10-Q 1 allcorp-6301710xq.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
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
allstatebrandcolor.jpg
THE ALLSTATE CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
 
36-3871531
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2775 Sanders Road, Northbrook, Illinois
60062
 
 
(Address of principal executive offices)
(Zip Code)
 
 
(847) 402-5000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes   X  
No ___
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes   X  
No ___
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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
____
 
 
 
 
 
 
Emerging growth company
____
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ____
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes        
No   X  
 
As of July 17, 2017, the registrant had 361,359,566 common shares, $.01 par value, outstanding.



The Allstate Corporation
Index to Quarterly Report on Form 10-Q
June 30, 2017
 
Part I
Financial Information
Page
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2017 and 2016 (unaudited)
 
Condensed Consolidated Statements of Comprehensive Income for the Three-Month and Six-Month Periods Ended June 30, 2017 and 2016 (unaudited)
 
Condensed Consolidated Statements of Financial Position as of June 30, 2017 (unaudited) and December 31, 2016
 
Condensed Consolidated Statements of Shareholders’ Equity for the Six-Month Periods Ended June 30, 2017 and 2016 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2017 and 2016 (unaudited)
 
 
 
 
 
 
 
 
 
 
Overview
 
 
 
 
Allstate brand
 
Esurance brand
 
Encompass brand
 
SquareTrade
 
 
 
Allstate Life
 
Allstate Benefits
 
Allstate Annuities
 
 
 
 
 
 
 
 
 
Part II
Other Information
 



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 June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(unaudited)
 
(unaudited)
Revenues
 

 
 

 
 

 
 

Property-liability insurance premiums
$
8,018

 
$
7,814

 
$
15,977

 
$
15,537

Life and annuity premiums and contract charges
591

 
564

 
1,184

 
1,130

Net investment income
897

 
762

 
1,645

 
1,493

Realized capital gains and losses:
 

 
 

 
 

 
 

Total other-than-temporary impairment (“OTTI”) losses
(47
)
 
(77
)
 
(109
)
 
(168
)
OTTI losses reclassified to (from) other comprehensive income
(3
)
 
(2
)
 

 
8

Net OTTI losses recognized in earnings
(50
)
 
(79
)
 
(109
)
 
(160
)
Sales and other realized capital gains and losses
131

 
103

 
324

 
35

Total realized capital gains and losses
81

 
24

 
215

 
(125
)
 
9,587

 
9,164

 
19,021

 
18,035

Costs and expenses
 

 
 

 
 

 
 

Property-liability insurance claims and claims expense
5,689

 
5,901

 
11,105

 
11,585

Life and annuity contract benefits
486

 
454

 
960

 
909

Interest credited to contractholder funds
175

 
185

 
348

 
375

Amortization of deferred policy acquisition costs
1,176

 
1,126

 
2,345

 
2,255

Operating costs and expenses
1,086

 
1,040

 
2,183

 
2,022

Restructuring and related charges
53

 
11

 
63

 
16

Interest expense
83

 
72

 
168

 
145

 
8,748

 
8,789

 
17,172

 
17,307

 
 
 
 
 
 
 
 
Gain on disposition of operations
12

 
1

 
14

 
3

 
 
 
 
 
 
 
 
Income from operations before income tax expense
851

 
376

 
1,863

 
731

 
 
 
 
 
 
 
 
Income tax expense
272

 
105

 
589

 
214

 
 
 
 
 
 
 
 
Net income
579

 
271

 
1,274

 
517

 
 
 
 
 
 
 
 
Preferred stock dividends
29

 
29

 
58

 
58

 
 
 
 
 
 
 
 
Net income applicable to common shareholders
$
550

 
$
242

 
$
1,216

 
$
459

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Net income applicable to common shareholders per common share - Basic
$
1.51

 
$
0.65

 
$
3.34

 
$
1.22

Weighted average common shares - Basic
363.6

 
373.6

 
364.6

 
375.8

Net income applicable to common shareholders per common share - Diluted
$
1.49

 
$
0.64

 
$
3.29

 
$
1.21

Weighted average common shares - Diluted
369.0

 
378.1

 
370.1

 
380.5

Cash dividends declared per common share
$
0.37

 
$
0.33

 
$
0.74

 
$
0.66







See notes to condensed consolidated financial statements.

The Allstate Corporation allstatelogohands01.jpg 1


The Allstate Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
($ in millions)
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
 (unaudited)
 
 (unaudited)
Net income
$
579

 
$
271

 
$
1,274

 
$
517

 
 
 
 
 
 
 
 
Other comprehensive income, after-tax
 

 
 

 
 

 
 

Changes in:
 

 
 

 
 

 
 

Unrealized net capital gains and losses
270

 
424

 
473

 
1,004

Unrealized foreign currency translation adjustments
11

 
5

 
8

 
19

Unrecognized pension and other postretirement benefit cost
18

 
16

 
37

 
27

Other comprehensive income, after-tax
299

 
445

 
518

 
1,050

 
 
 
 
 
 
 
 
Comprehensive income
$
878

 
$
716

 
$
1,792

 
$
1,567

 































See notes to condensed consolidated financial statements.

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The Allstate Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Position
($ in millions, except par value data)
June 30, 2017
 
December 31, 2016
Assets
(unaudited)
 
 

Investments
 

 
 

Fixed income securities, at fair value (amortized cost $56,901 and $56,576)
$
58,656

 
$
57,839

Equity securities, at fair value (cost $5,321 and $5,157)
6,117

 
5,666

Mortgage loans
4,336

 
4,486

Limited partnership interests
6,206

 
5,814

Short-term, at fair value (amortized cost $2,175 and $4,288)
2,175

 
4,288

Other
3,815

 
3,706

Total investments
81,305

 
81,799

Cash
482

 
436

Premium installment receivables, net
5,693

 
5,597

Deferred policy acquisition costs
4,037

 
3,954

Reinsurance recoverables, net
8,722

 
8,745

Accrued investment income
573

 
567

Property and equipment, net
1,072

 
1,065

Goodwill
2,309

 
1,219

Other assets
3,256

 
1,835

Separate Accounts
3,416

 
3,393

Total assets
$
110,865

 
$
108,610

Liabilities
 

 
 

Reserve for property-liability insurance claims and claims expense
$
25,884

 
$
25,250

Reserve for life-contingent contract benefits
12,234

 
12,239

Contractholder funds
19,832

 
20,260

Unearned premiums
13,024

 
12,583

Claim payments outstanding
939

 
879

Deferred income taxes
1,104

 
487

Other liabilities and accrued expenses
6,583

 
6,599

Long-term debt
6,348

 
6,347

Separate Accounts
3,416

 
3,393

Total liabilities
89,364

 
88,037

Commitments and Contingent Liabilities (Note 11)


 


Shareholders’ equity
 

 
 

Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 72.2 thousand shares issued and outstanding, and $1,805 aggregate liquidation preference
1,746

 
1,746

Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 361 million and 366 million shares outstanding
9

 
9

Additional capital paid-in
3,269

 
3,303

Retained income
41,622

 
40,678

Deferred ESOP expense
(6
)
 
(6
)
Treasury stock, at cost (539 million and 534 million shares)
(25,241
)
 
(24,741
)
Accumulated other comprehensive income:
 

 
 

Unrealized net capital gains and losses:
 

 
 

Unrealized net capital gains and losses on fixed income securities with OTTI
65

 
57

Other unrealized net capital gains and losses
1,590

 
1,091

Unrealized adjustment to DAC, DSI and insurance reserves
(129
)
 
(95
)
Total unrealized net capital gains and losses
1,526

 
1,053

Unrealized foreign currency translation adjustments
(42
)
 
(50
)
Unrecognized pension and other postretirement benefit cost
(1,382
)
 
(1,419
)
Total accumulated other comprehensive income (loss)
102

 
(416
)
Total shareholders’ equity
21,501

 
20,573

Total liabilities and shareholders’ equity
$
110,865

 
$
108,610

See notes to condensed consolidated financial statements.

The Allstate Corporation allstatelogohands01.jpg 3


The Allstate Corporate and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
($ in millions)
Six months ended June 30,
 
2017
 
2016
 
(unaudited)
Preferred stock par value
$

 
$

 
 
 
 
Preferred stock additional capital paid-in
1,746

 
1,746

 
 
 
 
Common stock
9

 
9

 
 
 
 
Additional capital paid-in
 

 
 

Balance, beginning of period
3,303

 
3,245

Forward contract on accelerated share repurchase agreement
(38
)
 
(52
)
Equity incentive plans activity
4

 
10

Balance, end of period
3,269

 
3,203

 
 
 
 
Retained income
 

 
 

Balance, beginning of period
40,678

 
39,413

Net income
1,274

 
517

Dividends on common stock
(272
)
 
(249
)
Dividends on preferred stock
(58
)
 
(58
)
Balance, end of period
41,622

 
39,623

 
 
 
 
Deferred ESOP expense
(6
)
 
(13
)
 
 
 
 
Treasury stock
 

 
 

Balance, beginning of period
(24,741
)
 
(23,620
)
Shares acquired
(646
)
 
(829
)
Shares reissued under equity incentive plans, net
146

 
139

Balance, end of period
(25,241
)
 
(24,310
)
 
 
 
 
Accumulated other comprehensive income
 

 
 

Balance, beginning of period
(416
)
 
(755
)
Change in unrealized net capital gains and losses
473

 
1,004

Change in unrealized foreign currency translation adjustments
8

 
19

Change in unrecognized pension and other postretirement benefit cost
37

 
27

Balance, end of period
102

 
295

Total shareholders’ equity
$
21,501

 
$
20,553

 











See notes to condensed consolidated financial statements.

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The Allstate Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
($ in millions)
Six months ended June 30,
 
2017
 
2016
Cash flows from operating activities
(unaudited)
Net income
$
1,274

 
$
517

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation, amortization and other non-cash items
238

 
188

Realized capital gains and losses
(215
)
 
125

Gain on disposition of operations
(14
)
 
(3
)
Interest credited to contractholder funds
348

 
375

Changes in:
 

 
 

Policy benefits and other insurance reserves
228

 
577

Unearned premiums
34

 
62

Deferred policy acquisition costs
(65
)
 
(72
)
Premium installment receivables, net
(51
)
 
(27
)
Reinsurance recoverables, net
6

 
(120
)
Income taxes
(42
)
 
(176
)
Other operating assets and liabilities
(393
)
 
(88
)
Net cash provided by operating activities
1,348

 
1,358

Cash flows from investing activities
 

 
 

Proceeds from sales
 

 
 

Fixed income securities
14,521

 
12,589

Equity securities
3,430

 
2,487

Limited partnership interests
481

 
363

Other investments
118

 
144

Investment collections
 

 
 

Fixed income securities
2,063

 
2,138

Mortgage loans
305

 
150

Other investments
337

 
168

Investment purchases
 

 
 

Fixed income securities
(17,214
)
 
(12,947
)
Equity securities
(3,473
)
 
(2,672
)
Limited partnership interests
(578
)
 
(703
)
Mortgage loans
(148
)
 
(264
)
Other investments
(532
)
 
(449
)
Change in short-term investments, net
2,142

 
(669
)
Change in other investments, net
107

 
(39
)
Purchases of property and equipment, net
(146
)
 
(120
)
Acquisition of operations
(1,356
)
 

Net cash provided by investing activities
57

 
176

Cash flows from financing activities
 

 
 

Repayments of long-term debt

 
(16
)
Contractholder fund deposits
515

 
522

Contractholder fund withdrawals
(957
)
 
(1,013
)
Dividends paid on common stock
(257
)
 
(240
)
Dividends paid on preferred stock
(58
)
 
(58
)
Treasury stock purchases
(657
)
 
(904
)
Shares reissued under equity incentive plans, net
108

 
72

Excess tax benefits on share-based payment arrangements

 
20

Other
(53
)
 
34

Net cash used in financing activities
(1,359
)
 
(1,583
)
Net increase (decrease) in cash
46

 
(49
)
Cash at beginning of period
436

 
495

Cash at end of period
$
482

 
$
446



See notes to condensed consolidated financial statements.

The Allstate Corporation allstatelogohands01.jpg 5


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 (the “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”). These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
The condensed consolidated financial statements and notes as of June 30, 2017 and for the three-month and six-month periods ended June 30, 2017 and 2016 are unaudited. The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year. All significant intercompany accounts and transactions have been eliminated.
Adopted accounting standards
Employee Share-Based Payment Accounting
Effective January 1, 2017, the Company adopted new Financial Accounting Standards Board (“FASB”) guidance that amends the accounting for share-based payments on a prospective basis. Under the new guidance, reporting entities are required to recognize all tax effects related to share-based payments at settlement or expiration through the income statement and the requirement to delay recognition of certain tax benefits until they reduce current taxes payable is eliminated. The new guidance also permits employers to withhold shares issued in connection with an employee’s exercise of options or the settlement of stock awards, up to the employee’s maximum individual statutory tax rate, to meet tax withholding requirements without causing liability classification of the award. In addition, all tax-related cash flows resulting from share-based payments are reported as operating activities on the statement of cash flows whereas cash payments made to taxing authorities on an employee’s behalf for withheld shares are presented as financing activities. The adoption of this guidance had no impact on the Company’s results of operations or financial position on the date of adoption.
Transition to Equity Method Accounting
Effective January 1, 2017, the Company adopted new FASB guidance amending the accounting requirements for transitioning to the equity method of accounting (“EMA”), including a transition from the cost method. The guidance requires the cost of acquiring an additional interest in an investee to be added to the existing carrying value to establish the initial basis of the EMA investment. Under the new guidance, no retroactive adjustment is required when an investment initially qualifies for EMA treatment. The guidance is applied prospectively to investments that qualify for EMA after application of the cost method of accounting. Accordingly, the adoption of this guidance had no impact on the Company’s results of operations or financial position.
Pending accounting standards
Revenue from Contracts with Customers
In May 2014, the FASB issued guidance which revises the criteria for revenue recognition. Insurance contracts are excluded from the scope of the new guidance. Under the guidance, the transaction price is attributed to underlying performance obligations in the contract and revenue is recognized as the entity satisfies the performance obligations and transfers control of a good or service to the customer. Incremental costs of obtaining a contract may be capitalized to the extent the entity expects to recover those costs. The guidance is effective for reporting periods beginning after December 15, 2017 and is to be applied retrospectively. The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations or financial position.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued guidance requiring equity investments, including equity securities and limited partnership interests, that are not accounted for under the equity method of accounting or result in consolidation to be measured at fair value with changes in fair value recognized in net income. Equity investments without readily determinable fair values may be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the

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identical or a similar investment of the same issuer. When a qualitative assessment of equity investments without readily determinable fair values indicates that impairment exists, the carrying value is required to be adjusted to fair value, if lower. The guidance clarifies that an entity should evaluate the realizability of a deferred tax asset related to available-for-sale fixed income securities in combination with the entity’s other deferred tax assets. The guidance also changes certain disclosure requirements. The guidance is effective for interim and annual periods beginning after December 15, 2017, and is to be applied through a cumulative-effect adjustment to beginning retained income as of the date of adoption. The new guidance related to equity investments without readily determinable fair values is applied prospectively as of the date of adoption. The most significant anticipated impacts, using values as of June 30, 2017, relate to the change in accounting for equity securities, where $796 million of pre-tax unrealized net capital gains would be reclassified from accumulated other comprehensive income to retained income, and cost method limited partnership interests (excluding limited partnership interests accounted for on a cost recovery basis), where the carrying value would increase by approximately $202 million, pre-tax, with the offsetting adjustment recognized in retained income.
Accounting for Leases
In February 2016, the FASB issued guidance that revises the accounting for leases. Under the new guidance, lessees will be required to recognize a right-of-use asset and lease liability for all leases other than those that meet the definition of a short-term lease. The lease liability will be equal to the present value of lease payments. A right-of-use asset will be based on the lease liability adjusted for qualifying initial direct costs. The expense of operating leases under the new guidance will be recognized in the income statement on a straight-line basis after combining the lease expense components (interest expense on the lease liability and amortization of the right-of-use asset) over the term of the lease. For finance leases, the expense components are computed separately and produce greater up-front expense compared to operating leases as interest expense on the lease liability is higher in early years and the right-of-use asset is amortized on a straight-line basis consistent with operating leases. Lease classification will be based on criteria similar to those currently applied. The accounting model for lessors will be similar to the current model with modifications to reflect definition changes for components such as initial direct costs. Lessors will continue to classify leases as operating, direct financing, or sales-type. The guidance is effective for reporting periods beginning after December 15, 2018 using a modified retrospective approach applied at the beginning of the earliest period presented. The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations or financial position.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance which revises the credit loss recognition criteria for certain financial assets measured at amortized cost, including reinsurance recoverables. The new guidance replaces the existing incurred loss recognition model with an expected loss recognition model. The objective of the expected credit loss model is for the reporting entity to recognize its estimate of expected credit losses for affected financial assets in a valuation allowance deducted from the amortized cost basis of the related financial assets that results in presenting the net carrying value of the financial assets at the amount expected to be collected. The reporting entity must consider all available relevant information when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts over the life of an asset. Financial assets may be evaluated individually or on a pooled basis when they share similar risk characteristics. The measurement of credit losses for available-for-sale debt securities measured at fair value is not affected except that credit losses recognized are limited to the amount by which fair value is below amortized cost and the carrying value adjustment is recognized through a valuation allowance and not as a direct write-down. The guidance is effective for interim and annual periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained income. The Company is in the process of evaluating the impact of adoption.
Goodwill Impairment
In January 2017, the FASB issued guidance to simplify the accounting for goodwill impairment which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. Under the new guidance, goodwill impairment will be measured and recognized as the amount by which a reporting unit’s carrying value, including goodwill, exceeds its fair value, not to exceed the carrying amount of goodwill allocated to the reporting unit. The revised guidance does not affect a reporting entity’s ability to first assess qualitative factors by reporting unit to determine whether to perform the quantitative goodwill impairment test. The guidance is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The guidance is to be applied on a prospective basis, with the effects, if any, recognized in net income in the period of adoption. The impact to the Company upon adoption is dependent upon the excess, if any, of carrying value of the Company’s reporting units, including goodwill, over their respective fair values, a measure that is not currently determinable.
Presentation of Net Periodic Pension and Postretirement Benefits Costs
In March 2017, the FASB issued guidance to improve the presentation of net periodic pension and postretirement benefits costs that requires the service cost component to be reported in operating expenses together with other employee compensation

The Allstate Corporation allstatelogohands01.jpg 7


costs and all other components of net periodic pension and postretirement benefits costs reported in non-operating expenses. If the reporting entity does not separately report operating and non-operating expenses on the statement of operations it is required to identify, on the statement of operations or in disclosures, the line items in which the components of net periodic pension and postretirement benefits costs are presented. The new guidance permits only the service cost component to be eligible for capitalization where applicable. The guidance is effective for annual periods beginning after December 15, 2017 and for interim periods within those annual periods. The guidance is to be applied on a prospective basis for capitalization of service costs where applicable and on a retrospective basis for the presentation of the service cost and other components of net periodic pension benefit costs in the statements of operations or in disclosures. The impact of adoption is not expected to be material to the Company’s results of operations or financial position.
2. Earnings per Common Share
Basic earnings per common share is computed using the weighted average number of common shares outstanding, including vested unissued participating restricted stock units. Diluted earnings per common share is computed using the weighted average number of common and dilutive potential common shares outstanding. For the Company, dilutive potential common shares consist of outstanding stock options and unvested non-participating restricted stock units and contingently issuable performance stock awards.
The computation of basic and diluted earnings per common share is presented in the following table.
($ in millions, except per share data)
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 

 
 

 
 

 
 

Net income
$
579

 
$
271

 
$
1,274

 
$
517

Less: Preferred stock dividends
29

 
29

 
58

 
58

Net income applicable to common shareholders (1)
$
550

 
$
242

 
$
1,216

 
$
459

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Weighted average common shares outstanding
363.6

 
373.6

 
364.6

 
375.8

Effect of dilutive potential common shares:
 

 
 

 
 

 
 

Stock options
4.3

 
3.4

 
4.2

 
3.4

Restricted stock units (non-participating) and performance stock awards
1.1

 
1.1

 
1.3

 
1.3

Weighted average common and dilutive potential common shares outstanding
369.0

 
378.1

 
370.1

 
380.5

 
 
 
 
 
 
 
 
Earnings per common share - Basic
$
1.51

 
$
0.65

 
$
3.34

 
$
1.22

Earnings per common share - Diluted
$
1.49

 
$
0.64

 
$
3.29

 
$
1.21

_____________________________
(1) 
Net income applicable to common shareholders is net income less preferred stock dividends.
The effect of dilutive potential common shares does not include the effect of options with an anti-dilutive effect on earnings per common share because their exercise prices exceed the average market price of Allstate common shares during the period or for which the unrecognized compensation cost would have an anti-dilutive effect. Options to purchase 2.5 million and 4.8 million Allstate common shares, with exercise prices ranging from $74.03 to $86.61 and $57.29 to $71.29, were outstanding for the three-month periods ended June 30, 2017 and 2016, respectively, but were not included in the computation of diluted earnings per common share in those periods. Options to purchase 2.6 million and 4.8 million Allstate common shares, with exercise prices ranging from $69.95 to $86.61 and $57.29 to $71.29, were outstanding for the six-month periods ended June 30, 2017 and 2016, respectively, but were not included in the computation of diluted earnings per common share in those periods.
3.    Acquisition
On January 3, 2017, the Company acquired SquareTrade Holding Company, Inc. (“SquareTrade”), a consumer product protection plan provider that distributes through many of America’s major retailers and Europe’s mobile operators, for $1.4 billion in cash. SquareTrade provides protection plans primarily covering consumer appliances and electronics, such as TVs, smartphones and computers. This acquisition broadens Allstate’s unique product offerings to better meet consumers’ needs.
In connection with the acquisition, the Company recorded goodwill of $1.08 billion, commissions paid to retailers (reported in deferred policy acquisition costs) of $70 million, other intangible assets (reported in other assets) of $555 million, contractual liability insurance policy premium expenses (reported in other assets) of $201 million, unearned premiums of $373 million and net deferred income tax liability of $140 million. The Company increased goodwill in the second quarter of 2017 by $14 million related to an adjustment to the fair value of the opening balance sheet liabilities.

8 allstatelogohands01.jpg www.allstate.com


As of June 30, 2017, the Company has $30 million of restricted cash related to an escrow account in connection with the acquisition that is recorded in other assets.
4. Reporting Segments
Summarized revenue data for each of the Company’s reportable segments are as follows:
($ in millions)
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Property-Liability
 

 
 

 
 

 
 

Property-liability insurance premiums
 

 
 

 
 

 
 

Auto
$
5,437

 
$
5,306

 
$
10,825

 
$
10,526

Homeowners
1,815

 
1,815

 
3,630

 
3,625

Other personal lines
436

 
424

 
867

 
845

Commercial lines
118

 
127

 
243

 
256

Other business lines
142

 
142

 
283

 
285

SquareTrade
70

 

 
129

 

Allstate Protection
8,018

 
7,814

 
15,977

 
15,537

Discontinued Lines and Coverages

 

 

 

Total property-liability insurance premiums
8,018

 
7,814

 
15,977

 
15,537

Net investment income
391

 
316

 
702

 
618

Realized capital gains and losses
85

 
26

 
220

 
(73
)
Total Property-Liability
8,494

 
8,156

 
16,899

 
16,082

Allstate Financial
 

 
 

 
 

 
 

Life and annuity premiums and contract charges
 

 
 

 
 

 
 

Premiums
 
 
 
 
 
 
 
Traditional life insurance
148

 
139

 
297

 
277

Accident and health insurance
233

 
214

 
465

 
430

Total premiums
381

 
353

 
762

 
707

Contract charges
 
 
 
 
 
 
 
Interest-sensitive life insurance
207

 
208

 
416

 
417

Fixed annuities
3

 
3

 
6

 
6

Total contract charges
210

 
211

 
422

 
423

Total life and annuity premiums and contract charges
591

 
564

 
1,184

 
1,130

Net investment income
496

 
435

 
922

 
854

Realized capital gains and losses
(4
)
 

 
(5
)
 
(49
)
Total Allstate Financial
1,083

 
999

 
2,101

 
1,935

Corporate and Other
 

 
 

 
 

 
 

Net investment income
10

 
11

 
21

 
21

Realized capital gains and losses

 
(2
)
 

 
(3
)
Total Corporate and Other
10

 
9

 
21

 
18

Consolidated revenues
$
9,587

 
$
9,164

 
$
19,021

 
$
18,035


The Allstate Corporation allstatelogohands01.jpg 9


Summarized financial performance data for each of the Company’s reportable segments are as follows:
($ in millions)
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Property-Liability
 

 
 

 
 

 
 

Underwriting income
 

 
 

 
 

 
 

Allstate Protection
$
232

 
$
(64
)
 
$
741

 
$
63

Discontinued Lines and Coverages
(5
)
 
(2
)
 
(7
)
 
(4
)
Total underwriting income (loss)
227

 
(66
)
 
734

 
59

Net investment income
391

 
316

 
702

 
618

Income tax expense on operations
(196
)
 
(70
)
 
(451
)
 
(211
)
Realized capital gains and losses, after-tax
56

 
18

 
145

 
(46
)
Gain on disposition of operations, after-tax
6

 

 
6

 

Property-Liability net income applicable to common shareholders
484

 
198

 
1,136

 
420

Allstate Financial
 

 
 

 
 

 
 

Life and annuity premiums and contract charges
591

 
564

 
1,184

 
1,130

Net investment income
496

 
435

 
922

 
854

Contract benefits and interest credited to contractholder funds
(659
)
 
(633
)
 
(1,306
)
 
(1,272
)
Operating costs and expenses and amortization of deferred policy acquisition costs
(199
)
 
(189
)
 
(409
)
 
(383
)
Restructuring and related charges
(1
)
 
(1
)
 
(1
)
 
(1
)
Income tax expense on operations
(75
)
 
(56
)
 
(127
)
 
(104
)
Operating income
153

 
120

 
263

 
224

Realized capital gains and losses, after-tax
(3
)
 

 
(4
)
 
(32
)
Valuation changes on embedded derivatives that are not hedged, after-tax
(1
)
 
(4
)
 
(1
)
 
(8
)
DAC and DSI amortization related to realized capital gains and losses and valuation changes on embedded derivatives that are not hedged, after-tax
(3
)
 
(1
)
 
(6
)
 
(2
)
Gain on disposition of operations, after-tax

 
1

 
2

 
2

Allstate Financial net income applicable to common shareholders
146

 
116

 
254

 
184

Corporate and Other
 

 
 

 
 

 
 
Net investment income
10

 
11

 
21

 
21

Operating costs and expenses
(92
)
 
(79
)
 
(185
)
 
(158
)
Income tax benefit on operations
31

 
26

 
61

 
51

Preferred stock dividends
(29
)
 
(29
)
 
(58
)
 
(58
)
Operating loss
(80
)
 
(71
)
 
(161
)
 
(144
)
Realized capital gains and losses, after-tax

 
(1
)
 

 
(1
)
Business combination expenses, after-tax

 

 
(13
)
 

Corporate and Other net loss applicable to common shareholders
(80
)
 
(72
)
 
(174
)
 
(145
)
Consolidated net income applicable to common shareholders
$
550

 
$
242

 
$
1,216

 
$
459




10 allstatelogohands01.jpg www.allstate.com


5. Investments
Fair values
The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:
($ in millions)
Amortized cost
 
Gross unrealized
 
Fair
value
 
 
Gains
 
Losses
 
June 30, 2017
 

 
 

 
 

 
 

U.S. government and agencies
$
3,363

 
$
70

 
$
(7
)
 
$
3,426

Municipal
7,543

 
336

 
(24
)
 
7,855

Corporate
43,007

 
1,394

 
(150
)
 
44,251

Foreign government
1,019

 
34

 
(6
)
 
1,047

Asset-backed securities (“ABS”)
1,237

 
16

 
(10
)
 
1,243

Residential mortgage-backed securities (“RMBS”)
549

 
96

 
(4
)
 
641

Commercial mortgage-backed securities (“CMBS”)
163

 
14

 
(7
)
 
170

Redeemable preferred stock
20

 
3

 

 
23

Total fixed income securities
$
56,901

 
$
1,963

 
$
(208
)
 
$
58,656

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 

 
 

 
 

 
 

U.S. government and agencies
$
3,572

 
$
74

 
$
(9
)
 
$
3,637

Municipal
7,116

 
304

 
(87
)
 
7,333

Corporate
42,742

 
1,178

 
(319
)
 
43,601

Foreign government
1,043

 
36

 
(4
)
 
1,075

ABS
1,169

 
13

 
(11
)
 
1,171

RMBS
651

 
85

 
(8
)
 
728

CMBS
262

 
17

 
(9
)
 
270

Redeemable preferred stock
21

 
3

 

 
24

Total fixed income securities
$
56,576

 
$
1,710

 
$
(447
)
 
$
57,839

Scheduled maturities
The scheduled maturities for fixed income securities are as follows as of June 30, 2017:
($ in millions)
Amortized cost
 
Fair value
Due in one year or less
$
4,226

 
$
4,247

Due after one year through five years
28,770

 
29,347

Due after five years through ten years
16,870

 
17,293

Due after ten years
5,086

 
5,715

 
54,952

 
56,602

ABS, RMBS and CMBS
1,949

 
2,054

Total
$
56,901

 
$
58,656

Actual maturities may differ from those scheduled as a result of calls and make-whole payments by the issuers. ABS, RMBS and CMBS are shown separately because of the potential for prepayment of principal prior to contractual maturity dates.

The Allstate Corporation allstatelogohands01.jpg 11


Net investment income
Net investment income is as follows:
($ in millions)
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Fixed income securities
$
527

 
$
520

 
$
1,045

 
$
1,038

Equity securities
49

 
44

 
93

 
72

Mortgage loans
50

 
53

 
105

 
106

Limited partnership interests
253

 
126

 
373

 
247

Short-term investments
6

 
3

 
12

 
7

Other
60

 
57

 
116

 
108

Investment income, before expense
945

 
803

 
1,744

 
1,578

Investment expense
(48
)
 
(41
)
 
(99
)
 
(85
)
Net investment income
$
897

 
$
762

 
$
1,645

 
$
1,493

Realized capital gains and losses
Realized capital gains and losses by asset type are as follows:
($ in millions)
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Fixed income securities
$
32

 
$
24

 
$
37

 
$
(47
)
Equity securities
19

 
11

 
125

 
(79
)
Mortgage loans

 
1

 

 
1

Limited partnership interests
31

 
(13
)
 
71

 
13

Derivatives
(8
)
 
2

 
(23
)
 
(7
)
Other
7

 
(1
)
 
5

 
(6
)
Realized capital gains and losses
$
81

 
$
24

 
$
215

 
$
(125
)
Realized capital gains and losses by transaction type are as follows:
($ in millions)
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Impairment write-downs
$
(28
)
 
$
(63
)
 
$
(71
)
 
$
(122
)
Change in intent write-downs
(22
)
 
(16
)
 
(38
)
 
(38
)
Net other-than-temporary impairment losses recognized in earnings
(50
)
 
(79
)
 
(109
)
 
(160
)
Sales and other
139

 
104

 
347

 
45

Valuation and settlements of derivative instruments
(8
)
 
(1
)
 
(23
)
 
(10
)
Realized capital gains and losses
$
81

 
$
24

 
$
215

 
$
(125
)
Gross gains of $141 million and $163 million and gross losses of $50 million and $74 million were realized on sales of fixed income and equity securities during the three months ended June 30, 2017 and 2016, respectively. Gross gains of $376 million and $306 million and gross losses of $125 million and $285 million were realized on sales of fixed income and equity securities during the six months ended June 30, 2017 and 2016, respectively.

12 allstatelogohands01.jpg www.allstate.com


Other-than-temporary impairment losses by asset type are as follows:
($ in millions)
Three months ended June 30, 2017
 
Three months ended June 30, 2016
 
Gross
 
Included
 in OCI
 
Net
 
Gross
 
Included
in OCI
 
Net
Fixed income securities:
 

 
 

 
 

 
 

 
 

 
 

Municipal
$
(1
)
 
$
(2
)
 
$
(3
)
 
$

 
$

 
$

Corporate

 

 

 
(1
)
 

 
(1
)
ABS
(1
)
 

 
(1
)
 

 
(1
)
 
(1
)
CMBS
(2
)
 
(1
)
 
(3
)
 

 
(1
)
 
(1
)
Total fixed income securities
(4
)
 
(3
)
 
(7
)
 
(1
)
 
(2
)
 
(3
)
Equity securities
(32
)
 

 
(32
)
 
(51
)
 

 
(51
)
Limited partnership interests
(9
)
 

 
(9
)
 
(24
)
 

 
(24
)
Other
(2
)
 

 
(2
)
 
(1
)
 

 
(1
)
Other-than-temporary impairment losses
$
(47
)
 
$
(3
)
 
$
(50
)
 
$
(77
)
 
$
(2
)
 
$
(79
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2017
 
Six months ended June 30, 2016
 
Gross
 
Included
 in OCI
 
Net
 
Gross
 
Included
in OCI
 
Net
Fixed income securities:
 

 
 

 
 

 
 

 
 

 
 

Municipal
$
(1
)
 
$
(2
)
 
$
(3
)
 
$

 
$

 
$

Corporate
(9
)
 
3

 
(6
)
 
(17
)
 
7

 
(10
)
ABS
(1
)
 

 
(1
)
 
(6
)
 

 
(6
)
RMBS
(1
)
 
(3
)
 
(4
)
 

 

 

CMBS
(8
)
 
2

 
(6
)
 
(4
)
 
1

 
(3
)
Total fixed income securities
(20
)
 

 
(20
)
 
(27
)
 
8

 
(19
)
Equity securities
(68
)
 

 
(68
)
 
(128
)
 

 
(128
)
Limited partnership interests
(16
)
 

 
(16
)
 
(11
)
 

 
(11
)
Other
(5
)
 

 
(5
)
 
(2
)
 

 
(2
)
Other-than-temporary impairment losses
$
(109
)
 
$

 
$
(109
)
 
$
(168
)
 
$
8

 
$
(160
)
The total amount of other-than-temporary impairment losses included in accumulated other comprehensive income at the time of impairment for fixed income securities, which were not included in earnings, are presented in the following table. The amounts exclude $231 million and $221 million as of June 30, 2017 and December 31, 2016, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.
($ in millions)
June 30, 2017
 
December 31, 2016
Municipal
$
(5
)
 
$
(8
)
Corporate
(3
)
 
(7
)
ABS
(16
)
 
(21
)
RMBS
(99
)
 
(90
)
CMBS
(8
)
 
(7
)
Total
$
(131
)
 
$
(133
)

The Allstate Corporation allstatelogohands01.jpg 13


Rollforwards of the cumulative credit losses recognized in earnings for fixed income securities held as of the end of the period are as follows:
($ in millions)
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Beginning balance
$
(294
)
 
$
(350
)
 
$
(318
)
 
$
(392
)
Additional credit loss for securities previously other-than-temporarily impaired
(6
)
 
(3
)
 
(13
)
 
(11
)
Additional credit loss for securities not previously other-than-temporarily impaired
(1
)
 

 
(7
)
 
(8
)
Reduction in credit loss for securities disposed or collected
19

 
22

 
56

 
80

Change in credit loss due to accretion of increase in cash flows
1

 

 
1

 

Ending balance
$
(281
)
 
$
(331
)
 
$
(281
)
 
$
(331
)
The Company uses its best estimate of future cash flows expected to be collected from the fixed income security, discounted at the security’s original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists. The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration of underlying collateral, available reserves or escrows, current subordination levels, third party guarantees and other credit enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate recovery value if the Company determines that the security is dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income. If the Company determines that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.

14 allstatelogohands01.jpg www.allstate.com


Unrealized net capital gains and losses
Unrealized net capital gains and losses included in accumulated other comprehensive income are as follows:
($ in millions)
Fair
value
 
Gross unrealized
 
Unrealized net
gains (losses)
June 30, 2017
 
Gains
 
Losses
 
Fixed income securities
$
58,656

 
$
1,963

 
$
(208
)
 
$
1,755

Equity securities
6,117

 
837

 
(41
)
 
796

Short-term investments
2,175

 

 

 

Derivative instruments (1)
3

 
3

 
(4
)
 
(1
)
Equity method (“EMA”) limited partnerships (2)
 

 
 

 
 

 
(1
)
Unrealized net capital gains and losses, pre-tax
 

 
 

 
 

 
2,549

Amounts recognized for:
 

 
 

 
 

 
 

Insurance reserves (3)
 

 
 

 
 

 

DAC and DSI (4)
 

 
 

 
 

 
(198
)
Amounts recognized
 

 
 

 
 

 
(198
)
Deferred income taxes
 

 
 

 
 

 
(825
)
Unrealized net capital gains and losses, after-tax
 

 
 

 
 

 
$
1,526

_______________
(1) 
Included in the fair value of derivative instruments is $(3) million classified as liabilities.
(2) 
Unrealized net capital gains and losses for limited partnership interests represent the Company’s share of EMA limited partnerships’ other comprehensive income. Fair value and gross unrealized gains and losses are not applicable.
(3) 
The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. Although the Company evaluates premium deficiencies on the combined performance of life insurance and immediate annuities with life contingencies, the adjustment, if any, primarily relates to structured settlement annuities with life contingencies, in addition to annuity buy-outs and certain payout annuities with life contingencies.
(4) 
The DAC and DSI adjustment balance represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized.
($ in millions)
Fair
value
 
Gross unrealized
 
Unrealized net
gains (losses)
December 31, 2016
 
Gains
 
Losses
 
Fixed income securities
$
57,839

 
$
1,710

 
$
(447
)
 
$
1,263

Equity securities
5,666

 
594

 
(85
)
 
509

Short-term investments
4,288

 

 

 

Derivative instruments (1)
5

 
5

 
(3
)
 
2

EMA limited partnerships
 

 
 

 
 

 
(4
)
Unrealized net capital gains and losses, pre-tax
 

 
 

 
 

 
1,770

Amounts recognized for:
 

 
 

 
 

 
 

Insurance reserves
 

 
 

 
 

 

DAC and DSI
 

 
 

 
 

 
(146
)
Amounts recognized
 

 
 

 
 

 
(146
)
Deferred income taxes
 

 
 

 
 

 
(571
)
Unrealized net capital gains and losses, after-tax
 

 
 

 
 

 
$
1,053

_______________
(1) Included in the fair value of derivative instruments is $5 million classified as assets.

The Allstate Corpo