
64
|
|
|
49
|
|
Annuities
|
|
(10
|
)
|
|
(2
|
)
|
Total
benefit spread
|
$
|
142
|
|
$
|
150
|
|
Benefit spread decreased 5.3% or $8
million in the first quarter of 2010 compared to the same period of 2009
primarily due to unfavorable mortality experience on interest-sensitive life
insurance, partially offset by growth in accident and health insurance business
sold through the Allstate Workplace Division.
Interest credited to
contractholder funds
decreased 20.0% or $116 million in the first quarter of 2010 compared to the
same period of 2009 primarily due to lower average contractholder funds,
decreased weighted average interest crediting rates on deferred fixed annuities
and institutional products, and lower amortization of DSI. Amortization of DSI in the first quarter of
2010 and 2009 was $5 million and $57 million, respectively. The decrease is primarily due to the first
quarter of 2009 including $38 million in amortization acceleration due to
changes in assumptions.
61
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
2010 AND 2009
In
order to analyze the impact of net investment income and interest credited to
contractholders on net income, we monitor the difference between net investment
income and the sum of interest credited to contractholder funds and the implied
interest on immediate annuities with life contingencies, which is included as a
component of life and annuity contract benefits on the Condensed Consolidated
Statements of Operations (investment spread).
The investment
spread by product group is shown in the following table.
($ in millions)
|
|
Three
months ended
March 31,
|
|
|
2010
|
|
2009
(1)
|
Annuities
and institutional products
|
$
|
50
|
|
$
|
34
|
|
Life
insurance
|
|
7
|
|
|
(3
|
)
|
Bank
|
|
8
|
|
|
6
|
|
Accident
and health
|
|
4
|
|
|
4
|
|
Net
investment income on investments supporting capital
|
|
60
|
|
|
60
|
|
Total
investment spread
|
$
|
129
|
|
$
|
101
|
|
(1)
To conform to the current year
presentation, certain amounts in the prior year have been reclassified.
Investment spread increased 27.7% or $28 million in
the first quarter of 2010 compared to the same period of 2009 as lower net
investment income was more than offset by decreased interest credited to
contractholder funds.
To further analyze investment spreads, the following
table summarizes the weighted average investment yield on assets supporting
product liabilities and capital, interest crediting rates and investment
spreads for the three months ended March 31.
|
|
Weighted average
investment
yield
|
|
Weighted
average interest crediting rate
|
|
Weighted
average investment spreads
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Interest-sensitive
life insurance
|
|
5.4
|
%
|
5.4
|
%
|
4.4
|
%
|
4.7
|
%
|
1.0
|
%
|
0.7
|
%
|
Deferred
fixed annuities and institutional products
|
|
4.4
|
|
4.7
|
|
3.2
|
|
3.4
|
|
1.2
|
|
1.3
|
|
Immediate
fixed annuities with and without life contingencies
|
|
6.3
|
|
6.3
|
|
6.4
|
|
6.4
|
|
(0.1)
|
|
(0.1)
|
|
Investments
supporting capital, traditional life and other products
|
|
4.1
|
|
4.1
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
The following table summarizes our product liabilities
and indicates the account value of those contracts and policies in which an
investment spread is generated.
($ in millions)
|
|
March 31,
|
|
|
|
2010
|
|
2009
|
Immediate
fixed annuities with life contingencies
|
$
|
8,517
|
|
$
|
8,368
|
|
Other
life contingent contracts and other
|
|
4,535
|
|
|
4,301
|
|
Reserve
for life-contingent contract benefits
|
$
|
13,052
|
|
$
|
12,669
|
|
|
|
|
|
|
|
|
Interest-sensitive
life insurance
|
$
|
10,417
|
|
$
|
10,015
|
|
Deferred
fixed annuities
|
|
31,570
|
|
|
33,554
|
|
Immediate
fixed annuities without life contingencies
|
|
3,870
|
|
|
3,884
|
|
Institutional
products
|
|
3,448
|
|
|
7,078
|
|
Allstate
Bank
|
|
1,095
|
|
|
1,097
|
|
Market
value adjustments related to fair value hedges and other
|
|
627
|
|
|
993
|
|
Contractholder
funds
|
$
|
51,027
|
|
$
|
56,621
|
|
62
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
2010 AND 2009
Amortization of DAC
decreased 80.1% in the first quarter of 2010 compared
to the same period of 2009. The
components of amortization of DAC are summarized in the following table.
($ in millions)
|
|
Three months ended
March 31,
|
|
|
2010
|
|
2009
|
Amortization
of DAC before amortization relating to realized capital gains and losses and
changes in assumptions
|
$
|
(98
|
)
|
$
|
(144
|
)
|
Amortization
relating to realized capital gains and losses
(1)
|
|
(3
|
)
|
|
(27
|
)
|
Amortization
deceleration (acceleration) for changes in assumptions (DAC unlocking)
|
|
12
|
|
|
(277
|
)
|
Total
amortization of DAC
|
$
|
(89
|
)
|
$
|
(448
|
)
|
(1)
The impact of realized
capital gains and losses on amortization of DAC is dependent upon the
relationship between the assets that give rise to the gain or loss and the
product liability supported by the assets.
Fluctuations result from changes in the impact of realized capital
gains and losses on actual and expected gross profits.
|
The decrease of $359 million in the first quarter of
2010 compared to the same period of 2009 was primarily due to a favorable change
in amortization acceleration/deceleration for changes in assumptions.
During
the first quarter of 2010, we completed our annual comprehensive review of the
profitability of our products to determine DAC balances for our
interest-sensitive life, fixed annuities and other investment contracts, which
covers assumptions for investment returns, including capital gains and losses,
interest crediting rates to policyholders, the effect of any hedges,
persistency, mortality and expenses in all product lines. In the first quarter of 2010, the review
resulted in a deceleration of DAC amortization (credit to income) of $12
million. Amortization deceleration of
$45 million related to variable life insurance and was primarily due to
appreciation in the underlying separate account valuations. Amortization acceleration of $32 million
related to interest-sensitive life insurance and was primarily due to an
increase in projected realized capital losses and lower projected renewal
premium (which is also expected to reduce persistency), partially offset by
lower expenses.
In the
first quarter of 2009, our annual comprehensive review resulted in the
acceleration of DAC amortization (charge to income) of $277 million. $289 million related to fixed annuities, of
which $210 million was attributable to market value adjusted annuities, and $18
million related to variable life insurance.
Partially offsetting these amounts was amortization deceleration (credit
to income) for interest-sensitive life insurance of $30 million. The principal assumption impacting fixed
annuity amortization acceleration was an increase in the level of expected
realized capital losses in 2009 and 2010.
For interest-sensitive life insurance, the amortization deceleration was
due to a favorable change in our mortality assumptions, partially offset by
increased expected capital losses.
The following
table provides the effect on DAC amortization of changes in assumptions
relating to the gross profit components of investment margin, benefit margin
and expense margin.
($ in millions)
|
|
Three months ended
March 31,
|
|
|
2010
|
|
2009
|
Investment
margin
|
$
|
15
|
|
$
|
(399
|
)
|
Benefit
margin
|
|
(45
|
)
|
|
129
|
|
Expense
margin
|
|
42
|
|
|
(7
|
)
|
Net
deceleration (acceleration)
|
$
|
12
|
|
$
|
(277
|
)
|
63
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
2010 AND 2009
Operating costs and expenses
were consistent in the first quarter of
2010 compared to the same period of 2009.
The following table summarizes operating costs and expenses.
($ in millions)
|
|
Three months ended
March 31,
|
Non-deferrable
acquisition costs
|
|
2010
|
|
2009
|
Other operating
costs and expenses
|
$
|
44
|
|
$
|
40
|
|
Total operating
costs and expenses
|
|
76
|
|
|
81
|
|
|
$
|
120
|
|
$
|
121
|
|
|
|
|
|
|
|
|
Restructuring
and related charges
|
$
|
--
|
|
$
|
18
|
|
Non-deferrable
acquisition costs increased 10.0% or $4 million in the first quarter of 2010
compared to the same period of 2009 primarily due to higher non-deferrable commissions
related to accident and health insurance business sold through the Allstate
Workplace Division. Other operating
costs and expenses decreased 6.2% or $5 million in the first quarter of 2010
compared to the same period of 2009 due primarily to our expense reduction
actions, which resulted in lower employee, professional services and sales
support expenses.
Income
tax benefit
of $4 million was recognized for the first
quarter of 2010 compared to expense of $37 million for the same period of
2009. Income tax expense for the first quarter of 2009 included expense of $142
million attributable to an increase in the valuation allowance relating to the
deferred tax asset on capital losses.
INVESTMENTS
HIGHLIGHTS
·
Investments as of March 31, 2010
totaled $100.22 billion, an increase of 0.4% from $99.83 billion as of December 31,
2009.
·
Unrealized net capital losses totaled
$849 million as of March 31, 2010, declining from $2.32 billion as of December 31,
2009. This resulted from improving fixed
income and equity portfolio valuations.
The fair value of fixed income securities increased primarily as a
result of tightening credit spreads.
·
Net investment income was $1.05 billion
in the first quarter of 2010, a decrease of 10.7% from $1.18 billion in the first
quarter of 2009.
·
Net realized
capital losses were $348 million in the first quarter of 2010 compared to $359
million in the first quarter of 2009.
First quarter 2010 net realized capital losses include $255 million of
impairment and intent write-downs, compared to $725 million in the first
quarter of 2009, and $185 million of derivative losses primarily resulting from
risk mitigation initiatives, compared to $91 million of derivative gains in the
first quarter of 2009. Net realized
capital losses in the first quarter of 2010 were partially offset by net
realized capital gains of $88 million from investment sales, compared to $418
million in the first quarter of 2009, and EMA limited partnership income of $4
million, compared to losses of $143 million in the first quarter of 2009.
·
Derivative net
realized capital losses from our risk mitigation and return optimization
programs (macro hedge program) totaled $161 million in the first quarter of
2010 and stemmed primarily from interest rate swaptions used to protect our
fixed income portfolio, where valuations were negatively impacted by the
decline in interest rates and volatility.
·
During the first quarter of 2010, our fixed income and mortgage loan
portfolio continued to generate significant cash flows totaling $2.37 billion,
which provides flexibility to take advantage of market opportunities and manage
liabilities.
64
Item 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 2010 AND 2009
|
INVESTMENTS
We continue to focus our strategic risk mitigation
efforts towards managing interest rate, equity, credit and real estate
investment risks, while our return optimization efforts focus on investing in
new opportunities to generate income and capital appreciation. As a result, during the first quarter of 2010
we took the following actions:
·
Reduced our municipal bond exposure by 5.9%
or $1.28 billion of amortized cost primarily through targeted dispositions,
calls and scheduled maturities.
·
Decreased our commercial real estate exposure by 4.9% or $609 million
of amortized cost primarily through targeted dispositions and principal
repayments from borrowers.
·
Reduced our
exposure to equity markets by $1.41 billion of cost as a result of an updated
asset allocation strategy.
·
Macro hedges
were adjusted in respect to our portfolio allocations, but remain in place to
protect our portfolio against interest rate and equity risks. Hedge results were consistent with our
positions in relation to the movement in the underlying market indices and the
resulting realized capital losses were significantly offset by the increase in
fair value of our fixed income and equity securities which is reflected in
other comprehensive income.
The composition of the investment portfolios at March 31,
2010 is presented in the table below.
($ in millions)
|
|
Property-Liability
(5)
|
|
Allstate
Financial
(5)
|
|
Corporate
and Other
(5)
|
|
Total
|
|
|
|
|
|
Percent
to total
|
|
|
|
Percent
to total
|
|
|
|
Percent
to total
|
|
|
|
Percent
to total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
income securities
(1)
|
$
|
28,733
|
|
82.5%
|
$
|
50,310
|
|
80.7%
|
$
|
2,241
|
|
72.8%
|
$
|
81,284
|
|
81.1%
|
|
Equity
securities
(2)
|
|
3,580
|
|
10.3
|
|
227
|
|
0.4
|
|
--
|
|
--
|
|
3,807
|
|
3.8
|
|
Mortgage
loans
|
|
50
|
|
0.1
|
|
7,589
|
|
12.2
|
|
--
|
|
--
|
|
7,639
|
|
7.6
|
|
Limited
partnership interests
(3)
|
|
1,744
|
|
5.0
|
|
1,023
|
|
1.6
|
|
35
|
|
1.1
|
|
2,802
|
|
2.8
|
|
Short-term
(4)
|
|
608
|
|
1.8
|
|
1,074
|
|
1.7
|
|
800
|
|
26.0
|
|
2,482
|
|
2.5
|
|
Other
|
|
94
|
|
0.3
|
|
2,113
|
|
3.4
|
|
2
|
|
0.1
|
|
2,209
|
|
2.2
|
|
Total
|
$
|
34,809
|
|
100.0%
|
$
|
62,336
|
|
100.0%
|
$
|
3,078
|
|
100.0%
|
$
|
100,223
|
|
100.0%
|
|
(1)
Fixed income securities are carried at fair
value. Amortized cost basis for these
securities was $28.83 billion, $51.45 billion and $2.20 billion for
Property-Liability, Allstate Financial and Corporate and Other, respectively.
(2)
Equity securities are carried at fair
value. Cost basis for these securities
was $3.25 billion and $183 million for Property-Liability and Allstate
Financial, respectively.
(3)
We have commitments to invest in
additional limited partnership interests totaling $595 million and $759 million
for Property-Liability and Allstate Financial, respectively.
(4)
Short-term investments are carried at fair
value. Amortized cost basis for these
investments was $608 million, $1.07 billion and $800 million for
Property-Liability, Allstate Financial and Corporate and Other, respectively.
(5)
Balances reflect the elimination of
related party investments between segments.
Total investments increased to $100.22 billion at March 31,
2010, from $99.83 billion at December 31, 2009, primarily due to higher
valuations for fixed income and equity securities from improved market
conditions, partially offset by net reductions in contractholder obligations of
$1.56 billion. Fair values of fixed
income securities increased as a result of tightening credit spreads. Credit
spread is the additional yield on fixed income securities above the risk-free
rate (typically defined as the yield on U.S. Treasury securities) that market
participants require to compensate them for assuming credit, liquidity and/or
prepayment risks. Credit spreads vary
(i.e., widening or tightening) in response to the markets perception of risk
and liquidity in a specific issuer or specific sector.
The Property-Liability investment portfolio increased
to $34.81 billion at March 31, 2010, from $34.53 billion at December 31,
2009, primarily due to higher valuations for fixed income and equity securities
from improved market conditions, partially offset by operating cash flows.
The
Allstate
Financial investment portfolio increased to $62.34 billion at March 31,
2010, from $62.22 billion at December 31, 2009, primarily due to higher
valuations for fixed income securities from improved market conditions that was
almost entirely offset by net reductions in contractholder obligations of $1.56
billion primarily from maturities and retirements of institutional products.
65
Item 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 2010 AND 2009
|
The Corporate and Other investment portfolio decreased
to $3.08 billion at March 31, 2010, from $3.09 billion at December 31,
2009, as dividends paid to shareholders more than offset higher valuations for
fixed income securities from improved market conditions.
Fixed
income securities
by
type are listed in the table below.
($ in millions)
|
|
|
Fair
value at
March 31, 2010
|
|
|
Percent
to
total
investments
|
|
|
Fair
value at
December 31, 2009
|
|
|
Percent
to
total
investments
|
|
U.S.
government and agencies
|
$
|
|
8,422
|
|
|
|
8.4
|
%
|
$
|
|
7,536
|
|
|
|
7.6
|
%
|
|
Municipal
|
|
|
20,148
|
|
|
|
20.1
|
|
|
|
21,280
|
|
|
|
21.3
|
|
|
Corporate
|
|
|
34,499
|
|
|
|
34.4
|
|
|
|
33,115
|
|
|
|
33.2
|
|
|
Foreign
government
|
|
|
3,314
|
|
|
|
3.3
|
|
|
|
3,197
|
|
|
|
3.2
|
|
|
Residential
mortgage-backed securities (RMBS)
|
|
|
9,112
|
|
|
|
9.1
|
|
|
|
7,987
|
|
|
|
8.0
|
|
|
Commercial
mortgage-backed securities (CMBS)
|
|
|
2,452
|
|
|
|
2.5
|
|
|
|
2,586
|
|
|
|
2.6
|
|
|
Asset-backed
securities (ABS)
|
|
|
3,297
|
|
|
|
3.3
|
|
|
|
3,026
|
|
|
|
3.0
|
|
|
Redeemable
preferred stock
|
|
|
40
|
|
|
|
--
|
|
|
|
39
|
|
|
|
--
|
|
|
Total
fixed income securities
|
$
|
|
81,284
|
|
|
|
81.1
|
%
|
$
|
|
78,766
|
|
|
|
78.9
|
%
|
|
At March 31, 2010, 93.3% of the consolidated
fixed income securities portfolio was rated investment grade, which is defined
as a security having a rating of Aaa, Aa, A or Baa from Moodys, a rating of
AAA, AA, A or BBB from Standard & Poors (S&P), Fitch, Dominion,
or Realpoint, a rating of aaa, aa, a, or bbb from A.M. Best, or a
comparable internal rating, if an externally provided rating is not available,
which is consistent with the National Association of Insurance Commissioners (NAIC)
rating.
66
Item 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 2010 AND 2009
|
The following table summarizes the fair value and
unrealized net capital gains and losses for fixed income securities by credit
rating as of March 31, 2010.
($ in millions)
|
|
Aaa
|
|
Aa
|
|
A
|
|
|
|
Fair
value
|
|
Unrealized
gain/(loss)
|
|
Fair
value
|
|
Unrealized
gain/(loss)
|
|
Fair
value
|
|
Unrealized
gain/(loss)
|
|
U.S.
government and agencies
|
$
|
8,422
|
$
|
218
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt
|
|
1,480
|
|
95
|
|
5,743
|
|
178
|
|
4,072
|
|
55
|
|
Taxable
|
|
135
|
|
3
|
|
2,268
|
|
(31)
|
|
1,350
|
|
(89)
|
|
Auction rate
securities (ARS)
|
|
1,175
|
|
(47)
|
|
99
|
|
(9)
|
|
118
|
|
(19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
|
|
2,506
|
|
32
|
|
2,620
|
|
69
|
|
6,186
|
|
291
|
|
Privately placed
|
|
753
|
|
23
|
|
1,580
|
|
55
|
|
3,519
|
|
139
|
|
Hybrid
|
|
33
|
|
3
|
|
60
|
|
9
|
|
584
|
|
(74)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
government
|
|
2,025
|
|
240
|
|
419
|
|
10
|
|
468
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored entities (U.S. Agency)
|
|
5,452
|
|
146
|
|
--
|
|
--
|
|
--
|
|
--
|
|
Prime
residential mortgage-backed securities (Prime)
|
|
584
|
|
(14)
|
|
99
|
|
(12)
|
|
209
|
|
(7)
|
|
Alt-A
residential mortgage-backed securities (Alt-A)
|
|
42
|
|
(4)
|
|
72
|
|
(10)
|
|
113
|
|
(9)
|
|
Subprime
residential mortgage-backed securities (Subprime)
|
|
175
|
|
(12)
|
|
454
|
|
(185)
|
|
139
|
|
(104)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS
|
|
1,557
|
|
(35)
|
|
344
|
|
(74)
|
|
237
|
|
(219)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
debt obligations (CDO)
|
|
36
|
|
(10)
|
|
514
|
|
(14)
|
|
532
|
|
(92)
|
|
Consumer
and other asset-backed securities (Consumer and other ABS)
|
|
787
|
|
3
|
|
257
|
|
(1)
|
|
199
|
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
preferred stock
|
|
--
|
|
--
|
|
--
|
|
--
|
|
3
|
|
--
|
|
Total
fixed income securities
|
$
|
25,162
|
$
|
641
|
$
|
14,529
|
$
|
(15)
|
$
|
17,729
|
$
|
(96)
|
|
|
|
Baa
|
|
Ba or
lower
|
|
Total
|
|
|
|
Fair
value
|
|
Unrealized
gain/(loss)
|
|
Fair
value
|
|
Unrealized
gain/(loss)
|
|
Fair
value
|
|
Unrealized
gain/(loss)
|
|
U.S.
government and agencies
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
8,422
|
$
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt
|
|
1,925
|
|
(81)
|
|
677
|
|
(70)
|
|
13,897
|
|
177
|
|
Taxable
|
|
791
|
|
(163)
|
|
166
|
|
(50)
|
|
4,710
|
|
(330)
|
|
ARS
|
|
45
|
|
(7)
|
|
104
|
|
(21)
|
|
1,541
|
|
(103)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
|
|
7,713
|
|
324
|
|
931
|
|
1
|
|
19,956
|
|
717
|
|
Privately placed
|
|
6,184
|
|
122
|
|
1,142
|
|
--
|
|
13,178
|
|
339
|
|
Hybrid
|
|
484
|
|
(80)
|
|
204
|
|
--
|
|
1,365
|
|
(142)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
government
|
|
385
|
|
18
|
|
17
|
|
--
|
|
3,314
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency
|
|
--
|
|
--
|
|
--
|
|
--
|
|
5,452
|
|
146
|
|
Prime
|
|
20
|
|
(7)
|
|
378
|
|
(30)
|
|
1,290
|
|
(70)
|
|
Alt-A
|
|
66
|
|
(15)
|
|
443
|
|
(161)
|
|
736
|
|
(199)
|
|
Subprime
|
|
78
|
|
(61)
|
|
788
|
|
(746)
|
|
1,634
|
|
(1,108)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS
|
|
194
|
|
(234)
|
|
120
|
|
(206)
|
|
2,452
|
|
(768)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDO
|
|
264
|
|
(87)
|
|
416
|
|
(170)
|
|
1,762
|
|
(373)
|
|
Consumer and
other ABS
|
|
258
|
|
(5)
|
|
34
|
|
(5)
|
|
1,535
|
|
(14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
preferred stock
|
|
32
|
|
2
|
|
5
|
|
--
|
|
40
|
|
2
|
|
Total
fixed income securities
|
$
|
18,439
|
$
|
(274)
|
$
|
5,425
|
$
|
(1,458)
|
$
|
81,284
|
$
|
(1,202)
|
|
67
Item 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 2010 AND 2009
|
Municipal Bonds
, including tax
exempt, taxable and ARS securities, totaled $20.15 billion as of March 31,
2010 with an unrealized net capital loss of $256 million. Taxable municipal bonds have an unrealized
net capital loss of $330 million resulting from wider credit spreads than at
initial purchase, which is largely due to the macroeconomic conditions and
credit market deterioration that persisted into 2010, as well as specific issue
or issuer conditions.
Included
in our municipal bond holdings at March 31, 2010 are $1.18 billion of
municipal securities which are not rated by third party credit rating agencies,
but are rated by the NAIC and also internally rated. These holdings include $599 million of below
investment grade municipal bonds that provide the opportunity to achieve
incremental returns. Our initial
investment decisions and ongoing monitoring procedures for these securities are
based on a thorough due diligence process which includes, but is not limited
to, an assessment of the credit quality, sector, structure, and liquidity risks
of each issue.
48.1% or $9.68 billion of
our municipal bond portfolio is insured by nine bond insurers and 39.5% of
these securities have a credit rating of Aaa or Aa. Our practices for acquiring and monitoring
municipal bonds primarily are based on the credit quality of the primary
obligor. As of March 31, 2010, we
believe valuations substantially reflected the decline in the value of the
insurance, and further related valuation declines, if any, are not expected to
be material. While the valuation of
these holdings may be temporarily impacted by negative market developments, we
expect to receive all of the contractual cash flows. As of March 31, 2010, 47.3% of our
insured municipal bond portfolio was insured by National Public Finance
Guarantee Corporation, Inc., 23.9% by Ambac Assurance Corporation, 22.3%
by Assured Guaranty Municipal Corporation and 2.8% by Assured Guaranty Ltd.
Corporate bonds
, including publicly traded, privately placed and
hybrid securities, totaled $34.50 billion as of March 31, 2010 with an
unrealized net capital gain of $914 million.
Privately placed securities primarily consist of corporate issued senior
debt securities that are in unregistered form or are directly negotiated with
the borrower. Privately placed corporate
securities are rated by the NAIC in instances when information is provided to
them. 49.6% of the privately placed
corporate securities in our portfolio are rated by an independent rating
agency.
The following table shows details of hybrid securities
as of March 31, 2010.
($ in millions)
|
|
Public
|
|
Privately
placed
|
|
Total
|
|
|
|
Fair
value
|
|
Unrealized
gain/(loss)
|
|
Fair
value
|
|
Unrealized
gain/(loss)
|
|
Fair
value
|
|
Unrealized
gain/(loss)
|
|
United
Kingdom (UK)
|
$
|
77
|
$
|
(5)
|
$
|
60
|
$
|
(3)
|
$
|
137
|
$
|
(8)
|
|
Europe
(non-UK)
|
|
131
|
|
9
|
|
313
|
|
(33)
|
|
444
|
|
(24)
|
|
Asia/Australia
|
|
12
|
|
--
|
|
137
|
|
(11)
|
|
149
|
|
(11)
|
|
North
America
|
|
421
|
|
(56)
|
|
214
|
|
(43)
|
|
635
|
|
(99)
|
|
Total
|
$
|
641
|
$
|
(52)
|
$
|
724
|
$
|
(90)
|
$
|
1,365
|
$
|
(142)
|
|
Hybrid
securities have attributes most similar to those of fixed income securities
such as stated interest rates and mandatory redemption dates. Additionally, some hybrids may have an
interest rate step-up feature which is intended to incent the issuer to redeem
the security at a specified call date.
Hybrid securities include publicly-traded and privately placed securities. While hybrid securities are generally issued
by investment grade-rated financial institutions, they have structural
features, such as the ability to defer principal and interest payments, which
make them more sensitive to credit market deterioration. $1.13 billion of our hybrid securities with
$140 million of unrealized net capital losses are Tier 1 securities, and $239
million with $2 million of unrealized net capital losses are Tier 2
securities. Tier 1 securities are lower
in the capital structure than Tier 2 securities.
RMBS, CMBS and ABS
are structured
securities that are primarily collateralized by residential and commercial real
estate related loans and other consumer related borrowings. The cash flows 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, or rating class, which would originally qualify for a
rating of Aaa typically has priority in receiving the principal repayments on
the collateral. In a sequential
structure, underlying collateral principal repayments are directed to the most
senior rated Aaa class in the structure until paid in full, after which principal
repayments are directed to the next most senior Aaa class in the structure
until it is paid in full. Senior Aaa
classes generally share any losses from the underlying collateral on a pro-rata
basis after losses are absorbed by classes with lower original ratings and
include other junior or subordinate securities. The collateral can have fixed interest rates,
variable interest rates (such as adjustable rate mortgages (ARM)) or may
contain features of both fixed and variable rate mortgages.
68
Item 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 2010 AND 2009
|
RMBS
, including U.S. Agency,
Prime, Alt-A and Subprime,
totaled $9.11
billion, with 82.4% rated investment grade, at March 31, 2010. The RMBS portfolio is subject to interest
rate risk, but unlike other fixed income securities, is additionally subject to
significant prepayment risk from the underlying mortgages. The credit risk associated with our RMBS is
mitigated due to the fact that 59.8% of the portfolio consists of securities
that were issued by, or have underlying collateral that is guaranteed by, U.S.
government agencies. The unrealized net
capital loss of $1.23 billion at March 31, 2010 on our RMBS portfolio was
the result of wider credit spreads than at initial purchase on non-U.S. Agency
securities, which is largely due to the macroeconomic conditions and credit
market deterioration, including the impact of real estate valuations, that
persisted into 2010. The following table
shows our RMBS portfolio at March 31, 2010 based upon vintage year of the
issuance of the securities.
($ in millions)
|
|
U.S.
Agency
|
|
Prime
|
|
Alt-A
|
|
Subprime
|
|
Total
RMBS
|
|
|
Fair
value
|
|
Unrealized
gain/(loss)
|
|
Fair
value
|
|
Unrealized
gain/(loss)
|
|
Fair
value
|
|
Unrealized
gain/(loss)
|
|
Fair
value
|
|
Unrealized
gain/(loss)
|
|
Fair
value
|
|
Unrealized
gain/(loss)
|
2010
|
$
|
255
|
$
|
(1)
|
$
|
237
|
$
|
--
|
$
|
75
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
567
|
$
|
(1)
|
2009
|
|
968
|
|
10
|
|
76
|
|
--
|
|
12
|
|
--
|
|
--
|
|
--
|
|
1,056
|
|
10
|
2008
|
|
1,017
|
|
18
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
1,017
|
|
18
|
2007
|
|
593
|
|
10
|
|
171
|
|
(12)
|
|
112
|
|
(78)
|
|
412
|
|
(393)
|
|
1,288
|
|
(473)
|
2006
|
|
369
|
|
9
|
|
219
|
|
(16)
|
|
195
|
|
(30)
|
|
487
|
|
(338)
|
|
1,270
|
|
(375)
|
2005
|
|
682
|
|
20
|
|
218
|
|
(29)
|
|
145
|
|
(48)
|
|
404
|
|
(246)
|
|
1,449
|
|
(303)
|
Pre-2005
|
|
1,568
|
|
80
|
|
369
|
|
(13)
|
|
197
|
|
(43)
|
|
331
|
|
(131)
|
|
2,465
|
|
(107)
|
Total
|
$
|
5,452
|
$
|
146
|
$
|
1,290
|
$
|
(70)
|
$
|
736
|
$
|
(199)
|
$
|
1,634
|
$
|
(1,108)
|
$
|
9,112
|
$
|
(1,231)
|
Prime
are collateralized by residential mortgage loans issued to prime
borrowers. As of March 31, 2010,
$988 million of the Prime were fixed rate and $302 million were variable rate.
Alt-A
includes securities collateralized by
residential mortgage loans issued to borrowers with
stronger credit profiles than subprime borrowers, but who do not qualify for prime
financing terms due to high loan-to-value ratios or limited supporting
documentation. As of March 31,
2010, $546 million of the Alt-A were fixed rate and $190 million were variable
rate.
Subprime 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 Subprime portfolio
consisted of $1.35 billion and $284 million of first lien and second lien
securities, respectively. Subprime
included $834 million of fixed rate and $800 million of variable rate
securities.
CMBS
totaled $2.45 billion, with 95.1% rated investment
grade, at March 31, 2010. The CMBS
portfolio is subject to credit risk, but unlike certain other structured
securities, is generally not subject to prepayment risk due to protections
within the underlying commercial mortgages whereby borrowers are effectively
restricted from prepaying their mortgages due to changes in interest
rates. Of the CMBS investments, 90.2%
are traditional conduit transactions collateralized by pools of commercial mortgages,
broadly diversified across property types and geographical area. The remainder consists of non-traditional
CMBS such as small balance transactions, large loan pools and single borrower
transactions.
The following table shows our CMBS portfolio at March 31,
2010 based upon vintage year.
($ in millions)
|
|
Fair
value
|
|
Unrealized
gain/(loss)
|
2007
|
$
|
619
|
$
|
(229)
|
2006
|
|
551
|
|
(399)
|
2005
|
|
381
|
|
(100)
|
Pre-2005
|
|
901
|
|
(40)
|
Total CMBS
|
$
|
2,452
|
$
|
(768)
|
The unrealized net capital loss of $768 million at March 31,
2010 on our CMBS portfolio was the result of wider credit spreads than at
initial purchase, which is largely due to the macroeconomic conditions and
credit market deterioration, including the impact of real estate valuations,
that persisted into 2010. While CMBS
spreads tightened during 2009 and 2010, credit spreads in most rating classes
remain wider than at initial purchase, which is particularly evident in our
2005-2007 vintage year and non-traditional CMBS. These holdings accounted for $692 million, or
90.1%, of the unrealized net capital loss.
69
Item 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 2010 AND 2009
|
ABS
, including CDO and Consumer and other ABS, totaled
$3.30 billion, with 86.4% rated investment grade, at March 31, 2010.
Credit risk is managed by monitoring the performance of the collateral. In addition, many of the securities in the
ABS portfolio are credit enhanced with features such as overcollateralization,
subordinated structures, reserve funds, guarantees and/or insurance. The unrealized net capital loss of $387
million at March 31, 2010 on our ABS portfolio was the result of wider
credit spreads than at initial purchase.
CDO totaled $1.76 billion, with 76.4% rated investment
grade, at March 31, 2010. CDO
consist primarily of obligations secured by high yield and investment grade
corporate credits including $1.37 billion of cash flow collateralized loan obligations
(CLO) and $98 million of synthetic CDO with unrealized losses of $174 million
and $97 million, respectively. The
remaining $295 million of securities consisted of trust preferred CDO, market
value CDO, project finance CDO, collateralized bond obligations and other CLO
with unrealized losses of $102 million.
Cash
flow CLO are structures where the underlying assets are primarily comprised of
below investment grade senior secured corporate loans. The
collateral is actively managed by external managers that monitor the collateral
performance. The underlying investments
are well diversified across industries and among issuers. A transaction will typically issue
notes with various capital structure classes (i.e. Aaa, Aa, A, etc.) as well as
equity-like tranches. In general, these
securities are structured with overcollateralization ratios and performance is
impacted by downgrades, defaults and recoveries of the underlying assets within
the structures. Downgrades of underlying
assets, along with increased defaults reduce overcollateralization ratios over
time. A violation of the senior
overcollateralization test could result in an event of default of the
structure. This would give the
controlling class, defined as the majority of the senior lenders, certain
rights which could include diverting cash flows or liquidating the underlying
portfolio to pay off the senior liabilities.
Synthetic
CDO primarily consist of a portfolio
of corporate credit default swaps (CDS) which are collateralized by Aaa rated
LIBOR-based securities (i.e. fully funded synthetic CDO). Our synthetic CDO collateral primarily
is actively managed by external managers monitoring the CDS selection and
performance.
Consumer
and other ABS totaled $1.54 billion, with 97.8% rated investment grade, at March 31,
2010. Consumer and other ABS consists of
$844 million of auto, $76 million of student loan and $615 million of other ABS
securities with unrealized gains of $14 million for auto and unrealized losses
of $28 million for other ABS securities.
Mortgage loans
Our mortgage loan portfolio,
which is primarily held in the Allstate Financial portfolio, totaled
$7.64 billion at March 31, 2010, compared to $7.94 billion at December 31,
2009, and is primarily comprised of loans secured by first mortgages on
developed commercial real estate. Key
considerations used to manage our exposure include property type and geographic
diversification. Our exposure to any
metropolitan area is also highly diversified, with the largest exposure not
exceeding 9.6% of the portfolio. The
portfolio is diversified across several property types, with the largest
concentrations of 34.2% in office buildings and 24.6% in retail property. Debt service coverage ratio represents the
amount of cash flows from the property available to the borrower to meet
principal and interest payment obligations.
For fixed rate mortgage loans, which comprise 90% of the total
portfolio, the average debt service coverage ratios as of both March 31,
2010 and December 31, 2009 were 1.7.
Mortgage loans with debt service coverage ratios below 1.0 generally
have a higher level of risk. 5.5% of the
mortgage loan portfolio had a debt service coverage ratio under 1.0 compared to
5.8% as of December 31, 2009. As of
March 31, 2010, 27.2% of these loans have valuation allowances totaling
$36 million compared to 18.4% totaling $26 million as of December 31,
2009. Mortgage loans with debt service
coverage below 1.0 for which valuation allowances have not been established
primarily relate to instances where the borrower has the financial capacity to
fund the revenue shortfalls from the properties for the foreseeable term, the
decrease in occupancy is considered temporary, or there are other risk
mitigating circumstances such as additional collateral, escrow balances or
borrower guarantees.
In the first three months of 2010, $346 million of
commercial mortgage loans were contractually due. Of these, 9% were paid as due, 72% were
extended generally for less than one year, 11% were refinanced and 8% were
foreclosed or in the process of foreclosure.
In addition, $193 million that were not contractually due in the first
three months of 2010 were paid in full.
We have nine additional loans totaling $129 million in the process of
foreclosure that were not contractually due in the first three months of
2010. In total we have eleven loans
totaling $158 million in foreclosure, reflecting an increase from five loans
totaling $49 million as of December 31, 2009.
70
Item 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 2010 AND 2009
|
The
net carrying value of impaired loans at March 31, 2010 and December 31,
2009 was $339 million and $383 million, respectively. Total valuation allowances of $104 million
were held on impaired loans at March 31, 2010. We recognized $13 million of realized
capital losses related to net increases in the valuation allowances on impaired
loans for the three months ended March 31, 2010 primarily due to
deteriorating debt service coverage resulting from a decrease in occupancy and
the risk associated with refinancing near-term maturities due to declining
collateral valuations. Realized capital
losses recognized on mortgage loans held for sale totaled $6 million for the
three months ended March 31, 2010.
Limited partnership interests
consist of investments in private
equity/debt funds, real estate funds and hedge funds. The overall limited partnership interests
portfolio is well diversified across a number of characteristics including fund
sponsors, vintage years, strategies, geography (including international), and
company/property types. The following
table presents information about our limited partnership interests as of March 31,
2010.
($ in millions)
|
|
Private
equity/ debt
funds
|
|
Real estate
funds
|
|
Hedge
funds
|
|
Total
|
Cost
method of accounting (Cost)
|
$
|
788
|
$
|
268
|
$
|
56
|
$
|
1,112
|
Equity
method of accounting (EMA)
|
|
650
|
|
261
|
|
779
|
|
1,690
|
Total
|
$
|
1,438
|
$
|
529
|
$
|
835
|
$
|
2,802
|
|
|
|
|
|
|
|
|
|
Number
of sponsors
|
|
84
|
|
40
|
|
11
|
|
|
Number
of individual funds
|
|
133
|
|
88
|
|
92
|
|
|
Largest
exposure to single fund
|
$
|
40
|
$
|
35
|
$
|
107
|
|
|
As of
both March 31, 2010 and December 31, 2009, our aggregate limited
partnership exposure represented 2.8% of total invested assets.
The following
table shows the results from our limited partnership interests by fund type and
accounting classification.
($ in millions)
|
|
Three
months ended
March 31,
|
|
|
2010
|
|
2009
|
|
|
Cost
|
|
EMA
|
|
Total
income
|
|
Impairment
write-downs
(1)
|
|
Cost
|
|
EMA
|
|
Total
income
|
|
Impairment
write-downs
(1)
|
Private
equity/debt funds
|
$
|
6
|
$
|
15
|
$
|
21
|
$
|
(2)
|
$
|
3
|
$
|
(63)
|
$
|
(60)
|
$
|
(71)
|
Real estate funds
|
|
--
|
|
(28)
|
|
(28)
|
|
(21)
|
|
--
|
|
(78)
|
|
(78)
|
|
(124)
|
Hedge funds
|
|
--
|
|
17
|
|
17
|
|
(1)
|
|
--
|
|
(2)
|
|
(2)
|
|
(2)
|
Total
|
$
|
6
|
$
|
4
|
$
|
10
|
$
|
(24)
|
$
|
3
|
$
|
(143)
|
$
|
(140)
|
$
|
(197)
|
(1)
Impairment write-downs related to Cost
limited partnerships were $24 million and $187 million in the three months
ended March 31, 2010 and 2009, respectively. Impairment write-downs
related to EMA limited partnerships were $10 million in the three months ended March 31,
2009. There were no impairment
write-downs related to EMA limited partnerships in the three months ended March 31,
2010.
Limited partnership
interests, excluding impairment write-downs, produced income of $10 million in
the three months ended March 31, 2010 compared to losses of $140 million
in the three months ended March 31, 2009.
Income on EMA limited partnerships is recognized on a delay due to the availability
of the related financial statements. The
recognition of income on hedge funds is primarily on a one-month delay and the
income recognition on private equity/debt funds and real estate funds are
generally on a three-month delay.
Limited partnership interests accounted for under the cost method of
accounting recognize income only upon cash distributions by the partnership.
71
Item 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 2010 AND 2009
|
Unrealized net capital losses
totaled $849 million as of March 31,
2010 compared to unrealized net capital losses of $2.32 billion as of December 31,
2009. The improvement since December 31,
2009 for fixed income securities was primarily a result of tightening credit
spreads on certain fixed income securities.
The improvement since December 31, 2009 for equity securities was a
result of higher equity security valuations.
The following table presents unrealized net capital gains and losses,
pre-tax and after-tax.
($ in millions)
|
|
March 31,
2010
|
|
December 31,
2009
|
U.S.
government and agencies
|
$
|
218
|
$
|
203
|
Municipal
|
|
(256)
|
|
(403)
|
Corporate
|
|
914
|
|
345
|
Foreign government
|
|
306
|
|
291
|
RMBS
|
|
(1,231)
|
|
(1,500)
|
CMBS
|
|
(768)
|
|
(925)
|
ABS
|
|
(387)
|
|
(488)
|
Redeemable preferred stock
|
|
2
|
|
--
|
Fixed income securities
(1)
|
|
(1,202)
|
|
(2,477)
|
Equity securities
|
|
371
|
|
179
|
Short-term investments
|
|
--
|
|
--
|
Derivatives
|
|
(18)
|
|
(23)
|
Unrealized net capital gains and
losses, pre-tax
|
|
(849)
|
|
(2,321)
|
Amounts recognized for:
|
|
|
|
|
Insurance reserves
(2)
|
|
--
|
|
--
|
DAC and DSI
(3)
|
|
726
|
|
990
|
Amounts recognized
|
|
726
|
|
990
|
Deferred income taxes
|
|
39
|
|
461
|
Unrealized net capital gains and
losses, after-tax
|
$
|
(84)
|
$
|
(870)
|
(1)
Unrealized
net capital gains and losses for fixed income securities as of March 31,
2010 and December 31, 2009 comprises $(590) million and $(679) million,
respectively, related to unrealized net capital losses on fixed income
securities with other-than-temporary impairment and $(612) million and $(1,798)
million, respectively, related to other unrealized net capital gains and
losses.
(2)
The
insurance reserves adjustment represents the amount by which the reserve
balance would increase if the net unrealized gains in the applicable product
portfolios were realized and reinvested at current lower interest rates,
resulting in a premium deficiency.
Although we evaluate premium deficiencies on the combined performance of
our life insurance and immediate annuities with life contingencies, the
adjustment primarily relates to structured settlement annuities with life
contingencies, in addition to annuity buy-outs and certain payout annuities
with life contingencies.
(3)
The DAC and DSI adjustment balance represents the
amount by which the amortization of DAC and DSI would increase or decrease if
the unrealized gains or losses in the respective product portfolios were
realized. Only the unrealized net
capital gains and losses on the Allstate Financial fixed annuity and
interest-sensitive life product portfolios are used in this calculation. The reduction in unrealized net capital
losses in the first quarter of 2010 for these product portfolios was less than
the reduction in unrealized net capital losses for the total Allstate Financial
and consolidated portfolios. The DAC and
DSI adjustment balance, subject to limitations, is determined by applying the
DAC and DSI amortization rate to unrealized net capital gains or losses. Recapitalization of the DAC and DSI balances
is limited to the originally deferred costs plus interest.
The net unrealized loss
for the fixed income portfolio totaled $1.20 billion, comprised of $2.78
billion of gross unrealized gains and $3.98 billion of gross unrealized losses
at March 31, 2010. This is compared
to a net unrealized loss for the fixed income portfolio totaling $2.48 billion,
comprised of $2.47 billion of gross unrealized gains and $4.95 billion of gross
unrealized losses at December 31, 2009.
72
Item 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 2010 AND 2009
|
Gross unrealized gains and losses as of March 31,
2010 on fixed income securities by type and sector are provided in the table
below
.
($ in millions)
|
|
|
|
|
|
Gross
unrealized
|
|
|
|
Amortized
cost as a
|
|
Fair
value
as a percent
|
|
|
|
Par
|
|
Amortized
|
|
|
|
|
|
Fair
|
|
percent
of
|
|
of
|
|
|
|
value
(1)
|
|
cost
|
|
Gains
|
|
Losses
|
|
value
|
|
par value
(2)
|
|
par value
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking
|
$
|
4,242
|
$
|
4,063
|
$
|
104
|
$
|
(206)
|
$
|
3,961
|
|
95.8
|
%
|
93.4
|
%
|
Financial
services
|
|
3,371
|
|
3,275
|
|
109
|
|
(60)
|
|
3,324
|
|
97.2
|
|
98.6
|
|
Consumer
goods (cyclical and
non-cyclical)
|
|
5,002
|
|
5,064
|
|
233
|
|
(51)
|
|
5,246
|
|
101.2
|
|
104.9
|
|
Utilities
|
|
5,899
|
|
5,903
|
|
337
|
|
(50)
|
|
6,190
|
|
100.1
|
|
104.9
|
|
Transportation
|
|
1,661
|
|
1,677
|
|
72
|
|
(33)
|
|
1,716
|
|
101.0
|
|
103.3
|
|
Capital
goods
|
|
3,551
|
|
3,560
|
|
171
|
|
(28)
|
|
3,703
|
|
100.3
|
|
104.3
|
|
Basic
industry
|
|
1,480
|
|
1,502
|
|
71
|
|
(15)
|
|
1,558
|
|
101.5
|
|
105.3
|
|
Energy
|
|
2,212
|
|
2,230
|
|
106
|
|
(12)
|
|
2,324
|
|
100.8
|
|
105.1
|
|
Communications
|
|
1,947
|
|
1,921
|
|
91
|
|
(11)
|
|
2,001
|
|
98.7
|
|
102.8
|
|
Technology
|
|
1,121
|
|
1,138
|
|
51
|
|
(10)
|
|
1,179
|
|
101.5
|
|
105.2
|
|
FDIC
guaranteed
|
|
1,982
|
|
1,994
|
|
25
|
|
--
|
|
2,019
|
|
100.6
|
|
101.9
|
|
Other
|
|
1,403
|
|
1,258
|
|
43
|
|
(23)
|
|
1,278
|
|
89.7
|
|
91.1
|
|
Total
corporate fixed income portfolio
|
|
33,871
|
|
33,585
|
|
1,413
|
|
(499)
|
|
34,499
|
|
99.2
|
|
101.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government and agencies
|
|
8,845
|
|
8,204
|
|
238
|
|
(20)
|
|
8,422
|
|
92.8
|
|
95.2
|
|
Municipal
|
|
25,891
|
|
20,404
|
|
517
|
|
(773)
|
|
20,148
|
|
78.8
|
|
77.8
|
|
Foreign
government
|
|
3,474
|
|
3,008
|
|
315
|
|
(9)
|
|
3,314
|
|
86.6
|
|
95.4
|
|
RMBS
|
|
10,966
|
|
10,343
|
|
173
|
|
(1,404)
|
|
9,112
|
|
94.3
|
|
83.1
|
|
CMBS
|
|
3,286
|
|
3,220
|
|
44
|
|
(812)
|
|
2,452
|
|
98.0
|
|
74.6
|
|
ABS
|
|
4,105
|
|
3,684
|
|
80
|
|
(467)
|
|
3,297
|
|
89.7
|
|
80.3
|
|
Redeemable
preferred stock
|
|
47
|
|
38
|
|
2
|
|
--
|
|
40
|
|
80.9
|
|
85.1
|
|
Total
fixed income securities
|
$
|
90,485
|
$
|
82,486
|
$
|
2,782
|
$
|
(3,984)
|
$
|
81,284
|
|
91.2
|
|
89.8
|
|
(1)
Included in par value are zero-coupon
securities that are generally purchased at a deep discount to the par value
that is received at maturity. These
primarily included corporate, municipal, foreign government and U.S. government
and agencies zero-coupon securities with par value of $882 million, $7.83
billion, $1.35 billion and $1.49 billion, respectively.
(2)
Excluding the impact of zero-coupon
securities, the percentage of amortized cost to par value would be 99.7% for
corporates, 99.9% for municipals, 104.2% for foreign governments and 101.3% for
U.S. government and agencies. Similarly,
excluding the impact of zero-coupon securities, the percentage of fair value to
par value would be 102.3% for corporates, 99.8% for municipals, 108.9% for
foreign governments and 102.8% for U.S. government and agencies.
The
banking, financial services, consumer goods and utilities sectors had the
highest concentration of gross unrealized losses in our corporate fixed income
securities portfolio at March 31, 2010.
While credit spreads tightened in 2009 and 2010, they remain wider than
at initial purchase for select securities in the portfolio.
The net unrealized gain for the equity portfolio
totaled $371 million, comprised of $457 million of unrealized gains and $86
million of unrealized losses at March 31, 2010. This is compared to a net unrealized gain for
the equity portfolio totaling $179 million, comprised of $381 million of
unrealized gains and $202 million of unrealized losses at December 31,
2009. Within the equity portfolio, the
losses were primarily concentrated in index-based securities, banking, consumer
goods and financial services sectors.
The unrealized losses in these sectors were company and sector
specific. As of March 31, 2010, we
have the intent and ability to hold our equity securities with unrealized
losses until recovery.
We have a comprehensive
portfolio monitoring process to identify and evaluate each fixed income and
equity security whose carrying value may be other-than-temporarily
impaired. The process includes a
quarterly review of all securities through a screening criteria which
identifies instances where the fair value compared to amortized cost for fixed
income securities and cost for equity securities is below established
thresholds, and also includes the monitoring of other 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
73
Item 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 2010 AND 2009
|
inclusion on our
watch-list. All investments in an
unrealized loss position at March 31, 2010 were included in our portfolio
monitoring process for determining whether declines in value were other than
temporary.
The extent and duration of a decline in fair value have become less
indicative of when the market may believe there has been credit deterioration
with respect to an issue or issuer.
While we continue to use declines in fair value and the length of time a
security is in an unrealized loss position as indicators of potential credit
deterioration, our determination of whether a securitys decline in fair value
is other than temporary has placed greater emphasis on our analysis of the
underlying credit and collateral.
The
following table summarizes fixed income and equity securities in a gross
unrealized loss position according to significance, aging and investment grade
classification.
($ in millions, except number
|
|
March 31,
2010
|
|
December 31,
2009
|
of issues)
|
|
Fixed
income
|
|
|
|
|
|
Fixed
income
|
|
|
|
|
|
|
|
Investment
grade
|
|
Below
investment
grade
|
|
Equity
|
|
Total
|
|
Investment
grade
|
|
Below
investment
grade
|
|
Equity
|
|
Total
|
|
Category (I): Unrealized
loss less than 20% of cost
(1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of issues
|
|
2,165
|
|
280
|
|
490
|
|
2,935
|
|
2,626
|
|
290
|
|
1,517
|
|
4,433
|
|
Fair
value
|
$
|
18,857
|
$
|
1,970
|
$
|
757
|
$
|
21,584
|
$
|
24,260
|
$
|
1,724
|
$
|
1,703
|
$
|
27,687
|
|
Unrealized
|
$
|
(921)
|
$
|
(191)
|
$
|
(69)
|
$
|
(1,181)
|
$
|
(1,198)
|
$
|
(181)
|
$
|
(167)
|
$
|
(1,546)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category (II):
Unrealized loss greater than or equal to 20% of cost for a period of less
than 6 consecutive months
(1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of issues
|
|
71
|
|
12
|
|
32
|
|
115
|
|
81
|
|
30
|
|
171
|
|
282
|
|
Fair
value
|
$
|
282
|
$
|
111
|
$
|
42
|
$
|
435
|
$
|
444
|
$
|
191
|
$
|
68
|
$
|
703
|
|
Unrealized
|
$
|
(87)
|
$
|
(41)
|
$
|
(12)
|
$
|
(140)
|
$
|
(142)
|
$
|
(77)
|
$
|
(24)
|
$
|
(243)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of issues
|
|
3
|
|
11
|
|
1
|
|
15
|
|
26
|
|
30
|
|
3
|
|
59
|
|
Fair
value
|
$
|
17
|
$
|
49
|
$
|
15
|
$
|
81
|
$
|
196
|
$
|
167
|
$
|
14
|
$
|
377
|
|
Unrealized
|
$
|
(9)
|
$
|
(27)
|
$
|
(5)
|
$
|
(41)
|
$
|
(112)
|
$
|
(86)
|
$
|
(6)
|
$
|
(204)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category (IV):
Unrealized loss greater than or equal to 20% of cost for 12 or more
consecutive months
(1)
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of issues
|
|
358
|
|
265
|
|
--
|
|
623
|
|
415
|
|
257
|
|
2
|
|
674
|
|
Fair
value
|
$
|
1,761
|
$
|
1,460
|
$
|
--
|
$
|
3,221
|
$
|
2,118
|
$
|
1,428
|
$
|
14
|
$
|
3,560
|
|
Unrealized
|
$
|
(1,326)
|
$
|
(1,382)
|
$
|
--
|
$
|
(2,708)
|
$
|
(1,689)
|
$
|
(1,469)
|
$
|
(5)
|
$
|
(3,163)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
number of issues
|
|
2,597
|
|
568
|
|
523
|
|
3,688
|
|
3,148
|
|
607
|
|
1,693
|
|
5,448
|
|
Total
fair value
|
$
|
20,917
|
$
|
3,590
|
$
|
814
|
$
|
25,321
|
$
|
27,018
|
$
|
3,510
|
$
|
1,799
|
$
|
32,327
|
|
Total
unrealized losses
|
$
|
(2,343)
|
$
|
(1,641)
|
$
|
(86)
|
$
|
(4,070)
|
$
|
(3,141)
|
$
|
(1,813)
|
$
|
(202)
|
$
|
(5,156)
|
|
(1)
For fixed income securities, cost
represents amortized cost.
(2)
At March 31, 2010, gross unrealized
losses resulting from factors other than credit on fixed income securities with
other-than-temporary impairments for which we have recorded a credit loss in
earnings are included as follows: Category (I) $34
million, Category (II) $1 million, Category (III) $14 million, and
Category (IV) $647 million.
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. The largest individual
unrealized loss was $23 million for Category (I) and $17 million for
Category (II) as of March 31, 2010.
Gross unrealized losses on fixed income securities
in Category (II) decreased $91 million since December 31, 2009. This change was primarily the result of
improved market conditions resulting in higher valuations, which either caused
a shift to Category (I) or created an overall gross unrealized gain
position. The remainder of the reduction
in Category (II) is primarily a result of losses shifting into Category (III) and
(IV) due to continued aging of losses in a continuous unrealized loss
position of greater than or equal to 20% of amortized cost.
74
Item 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 2010 AND 2009
|
Categories (III) and (IV) are affected by
macroeconomic and credit pressures upon real estate valuations and borrowers,
and issue, issuer or industry specific conditions.
The degree to which and/or length of
time these securities have been in an unrealized loss position subject them to
increased scrutiny through our portfolio monitoring process. The largest individual unrealized loss was $6
million for Category (III) and $46 million for Category (IV) as of March 31,
2010.
Category (III) and (IV) fixed
income securities at March 31, 2010 are listed in the following table by
fixed income security type and investment quality classification.
($ in
millions)
|
|
Investment
grade
|
|
|
Category
(III)
|
|
Category
(IV)
|
|
Total
|
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
Municipal
|
$
|
--
|
$
|
--
|
$
|
377
|
$
|
(245)
|
$
|
377
|
$
|
(245)
|
Corporate
|
|
15
|
|
(7)
|
|
135
|
|
(60)
|
|
150
|
|
(67)
|
RMBS
|
|
2
|
|
(2)
|
|
385
|
|
(337)
|
|
387
|
|
(339)
|
CMBS
|
|
--
|
|
--
|
|
564
|
|
(537)
|
|
564
|
|
(537)
|
ABS
|
|
--
|
|
--
|
|
300
|
|
(147)
|
|
300
|
|
(147)
|
|
$
|
17
|
$
|
(9)
|
$
|
1,761
|
$
|
(1,326)
|
$
|
1,778
|
$
|
(1,335)
|
|
|
Below
investment grade
|
|
|
Category
(III)
|
|
Category
(IV)
|
|
Total
|
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair
value
|
|
Unrealized
losses
|
Municipal
|
$
|
11
|
$
|
(5)
|
$
|
177
|
$
|
(75)
|
$
|
188
|
$
|
(80)
|
Corporate
|
|
11
|
|
(4)
|
|
52
|
|
(17)
|
|
63
|
|
(21)
|
RMBS
|
|
24
|
|
(14)
|
|
801
|
|
(879)
|
|
825
|
|
(893)
|
CMBS
|
|
--
|
|
--
|
|
117
|
|
(206)
|
|
117
|
|
(206)
|
ABS
|
|
3
|
|
(4)
|
|
313
|
|
(205)
|
|
316
|
|
(209)
|
|
$
|
49
|
$
|
(27)
|
$
|
1,460
|
$
|
(1,382)
|
$
|
1,509
|
$
|
(1,409)
|
Total
|
$
|
66
|
$
|
(36)
|
$
|
3,221
|
$
|
(2,708)
|
$
|
3,287
|
$
|
(2,744)
|
As of March 31,
2010, our gross unrealized losses in Category (III) and (IV) were
primarily concentrated in structured securities, as we have experienced
declines in fair value primarily due to wider credit spreads since the time of
initial purchase. As of March 31,
2010, RMBS, CMBS and ABS comprised $1.25 billion and $1.26 billion of investment
grade and below investment grade securities in Category (III) and (IV),
respectively. Consistent with their
rating, our portfolio monitoring indicates that the investment grade securities
have a relatively low risk of default.
Securities rated below investment grade, whether at issue or upon
subsequent downgrade, have a higher level of risk and can be more volatile.
A key
consideration in the determination of other-than-temporary impairment for
structured securities is whether the present value of loss adjusted cash flows
from the underlying collateral will be sufficient to recover our amortized cost
basis. This evaluation focuses on the
adequacy of credit enhancement relative to the performance of the underlying
collateral, adjusted for projected defaults and prepayments. Credit enhancement includes, but is not
limited to, structural subordination, guarantees and reserves. Key future collateral performance
considerations include historical default/prepayment trends, as well as
projected macroeconomic variables such as unemployment rates and interest
rates. In general, securities with
credit enhancement in excess of projected loss-adjusted collateral performance
or which are reliably insured are deemed not other-than-temporarily impaired.
75
Item 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 2010 AND 2009
|
A
description of the other-than-temporary impairment (OTTI) assessment for our
RMBS, CMBS and ABS, which comprise a majority of our Category (III) and (IV) unrealized
losses, follows:
·
The credit loss evaluation for non-agency RMBS securities, including
Prime, Alt-A and Subprime securities, primarily relies on projections of losses
based on future collateral performance, taking into account security specific
delinquency and loss severity trends on the underlying mortgage collateral to
date. The expected performance of each
transaction considers projected collateral losses and credit enhancement
levels, as well as an assessment of the origination practices of the
transaction sponsor, geographic diversification, overall transaction structure,
collateral type and quality, transaction vintage year and other considerations
that may be of concern. Our default
estimates on the underlying mortgage collateral are forward looking and
generally based upon security specific performance trends to date as well as
our overall economic outlook, with a focus on housing, unemployment and GDP
expectations, and consider other factors that may influence future borrower
behaviors. Our loss severity estimates
are forward looking and incorporate estimates of future house price appreciation/depreciation
expectations and estimates of foreclosure timing and expenses.
The following table shows our Category (IV) below
investment grade RMBS securities, including Prime, Alt-A and Subprime, by
credit rating as of March 31, 2010.
($ in
millions)
|
|
With OTTI recorded
|
|
Other
|
|
Total
|
|
|
|
|
Ba
|
|
B
|
|
Caa or
lower
|
|
Ba
|
|
B
|
|
Caa or
lower
|
|
Ba
|
|
B
|
|
Caa or
lower
|
|
Total
|
Prime
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
$
|
--
|
$
|
--
|
$
|
34
|
$
|
3
|
$
|
3
|
$
|
9
|
$
|
3
|
$
|
3
|
$
|
43
|
$
|
49
|
Unrealized losses
|
$
|
--
|
$
|
--
|
$
|
(14)
|
$
|
(1)
|
$
|
(3)
|
$
|
(4)
|
$
|
(1)
|
$
|
(3)
|
$
|
(18)
|
$
|
(22)
|
Cumulative write-downs recognized
|
$
|
--
|
$
|
--
|
$
|
(3)
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
(3)
|
$
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
$
|
1
|
$
|
13
|
$
|
114
|
$
|
25
|
$
|
4
|
$
|
17
|
$
|
26
|
$
|
17
|
$
|
131
|
$
|
174
|
Unrealized losses
|
$
|
(3)
|
$
|
(9)
|
$
|
(105)
|
$
|
(23)
|
$
|
(4)
|
$
|
(7)
|
$
|
(26)
|
$
|
(13)
|
$
|
(112)
|
$
|
(151)
|
Cumulative write-downs recognized
|
$
|
--
|
$
|
(2)
|
$
|
(71)
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
(2)
|
$
|
(71)
|
$
|
(73)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
$
|
5
|
$
|
10
|
$
|
259
|
$
|
64
|
$
|
102
|
$
|
138
|
$
|
69
|
$
|
112
|
$
|
397
|
$
|
578
|
Unrealized losses
|
$
|
(5)
|
$
|
(10)
|
$
|
(345)
|
$
|
(69)
|
$
|
(123)
|
$
|
(154)
|
$
|
(74)
|
$
|
(133)
|
$
|
(499)
|
$
|
(706)
|
Cumulative write-downs recognized
|
$
|
(1)
|
$
|
(1)
|
$
|
(245)
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
(1)
|
$
|
(1)
|
$
|
(245)
|
$
|
(247)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
$
|
6
|
$
|
23
|
$
|
407
|
$
|
92
|
$
|
109
|
$
|
164
|
$
|
98
|
$
|
132
|
$
|
571
|
$
|
801
|
Unrealized losses
|
$
|
(8)
|
$
|
(19)
|
$
|
(464)
|
$
|
(93)
|
$
|
(130)
|
$
|
(165)
|
$
|
(101)
|
$
|
(149)
|
$
|
(629)
|
$
|
(879)
|
Cumulative write-downs recognized
|
$
|
(1)
|
$
|
(3)
|
$
|
(319)
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
(1)
|
$
|
(3)
|
$
|
(319)
|
$
|
(323)
|
Other-than-temporary impairment write-downs have been
recorded for 54% of our Category (IV) below investment grade RMBS as of March 31,
2010. For securities in this group rated
Caa or lower, 71% have had other-than-temporary impairment write-downs recorded
as of March 31, 2010. For the
Category (IV) below investment grade RMBS with other-than-temporary
impairment write-downs recorded, approximately 40% of the decline in fair value
has been recognized as impairment losses.
76
Item 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 2010 AND 2009
|
·
The credit loss evaluation for CMBS primarily relies on model-driven
projections of future collateral performance, taking into account all
reasonably available information specific to the underlying commercial mortgage
loans including estimates of current and future property value, current and
projected rental income and the credit enhancement levels. Estimates of future property value and rental
income consider specific property-type and metro area economic trends such as
property vacancy rates and rental rates, employment indicators and building
industry fundamentals. Other considerations
include borrower payment history, the origination practices of the transaction
sponsor, overall collateral quality and diversification, transaction vintage
year, maturity date, overall structure of the transaction and other factors
that may influence performance. Actual
realized losses in the CMBS market have historically been low, therefore our
projection of collateral performance is informed by credit opinions obtained
from third parties, such as nationally recognized credit rating agencies,
industry analysts and a CMBS loss modeling advisory service.
The
following table shows our Category (IV) below investment grade CMBS
securities by credit rating as of March 31, 2010.
($ in
millions)
|
|
With OTTI recorded
|
|
Other
|
|
Total
|
|
|
|
|
Ba
|
|
B
|
|
Caa or
lower
|
|
Ba
|
|
B
|
|
Caa or
lower
|
|
Ba
|
|
B
|
|
Caa or
lower
|
|
Total
|
CMBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
$
|
6
|
$
|
38
|
$
|
9
|
$
|
50
|
$
|
14
|
$
|
--
|
$
|
56
|
$
|
52
|
$
|
9
|
$
|
117
|
Unrealized losses
|
$
|
(20)
|
$
|
(46)
|
$
|
(19)
|
$
|
(81)
|
$
|
(40)
|
$
|
--
|
$
|
(101)
|
$
|
(86)
|
$
|
(19)
|
$
|
(206)
|
Cumulative write-downs recognized
|
$
|
(13)
|
$
|
(45)
|
$
|
(15)
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
(13)
|
$
|
(45)
|
$
|
(15)
|
$
|
(73)
|
Other-than-temporary impairment write-downs have been
recorded for 45% of our Category (IV) below investment grade CMBS as of March 31,
2010. For securities in this group rated
Caa or lower, 100% have had other-than-temporary impairment write-downs
recorded as of March 31, 2010. For
the Category (IV) below investment grade CMBS with other-than-temporary
impairment write-downs recorded, approximately 46% of the decline in fair value
has been recognized as impairment losses.
·
The credit loss evaluation for ABS primarily relies on expectations of
future losses on the underlying collateral and structural considerations of
each issue. The projection of future
losses is based on our expectations for investment grade corporate, bank loan
and high yield markets. Our expectations
are formulated through ongoing monitoring and participation in these markets,
and considers opinions from third parties, such as industry analysts and
strategists, and credit rating agencies as well as our overall economic outlook
for indicators such as unemployment and GDP.
The expected performance of each transaction considers expected
collateral losses and credit enhancement levels, as well as factors including
default rates, expected recoveries, prepayment rates, changes in interest rates
and other characteristics. In addition,
the performance of collateral underlying certain ABS securities is actively
monitored by external managers, allowing for enhanced collateral management
actions which help mitigate the risk of loss.
The
following table shows our Category (IV) below investment grade ABS
securities, including CDO and other ABS by credit rating as of March 31,
2010.
($ in
millions)
|
|
With OTTI recorded
|
|
Other
|
|
Total
|
|
|
|
|
Ba
|
|
B
|
|
Caa or
lower
|
|
Ba
|
|
B
|
|
Caa or
lower
|
|
Ba
|
|
B
|
|
Caa or
lower
|
|
Total
|
ABS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
$
|
--
|
$
|
5
|
$
|
12
|
$
|
251
|
$
|
18
|
$
|
27
|
$
|
251
|
$
|
23
|
$
|
39
|
$
|
313
|
Unrealized losses
|
$
|
--
|
$
|
(4)
|
$
|
(34)
|
$
|
(139)
|
$
|
(10)
|
$
|
(18)
|
$
|
(139)
|
$
|
(14)
|
$
|
(52)
|
$
|
(205)
|
Cumulative write-downs recognized
|
$
|
--
|
$
|
(15)
|
$
|
(97)
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
(15)
|
$
|
(97)
|
$
|
(112)
|
Other-than-temporary impairment write-downs have been
recorded for 5% of our Category (IV) below investment grade ABS as of March 31,
2010. For securities in this group rated
Caa or lower, 31% have had other-than-temporary impairment write-downs recorded
as of March 31, 2010. For the
Category (IV) below investment grade ABS with other-than-temporary
impairment write-downs recorded, approximately 75% of the decline in fair value
has been recognized as impairment losses.
77
Item 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 2010 AND 2009
|
For
structured securities deemed other-than-temporarily impaired, we recognized the
estimated credit loss in earnings, while $640 million of net unrealized losses
related to factors other than credit remains classified in other comprehensive
income (OCI) as of March 31, 2010. Structured securities deemed not
other-than-temporarily impaired are current on contractual or expected payments
and our detailed analysis of the underlying credit and related cash flows has
concluded that our amortized cost basis is recoverable or the securities are
reliably insured. The declines in fair
value are primarily due to credit spread widening in the structured security
marketplace and higher liquidity discounts.
We believe that the
unrealized losses on our fixed income securities are not predictive of their
ultimate performance and the unrealized losses should reverse over the
remaining lives of the securities. We anticipate that these securities
will recover in line with our best estimate of the expected cash flows which
are used for other-than-temporary impairment evaluations. As of March 31, 2010, we do not have the
intent to sell and it is not more likely than not we will be required to sell
these securities before the recovery of their amortized cost basis. Our
evaluation of whether it is more likely than not we will be required to sell a
security before recovery of its amortized cost basis is supported by our
liquidity position, which cushions us from the need to liquidate securities
with significant unrealized losses to meet cash obligations.
Additionally,
if a fixed income security which is deemed not to be other-than-temporarily
impaired through our portfolio monitoring process has an 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, additional evaluations and management approvals
are required to substantiate that recognition of an impairment write-down is
not appropriate. As of March 31,
2010, 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.
Fixed income and bank loan investments are categorized as restructured
when the debtor is in financial difficulty and we grant a concession. 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 according to the original terms,
which causes us to believe these investments may be classified as problem or
restructured in the future.
78
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
The following table summarizes problem, restructured
and potential problem fixed income securities and bank loans, which are
reported in other investments.
($ in millions)
|
|
March 31,
2010
|
|
|
|
Par
value
(1)
|
|
|
Amortized
cost
(1)
|
|
|
Amortized
cost as a
percent of
par value
|
|
Fair
value
(2)
|
|
|
Fair
value as a
percent of
par value
|
|
Percent
of
total fixed
income and
bank loan
portfolios
|
|
Restructured
|
|
$
|
105
|
|
|
$
|
83
|
|
|
79.0%
|
|
$
|
79
|
|
|
75.2%
|
|
|
0.1%
|
|
|
Problem
|
|
|
807
|
|
|
|
331
|
|
|
41.0
|
|
|
265
|
|
|
32.8
|
|
|
0.3
|
|
|
Potential
problem
|
|
|
2,430
|
|
|
|
1,518
|
|
|
62.5
|
|
|
928
|
|
|
38.2
|
|
|
1.1
|
|
|
Total
|
|
$
|
3,342
|
|
|
$
|
1,932
|
|
|
|
|
$
|
1,272
|
|
|
|
|
|
1.5%
|
|
|
Cumulative
write-downs recognized
(3)
|
|
|
|
|
|
$
|
1,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
|
Par
value
(1)
|
|
|
Amortized
cost
(1)
|
|
|
Amortized
cost as a
percent of
par value
|
|
Fair
value
(2)
|
|
|
Fair
value as a
percent of
par value
|
|
Percent
of
total fixed
income and
bank loan
portfolios
|
|
Restructured
|
|
$
|
107
|
|
|
$
|
85
|
|
|
79.4%
|
|
$
|
75
|
|
|
70.1%
|
|
|
0.1%
|
|
|
Problem
|
|
|
823
|
|
|
|
321
|
|
|
39.0
|
|
|
221
|
|
|
26.9
|
|
|
0.3
|
|
|
Potential
problem
|
|
|
2,630
|
|
|
|
1,651
|
|
|
62.8
|
|
|
977
|
|
|
37.1
|
|
|
1.2
|
|
|
Total
|
|
$
|
3,560
|
|
|
$
|
2,057
|
|
|
|
|
$
|
1,273
|
|
|
|
|
|
1.6%
|
|
|
Cumulative
write-downs recognized
(3)
|
|
|
|
|
|
$
|
1,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The difference between par value and amortized cost of $1.41
billion at March 31, 2010 and $1.50 billion at December 31, 2009 is
primarily attributable to write-downs.
Par value has been reduced by principal payments.
(2)
Bank loans are reflected at amortized cost.
(3)
Cumulative write-downs recognized
only reflects impairment write-downs related to investments within the problem,
potential problem and restructured categories.
At March 31, 2010, amortized cost for the problem
category was $331 million and was comprised of $136 million of Subprime, $27
million of Alt-A, $5 million of Consumer and other ABS, $4 million of CMBS and
$4 million of CDO.
Also included were $81 million of
municipal bonds, $66 million of corporates (primarily privately placed) and $8
million of bank loans. The increase of
$10 million compared to December 31, 2009 is primarily attributable to
additional Alt-A securities. The
amortized cost of problem investments with a fair value less than 80% of
amortized cost totaled $122 million with unrealized losses of $76 million and
fair value of $46 million.
At March 31, 2010, amortized cost for the
potential problem category was $1.52 billion and was comprised of $616 million
of Subprime, $404 million of Alt-A, $146 million of CMBS, $117 million of CDO,
$70 million of Prime and $10 million of Consumer and other ABS. Also included
were $96 million of corporates (primarily privately placed), $39 million of
municipal bonds and $20 million of bank loans.
The decrease of $133 million from December 31, 2009 is primarily
attributable to a reduction in corporates and CMBS. The amortized cost of potential problem
investments with a fair value less than 80% of amortized cost totaled $1.17
billion with unrealized losses of $610 million and fair value of $555 million.
79
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
Net
investment income
The
following table presents net investment income.
($ in millions)
|
|
Three months ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Fixed income securities
|
$
|
959
|
$
|
1,042
|
|
Equity securities
|
|
21
|
|
16
|
|
Mortgage loans
|
|
104
|
|
137
|
|
Limited partnership interests
|
|
6
|
|
3
|
|
Short-term
|
|
2
|
|
13
|
|
Other
|
|
1
|
|
1
|
|
Investment income, before expense
|
|
1,093
|
|
1,212
|
|
Investment expense
|
|
(43)
|
|
(36)
|
|
Net investment income
|
$
|
1,050
|
$
|
1,176
|
|
Net
investment income decreased 10.7% or $126 million in the first quarter of 2010
compared to the first quarter of 2009, primarily due to lower yields and
duration shortening actions taken to protect the portfolio from rising interest
rates, along with reduced average asset balances. Lower yields
particularly impacted short-term and variable rate assets. Net investment income was $1.08 billion in
both the third and fourth quarter of 2009.
Net realized capital gains and losses
The following table presents the components of
realized capital gains and losses and the related tax effect.
($ in millions)
|
|
Three months ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Impairment
write-downs
|
$
|
(223)
|
$
|
(620)
|
|
Change
in intent write-downs
|
|
(32)
|
|
(105)
|
|
Net other-than-temporary impairment
losses
recognized in earnings
|
|
(255)
|
|
(725)
|
|
Sales
|
|
88
|
|
418
|
|
Valuation
of derivative instruments
|
|
(155)
|
|
103
|
|
Settlements
of derivative instruments
|
|
(30)
|
|
(12)
|
|
EMA limited partnership
income
|
|
4
|
|
(143)
|
|
Realized
capital gains and losses, pre-tax
|
|
(348)
|
|
(359)
|
|
Income
tax benefit (expense)
|
|
122
|
|
(129)
|
|
Realized
capital gains and losses, after-tax
|
$
|
(226)
|
$
|
(488)
|
|
Impairment
write-downs
are
presented in the following table.
($ in
millions)
|
|
Three months ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Fixed income securities
|
$
|
(180)
|
$
|
(233)
|
|
Equity securities
|
|
(6)
|
|
(137)
|
|
Mortgage loans
|
|
(13)
|
|
(28)
|
|
Limited partnership
interests
|
|
(24)
|
|
(197)
|
|
Other investments
|
|
--
|
|
(25)
|
|
Impairment write-downs
|
$
|
(223)
|
$
|
(620)
|
|
Impairment
write-downs for the three months ended March 31, 2010 were primarily the
result of RMBS which experienced deterioration in expected cash flows;
investments with commercial real estate exposure, including CMBS, limited
partnership interests, and mortgage loans;
which were impacted by declines in real estate valuations or experienced
deterioration in expected cash flows; and privately placed corporate bonds and
municipal bonds due to issuer specific circumstances. $145 million or 80.6% of the fixed income
security write-downs for the three months ended March 31, 2010 related to
impaired securities that were performing in line with anticipated or
contractual cash flows but were written down primarily because of expected
deterioration in the performance of the underlying collateral or our assessment
of the probability of future default.
For these securities, as of March 31,
80
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
2010, there have either
been no defaults or defaults have only impacted classes lower than our position
in the capital structure. $35 million of
the fixed income security write-downs for the three months ended March 31,
2010 related to securities experiencing a significant departure from
anticipated cash flows; however, we believe they retain economic value.
Equity
securities were written down primarily due to the length of time and extent
fair value was below cost, considering our assessment of the financial
condition, near-term and long-term prospects of the issuer, including relevant
industry conditions and trends.
Limited partnership
impairment write-downs related to Cost limited partnerships which experienced
significant declines in portfolio valuations and we could not assert the
recovery period would be temporary. To
determine if an other-than-temporary impairment has occurred related to a Cost
limited partnership, we evaluate whether an impairment indicator has occurred
in the period that may have a significant adverse effect on the carrying value
of the investment. Impairment indicators
may include: significantly reduced valuations of the investments held by the
limited partnerships; actual recent cash flows received being significantly
less than expected cash flows; reduced valuations based on financing completed
at a lower value; completed sale of a material underlying investment at a price
significantly lower than expected; or any other recent adverse events since the
last financial statements received that might affect the fair value of the
investees capital.
Change in
intent write-downs
are presented in the following table.
($ in millions)
|
|
Three
months ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
Fixed
income securities
|
$
|
(26)
|
$
|
(82)
|
|
Equity
securities
|
|
--
|
|
(17)
|
|
Mortgage
loans
|
|
(6)
|
|
(6)
|
|
Change
in intent write-downs
|
$
|
(32)
|
$
|
(105)
|
|
Change in intent write-downs in the three months ended
March 31, 2010 related primarily to municipal bonds for which we have the
intent to sell.
Sales
generated $88 million of net realized gains for the
three months ended March 31, 2010 primarily due to $20 million of gains on
sales of equity securities and $71 million of gains on sales of corporate and
municipal fixed income securities.
Valuation and settlement of derivative instruments
recorded as net realized capital losses
totaling $185 million for the three months ended March 31, 2010 included
$155 million of losses on the valuation of derivative instruments and $30
million of losses on the settlement of derivative instruments.
Losses from the risk management programs primarily
occurred in the interest rate spike exposure program and related to a decrease
in interest rates and a decline in volatility.
Losses also occurred in the equity hedge program related to a decrease
in volatility and increase in the equity indices.
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 investment
portfolio view. Tactical duration
management is accomplished through both cash market transactions, sales and 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
our overall financial condition.
At March 31, 2010, our securities with embedded
options totaled $1.40 billion, a decrease in fair value of $6 million from December 31,
2009, resulting in realized capital losses on valuation of $13 million, net
sales activity of $36 million, and unrealized net capital gains reported in OCI
of $43 million for the host securities.
Net unrealized capital gains were further decreased by $10 million due
to amortization of the host securities.
The change in 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 the difference between the fair value and the
amortized cost of the host securities is reported in OCI. Total fair value exceeded total amortized
cost by $28 million at March 31, 2010.
Valuation gains and losses are converted into cash for securities with
embedded options upon our election to sell
81
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
these securities. In the event the economic value of the
options is not realized, we will recover the par value if held to maturity
unless the issuer of the note defaults.
Total fair value exceeded par value by $24 million at March 31,
2010.
The
table below presents the realized capital gains and losses (pre-tax) on the
valuation and settlement of derivative instruments shown by underlying exposure
and derivative strategy.
($ in millions)
|
|
Three months ended March 31,
|
|
|
|
|
|
2010
|
|
2009
|
|
2010
Explanations
|
|
|
|
Valuation
|
|
Settlements
|
|
Total
|
|
Total
|
|
|
|
Risk
management
Property-Liability
Portfolio
duration management
(1)
|
$
|
(2)
|
$
|
--
|
$
|
(2)
|
$
|
(6)
|
|
Interest
rate swaps and municipal interest rate swaps are used to offset the effects
of changing interest rates on a portion of the Property-Liability fixed
income portfolio that is reported in unrealized net capital gains or losses
in OCI. The 2010 losses are offset in
net unrealized capital gains and losses in OCI to the extent it relates to
changes in risk-free rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spike exposure
(1)
|
|
(78)
|
|
(44)
|
|
(122)
|
|
(11)
|
|
Interest rate
swaption contracts, with terms of less than one year, and exchange traded
options on treasury futures, with three month terms, provide an offset to
declines in fixed income market values resulting from potential rising
interest rates. As of March 31,
2010, the notional of our over-the-counter (OTC) swaption positions totaled
$10.00 billion and the notional of our exchange traded options totaled $1.50
billion. Exchange traded options on
treasury futures are utilized to supplement the protection provided by
swaption contracts without increasing the counterparty risk associated with
OTC contracts. The 2010 losses on
swaptions and options on treasury futures contracts relates to a decrease in
interest rates and a decline in volatility.
Volatility represents the measure of variation of average value over a
specified time period. If interest
rates do not increase above the strike rate, the maximum loss on swaptions
and options on treasury futures is limited to the amount of the premium
paid. The program is routinely
monitored and revised as capital market conditions change.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging unrealized
gains on equity securities
(1)
|
|
(29)
|
|
(10)
|
|
(39)
|
|
63
|
|
Exchange traded
put options provide an offset to significant declines in our equity portfolio
from equity market declines below a targeted level. Options can expire, terminate early or the
option can be exercised. If the price
level of the equity index does not fall below the puts strike price, the
maximum loss on purchased puts is limited to the amount of the premium
paid. The 2010 losses on options were
primarily the result of a decrease in volatility and an increase in the price
levels of the equity indices and were partially offset by net unrealized capital
gains and losses of our equity portfolio reflected in OCI to the extent it
relates to changes in price levels of the equity indices.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
9
|
|
4
|
|
13
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit risk reduction
(1)
|
|
3
|
|
(1)
|
|
2
|
|
8
|
|
Gains are
primarily the result of widening credit spreads on referenced credit
entities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allstate Financial
Duration gap management
|
|
(55)
|
|
12
|
|
(43)
|
|
74
|
|
Interest rate caps, floors and swaps are used by Allstate Financial to
balance interest-rate 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 contracts can be
terminated and settled at any time with minimal additional cost. The maximum loss on caps and floors is
limited to the amount of premiums paid.
The change in valuation reflects the changing value of expected future
settlements from changing interest rates, which may vary over the period of
the contracts. The 2010 losses,
resulting from decreasing interest rates, are offset in unrealized capital
gains and losses of our fixed income securities in OCI to the extent it
relates to changes in risk-free rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anticipatory hedging
|
|
16
|
|
4
|
|
20
|
|
(16)
|
|
Futures and
interest rate swaps 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 futures contracts are exchange traded, daily cash settled and can
be exited at any time for 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 loss in OCI. The 2010 gains were caused by a decrease in
risk-free interest rates over the life of the net short position as liability
issuances exceeded asset acquisitions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging of interest rate exposure in annuity
contracts
|
|
(9)
|
|
--
|
|
(9)
|
|
(2)
|
|
Value of expected
future settlements on interest rate caps and the associated value of future
credited interest, which is reportable in future periods when incurred,
decreased due to a decrease in interest rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging unrealized gains on equity indexed notes
|
|
--
|
|
--
|
|
--
|
|
3
|
|
|
|
82
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
($ in millions)
|
|
Three
months ended March 31,
|
|
|
|
|
2010
|
|
2009
|
|
2010
Explanations
|
|
|
Valuation
|
|
Settlements
|
|
Total
|
|
Total
|
|
|
Hedge ineffectiveness
|
|
--
|
|
--
|
|
--
|
|
(1)
|
|
The hedge
ineffectiveness of less than $1 million includes $47 million in realized
capital losses on swaps that were offset by $47 million in realized capital
gains on the hedged risk.
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
(2)
|
|
6
|
|
4
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit risk reduction
|
|
3
|
|
(3)
|
|
--
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk management
|
$
|
(144)
|
$
|
(32)
|
$
|
(176)
|
$
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
generation
|
|
|
|
|
|
|
|
|
|
|
Asset replication credit exposure
|
|
|
|
|
|
|
|
|
|
The 2010 changes
in valuation on the Property-Liability segment are due to the tightening of
credit spreads on referenced credit entities.
The gains are primarily on single name CDS. The 2010 changes in valuation on the Allstate
Financial segment are due to the widening credit spreads on referenced credit
entities. The losses are primarily on
first-to-default CDS
and credit
derivative index CDS. The changes in
valuation would only be converted to cash upon disposition, which can be done
at any time, or if the credit event specified in the contract occurs. For further discussion on CDS, see Note 6
of the condensed consolidated financial statements.
|
Property-Liability
|
$
|
4
|
$
|
2
|
$
|
6
|
$
|
(9)
|
|
Allstate Financial
|
|
(2)
|
|
--
|
|
(2)
|
|
(6)
|
|
Total
|
|
2
|
|
2
|
|
4
|
|
(15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset replication equity exposure
|
|
|
|
|
|
|
|
|
|
|
Property-Liability
|
|
--
|
|
--
|
|
--
|
|
(19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Income generation
|
$
|
2
|
$
|
2
|
$
|
4
|
$
|
(34)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
|
|
|
|
|
|
|
|
|
|
|
Equity indexed notes Allstate Financial
|
$
|
(4)
|
$
|
--
|
$
|
(4)
|
$
|
(26)
|
|
Equity-indexed
notes are fixed income securities that contain embedded 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 or
maturity. In the event the economic
value of the options is not realized, we will recover the par value of the
host fixed income security if held to maturity unless the issuer of the note
defaults. Par value exceeded fair
value by $35 million at March 31, 2010.
Equity-indexed notes are subject to our comprehensive portfolio
monitoring and watchlist processes to identify and evaluate when the carrying
value may be other-than-temporarily impaired.
The following table compares the March 31, 2010 and
December 31, 2009 holdings, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
Change
|
|
Change due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
in fair
|
|
to net sale
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
value
|
|
activity
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Par value
|
|
|
$
|
475
|
|
|
|
$
|
--
|
|
|
|
$
|
--
|
|
|
|
$
|
475
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost of host contract
|
|
|
$
|
349
|
|
|
|
$
|
5
|
|
|
|
$
|
--
|
|
|
|
$
|
344
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of equity-indexed call option
|
|
|
|
85
|
|
|
|
|
(4
|
)
|
|
|
|
--
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized cost
|
|
|
$
|
434
|
|
|
|
$
|
1
|
|
|
|
$
|
--
|
|
|
|
$
|
433
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
|
$
|
440
|
|
|
|
$
|
10
|
|
|
|
$
|
--
|
|
|
|
$
|
430
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain/loss
|
|
|
$
|
6
|
|
|
|
$
|
9
|
|
|
|
$
|
--
|
|
|
|
$
|
(3)
|
|
83
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2010 AND 2009
($ in millions)
|
|
Three
months ended March 31,
|
|
|
|
|
2010
|
|
2009
|
|
2010
Explanations
|
|
|
Valuation
|
|
Settlements
|
|
Total
|
|
Total
|
|
|
Conversion options in
fixed income securities
|
|
|
|
|
|
|
|
|
|
Convertible bonds
are fixed income securities that contain embedded options. Changes in valuation of the embedded
option are reported in realized capital gains and losses. The results generally track the performance
of underlying equities. 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 of the
host fixed income security if held to maturity unless the issuer of the note
defaults. Fair value exceeded par
value by $59 million at March 31, 2010.
Convertible bonds are subject to our comprehensive portfolio
monitoring and watchlist processes to identify and evaluate when the carrying
value may be other-than-temporarily impaired.
The following table compares the March 31, 2010 and
December 31, 2009 holdings, respectively.
|
Property-Liability
|
|
(8)
|
|
--
|
|
(8)
|
|
--
|
|
Allstate Financial
|
|
(1)
|
|
--
|
|
(1)
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(9)
|
|
--
|
|
(9)
|
|
3
|
|
($ in
millions)
|
|
|
|
Change
|
|
Change due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2010
|
|
in fair
value
|
|
to net sale
activity
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
Par
value
|
|
|
$
|
903
|
|
|
|
$
|
--
|
|
|
|
$
|
(33)
|
|
|
|
$
|
936
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
cost
of host contract
|
|
|
$
|
642
|
|
|
|
$
|
5
|
|
|
|
$
|
(27)
|
|
|
|
$
|
664
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of
conversion
option
|
|
|
|
298
|
|
|
|
|
(9)
|
|
|
|
|
(5)
|
|
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
Total
amortized
cost
|
|
|
$
|
940
|
|
|
|
$
|
(4)
|
|
|
|
$
|
(32)
|
|
|
|
$
|
976
|
|
|
|
|
|
|
|
|
|
|
|
Total
fair value
|
|
|
$
|
962
|
|
|
|
$
|
20
|
|
|
|
$
|
(36)
|
|
|
|
$
|
978
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain/loss
|
|
|
$
|
22
|
|
|
|
$
|
24
|
|
|
|
$
|
(4)
|
|
|
|
$
|
2
|
|
Total Accounting
|
$
|
(13)
|
$
|
--
|
$
|
(13)
|
$
|
(23)
|
|
|
|
Total
|
$
|
(155)
|
$
|
(30)
|
$
|
(185)
|
$
|
91
|
|
|
Total Property-
Liability
|
$
|
(101)
|
$
|
(49)
|
$
|
(150)
|
$
|
26
|
|
|
Total Allstate Financial
|
|
(54)
|
|
19
|
|
(35)
|
|
65
|
|
|
|
Total
|
$
|
(155)
|
$
|
(30)
|
$
|
(185)
|
$
|
91
|
|
|
(1)
A portion of the macro hedge program is contained
within this line item.
Included in the table
above are net realized capital losses on the valuation and settlement of
derivative instruments related to our macro hedge program. These realized capital gains and losses are
detailed in the following table.
($ in millions)
|
|
Valuation
|
|
Settlement
|
|
Total
|
Premium-based instruments:
|
|
|
|
|
|
|
Interest
rate spike exposure
|
$
|
(78)
|
$
|
(44)
|
$
|
(122)
|
Hedging
unrealized gains on
equity securities
|
|
(29)
|
|
(10)
|
|
(39)
|
Non premium-based instruments:
|
|
|
|
|
|
|
Portfolio
duration management
|
|
(2)
|
|
--
|
|
(2)
|
Credit
risk hedging
|
|
4
|
|
(2)
|
|
2
|
Total
|
$
|
(105)
|
$
|
(56)
|
$
|
(161)
|
Portions
of our current macro hedge
program consist of derivatives for which we pay a
premium at inception. This includes
over-the-counter interest rate swaptions, exchange traded options on treasury
futures, and options on equity indices.
These programs are designed to protect against the tail risk
associated with both interest rate spikes above, and equity market declines
below, targeted thresholds, so that derivative valuation gains will be realized
to partially offset corresponding declines in value for our fixed income and
equity portfolios, respectively. The net premium paid during the first
quarter of 2010 for these instruments was $46 million with a
fair value
as of March 31, 2010
of $61 million for all open positions. Net realized capital losses totaled
$161 million for the three months ended March 31,
2010. For these premium-based instruments, the maximum loss is limited to
the remaining fair value of $61 million as of March 31, 2010. Fair
value
on interest
rate spike exposure
includes $4 million on contracts expiring during the second quarter of
2010, $10 million on contracts expiring during the third quarter of 2010, and
$28 million on contracts expiring during the fourth quarter of 2010. The remaining $19 million of fair value
relates to equity hedges with $1 million
on contracts expiring in the second quarter of 2010 and $18 million on
contracts expiring in the fourth quarter of 2010.
84
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
The
remaining portions of our current macro hedge
program do not require an up front premium payment and
are related to portfolio duration management and credit risk hedging.
These positions currently include interest rate swaps, municipal interest rate
swaps, and CDS buy protection. Although interest rate swaps and CDS buy
protection typically do not require up front premiums, they do involve periodic
payments throughout the life of the contract. The fair value of these
positions was $(29) million and the net realized capital gain was zero for the
quarter ended March 31, 2010. The fair value and resulting gains and
losses from these instruments is dependent on our positions and the movement of
the underlying markets, or referenced entities in the case of CDS buy
protection.
The
macro hedge program
is routinely monitored
and
revised
as capital market conditions change.
CAPITAL
RESOURCES AND LIQUIDITY HIGHLIGHTS
·
Shareholders equity as of March 31, 2010 was
$17.56 billion, an increase of 5.2% from $16.69 billion as of December 31, 2009.
·
Deployable invested assets at the parent holding
company level totaled $3.05 billion at March 31, 2010 compared to $3.07
billion at December 31, 2009.
·
At March 31,
2010, we held 34.9% of our total consolidated cash and investment portfolio, or
$35.21 billion, in cash and liquid investments that are saleable within one
quarter without significant additional net realized capital losses.
·
On both January 5,
2010 and April 1, 2010, we paid a quarterly shareholder dividend of $0.20.
CAPITAL RESOURCES AND LIQUIDITY
Capital
resources
consist
of shareholders equity and debt, representing funds deployed or available to
be deployed to support business operations or for general corporate
purposes. The following table summarizes
our capital resources.
($ in millions)
|
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
|
|
|
|
|
|
|
|
Common
stock, retained income and other shareholders equity items
|
|
$
|
18,849
|
|
$
|
18,798
|
|
Accumulated
other comprehensive loss
|
|
|
(1,289)
|
|
|
(2,106)
|
|
Total
shareholders equity
|
|
|
17,560
|
|
|
16,692
|
|
Debt
|
|
|
5,910
|
|
|
5,910
|
|
Total
capital resources
|
|
$
|
23,470
|
|
$
|
22,602
|
|
|
|
|
|
|
|
|
|
Ratio
of debt to shareholders equity
|
|
|
33.7%
|
|
|
35.4%
|
|
Ratio
of debt to capital resources
|
|
|
25.2%
|
|
|
26.1%
|
|
Shareholders equity
increased in the first three months of 2010, due
primarily to decreases in unrealized net capital losses on investments and net
income, partially offset by dividends paid to shareholders.
Debt
Except for $42 million in long-term debt
related to the synthetic leases scheduled to mature in 2011, we do not have any
required principal payments until 2012 when the $350 million of 6.125% Senior
Notes is due.
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
from Moodys, S&P and A.M. Best since December 31, 2009.
Allstate Life
Insurance Company (ALIC), Allstate Insurance Company (AIC) and The Allstate
Corporation (the Corporation) are party to the Amended and Restated
Intercompany Liquidity Agreement (Liquidity Agreement) which allows for
short-term advances of funds to be made between parties for liquidity and other
general corporate purposes. The
Liquidity Agreement does not establish a commitment to advance funds on the
part of any party. ALIC and AIC each
serve as a lender and borrower and the Corporation serves only as a
lender. AIC also has a capital support
agreement with ALIC. Under the capital
support agreement, AIC is committed to provide capital to ALIC to maintain an
adequate capital level. The maximum
amount of potential funding under each of these agreements is $1.00 billion.
85
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
In addition to the
Liquidity Agreement, the Corporation also has an intercompany loan agreement
with certain of its subsidiaries, which include, but are not limited to, AIC
and ALIC. The amount of intercompany
loans available to the Corporations subsidiaries is at the discretion of the
Corporation. The maximum amount of loans
the Corporation will have outstanding to all its eligible subsidiaries at any
given point in time is limited to $1.00 billion. The Corporation may use commercial paper
borrowings, bank lines of credit and repurchase agreements to fund intercompany
borrowings.
Liquidity sources and uses
We actively manage our financial position and
liquidity levels in light of changing market, economic, and business
conditions. Liquidity is managed at both
the entity and enterprise level across the Company, and is assessed on both
base and stressed level liquidity needs.
We believe we have sufficient liquidity to meet these needs, with $35.21
billion of cash and liquid investments saleable within 90 days without
generating significant additional capital losses (34.9% of the total cash and
investment portfolio). We expect $10.15
billion of investment portfolio cash flows from maturities, calls, and interest
receipts over the next 12 months.
Additionally, we have existing intercompany agreements in place that
facilitate liquidity management across the Company to enhance flexibility.
Parent company capital capacity
At the parent
holding company level, we have deployable invested assets totaling $3.05 billion
as of March 31, 2010. These assets
include investments that are generally saleable within one quarter totaling
$2.64 billion. This provides funds for
the parent companys relatively low fixed charges.
The Corporation has
access to additional
borrowing to support liquidity as follows:
·
A commercial paper facility with a
borrowing limit of $1.00 billion to cover short-term cash needs. As of March 31, 2010, 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 is
available for short-term liquidity requirements and backs our commercial paper
facility. 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 anniversary years of the facility upon approval of existing or
replacement lenders providing more than two-thirds of the commitments to lend. The program is fully subscribed among 11
lenders with the largest commitment being $185 million. The commitments of the lenders are several
and no lender is responsible for any other lenders commitment if such lender
fails to make a loan under the facility.
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 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 March 31,
2010 was 19.8%. 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 the credit
facility during the first three months of 2010.
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 on May 8,
2009. We can use our current shelf
registration to issue an unspecified amount of debt securities, common stock
(including 362 million shares of treasury stock as of March 31, 2010),
preferred stock, depositary shares, warrants, stock purchase contracts, stock
purchase units and securities of trust subsidiaries. The specific terms of any securities we issue
under this registration statement will be provided in the applicable prospectus
supplements.
86
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
Liquidity
exposure
Contractholder funds as of March 31,
2010 were $51.03 billion. The following
table summarizes contractholder funds by their contractual withdrawal
provisions at March 31, 2010.
($ in millions)
|
|
|
|
Percent
to
total
|
|
Not
subject to discretionary withdrawal
|
$
|
7,876
|
|
15.4%
|
|
Subject
to discretionary withdrawal with adjustments:
|
|
|
|
|
|
Specified
surrender charges
(1)
|
|
21,530
|
|
42.2
|
|
Market
value adjustments
(2)
|
|
8,707
|
|
17.1
|
|
Subject
to discretionary withdrawal without adjustments
(3)
|
|
12,914
|
|
25.3
|
|
Total
contractholder funds
(4)
|
$
|
51,027
|
|
100.0%
|
|
(1)
Includes $9.84 billion of liabilities with a
contractual surrender charge of less than 5% of the account balance.
(2)
$7.24 billion of the contracts with market
value adjusted surrenders have a 30-45 day period at the end of their initial
and subsequent interest rate guarantee periods (which are typically 5 or 6
years) during which there is no surrender charge or market value adjustment.
(3)
98% of these contracts have a minimum interest
crediting rate guarantee of 3% or higher.
(4)
Includes $1.27 billion of contractholder funds
on variable annuities reinsured to The Prudential Insurance Company of America,
a subsidiary of Prudential Financial Inc. effective June 1, 2006.
While we are able to
quantify remaining scheduled maturities for our institutional products,
anticipating retail product surrenders is less precise. Retail life and annuity products may be
surrendered by customers for a variety of reasons. Reasons unique to individual customers
include a current or unexpected need for cash or a change in life insurance
coverage needs. Other key factors that
may impact the likelihood of customer surrender include the level of the
contract surrender charge, the length of time the contract has been in force,
distribution channel, market interest rates, equity market conditions and
potential tax implications. In addition,
the propensity for retail life insurance policies to lapse is lower than it is
for fixed annuities because of the need for the insured to be re-underwritten
upon policy replacement. Surrenders and
partial withdrawals for our retail annuities increased 10.0% in the first three
months of 2010 compared to the same period of 2009. The annualized surrender and partial
withdrawal rate on deferred annuities, interest-sensitive life insurance and
Allstate Bank products, based on the beginning of year contractholder funds,
was 11.7% and 11.1% for the first three months of 2010 and 2009,
respectively. Allstate Financial strives
to promptly pay customers who request cash surrenders, however, statutory
regulations generally provide up to six months in most states to fulfill
surrender requests.
Our institutional products are primarily funding agreements sold to
unaffiliated trusts used to back medium-term notes. As of March 31, 2010, total
institutional products outstanding were $3.41 billion. The following table presents the remaining
scheduled maturities for our institutional products outstanding as of March 31,
2010.
($ in millions)
|
|
|
|
2010
|
$
|
771
|
|
2011
|
|
760
|
|
2012
|
|
40
|
|
2013
|
|
1,750
|
|
2016
|
|
85
|
|
|
$
|
3,406
|
|
Our asset-liability management practices limit the differences between
the cash flows generated by our investment portfolio and the expected cash flow
requirements of our life insurance, annuity and institutional product
obligations.
87
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
The following
table summarizes consolidated cash flow activities by business segment for the
first three months ended March 31.
($ in
millions)
|
|
Property-Liability
(1)
|
|
Allstate Financial
(1)
|
|
Corporate
and Other
(1)
|
|
Consolidated
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
$
|
(30)
|
$
|
432
|
$
|
925
|
$
|
928
|
$
|
69
|
$
|
162
|
$
|
964
|
$
|
1,522
|
|
Investing activities
|
|
89
|
|
(118)
|
|
844
|
|
1,136
|
|
30
|
|
331
|
|
963
|
|
1,349
|
|
Financing activities
|
|
(2)
|
|
(9)
|
|
(1,735)
|
|
(2,217)
|
|
(98)
|
|
(223)
|
|
(1,835)
|
|
(2,449)
|
|
Net increase in
consolidated cash
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
92
|
$
|
422
|
|
(1)
Business unit cash flows reflect the
elimination of intersegment dividends, contributions and borrowings.
Property-Liability
Cash used in operating
activities in the first quarter of 2010 compared to cash provided by operating
activities in the first quarter of 2009
was primarily due to income tax payments in the first quarter of 2010 compared
to income tax refunds in the first quarter of 2009. Both periods were also impacted by claim
payments as a result of catastrophes.
Cash provided by investing activities in the first
three months of 2010 compared to cash used in investing activities in the first
three months of 2009 was primarily due to higher sales of fixed income and
equity securities and decreased purchases of equity securities, partially
offset by net change in short-term investments.
Allstate Financial
Operating cash flows for Allstate Financial in the first three months of
2010 were consistent with the same period in 2009 as higher premiums and
decreased operating costs and expenses almost entirely offset lower net
investment income, lower tax refunds and higher contract benefits.
Lower cash flows provided
by investing activities in the first three months of 2010 compared to the first
three months of 2009 were primarily related to lower cash flows used in
financing activities.
Lower cash flows used in
financing activities in the first three months of 2010 compared to the first
three months of 2009 were primarily due to decreased maturities and retirements
of institutional products, partially offset by lower deposits on fixed
annuities and Allstate Bank products.
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.
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.
88
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 15d-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 March 31, 2010, 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.
89
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 Compliance and under the heading Legal
and regulatory proceedings and inquiries in Note 10 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, investment results, 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, 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 2009.
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
(3)
|
|
January 1,
2010 -
January 31, 2010
|
|
--
|
|
$
|
--
|
|
--
|
|
$
|
--
|
|
February 1,
2010 -
February 28, 2010
|
|
158,629
|
|
$
|
31.2200
|
|
--
|
|
|
--
|
|
March 1,
2010-
March 31, 2010
|
|
2,256
|
|
$
|
31.3098
|
|
--
|
|
|
--
|
|
Total
|
|
160,885
|
|
$
|
31.2213
|
|
--
|
|
|
|
|
(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.
January:
|
|
none
|
February:
|
|
158,629
|
March:
|
|
2,256
|
(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.
None
(3)
A new share repurchase program has not
been authorized.
90
Item 6.
Exhibits
(a)
Exhibits
An Exhibit Index
has been filed as part of this report on page E-1.
91
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)
|
|
|
|
|
|
|
April 28, 2010
|
By
|
/s/
Samuel H. Pilch
|
|
|
Samuel H. Pilch
|
|
|
(chief accounting
officer and duly
|
|
|
authorized officer of
Registrant)
|
92
Exhibit No.
|
|
Description
|
|
|
|
4
|
|
Registrant
hereby agrees to furnish the Commission, upon request, with the instruments
defining the rights of holders of each issue of long-term debt of the
Registrant and its consolidated subsidiaries.
|
|
|
|
15
|
|
Acknowledgment
of awareness from Deloitte & Touche LLP, dated April 28, 2010,
concerning unaudited interim financial information.
|
|
|
|
31 (i)
|
|
Rule 13a-14(a) Certification
of Principal Executive Officer
|
|
|
|
31 (i)
|
|
Rule 13a-14(a) Certification
of Principal Financial Officer
|
|
|
|
32
|
|
Section 1350
Certifications
|
|
|
|
101.INS
|
|
XBRL Instance Document
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension
Schema
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension
Calculation Linkbase
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension
Label Linkbase
|
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension
Presentation Linkbase
|
E-1
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