10-Q 1 allcorp-9301710xq.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 September 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
allstatebrandcolora04.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 October 17, 2017, the registrant had 358,825,941 common shares, $.01 par value, outstanding.



The Allstate Corporation
Index to Quarterly Report on Form 10-Q
September 30, 2017
 
Part I
Financial Information
Page
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Operations for the Three-Month and Nine-Month Periods Ended September 30, 2017 and 2016 (unaudited)
 
Condensed Consolidated Statements of Comprehensive Income for the Three-Month and Nine-Month Periods Ended September 30, 2017 and 2016 (unaudited)
 
Condensed Consolidated Statements of Financial Position as of September 30, 2017 (unaudited) and December 31, 2016
 
Condensed Consolidated Statements of Shareholders’ Equity for the Nine-Month Periods Ended September 30, 2017 and 2016 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 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 September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(unaudited)
 
(unaudited)
Revenues
 

 
 

 
 

 
 

Property-liability insurance premiums
$
8,121

 
$
7,869

 
$
24,098

 
$
23,406

Life and annuity premiums and contract charges
593

 
571

 
1,777

 
1,701

Net investment income
843

 
748

 
2,488

 
2,241

Realized capital gains and losses:
 

 
 

 
 

 
 

Total other-than-temporary impairment (“OTTI”) losses
(26
)
 
(73
)
 
(135
)
 
(241
)
OTTI losses reclassified to (from) other comprehensive income
(2
)
 

 
(2
)
 
8

Net OTTI losses recognized in earnings
(28
)
 
(73
)
 
(137
)
 
(233
)
Sales and other realized capital gains and losses
131

 
106

 
455

 
141

Total realized capital gains and losses
103

 
33

 
318

 
(92
)
 
9,660

 
9,221

 
28,681

 
27,256

Costs and expenses
 

 
 

 
 

 
 

Property-liability insurance claims and claims expense
5,545

 
5,553

 
16,650

 
17,138

Life and annuity contract benefits
456

 
484

 
1,416

 
1,393

Interest credited to contractholder funds
174

 
183

 
522

 
558

Amortization of deferred policy acquisition costs
1,200

 
1,138

 
3,545

 
3,393

Operating costs and expenses
1,218

 
1,021

 
3,401

 
3,043

Restructuring and related charges
14

 
5

 
77

 
21

Interest expense
83

 
73

 
251

 
218

 
8,690

 
8,457

 
25,862

 
25,764

 
 
 
 
 
 
 
 
Gain on disposition of operations
1

 
1

 
15

 
4

 
 
 
 
 
 
 
 
Income from operations before income tax expense
971

 
765

 
2,834

 
1,496

 
 
 
 
 
 
 
 
Income tax expense
305

 
245

 
894

 
459

 
 
 
 
 
 
 
 
Net income
666

 
520

 
1,940

 
1,037

 
 
 
 
 
 
 
 
Preferred stock dividends
29

 
29

 
87

 
87

 
 
 
 
 
 
 
 
Net income applicable to common shareholders
$
637

 
$
491

 
$
1,853

 
$
950

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Net income applicable to common shareholders per common share - Basic
$
1.76

 
$
1.32

 
$
5.10

 
$
2.54

Weighted average common shares - Basic
361.3

 
371.5

 
363.5

 
374.4

Net income applicable to common shareholders per common share - Diluted
$
1.74

 
$
1.31

 
$
5.02

 
$
2.51

Weighted average common shares - Diluted
367.1

 
375.9

 
369.1

 
378.9

Cash dividends declared per common share
$
0.37

 
$
0.33

 
$
1.11

 
$
0.99







See notes to condensed consolidated financial statements.

The Allstate Corporation allstatelogohands03.jpg 1


The Allstate Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
($ in millions)
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
 
 (unaudited)
 
 (unaudited)
Net income
$
666

 
$
520

 
$
1,940

 
$
1,037

 
 
 
 
 
 
 
 
Other comprehensive income, after-tax
 

 
 

 
 

 
 

Changes in:
 

 
 

 
 

 
 

Unrealized net capital gains and losses
125

 
193

 
598

 
1,197

Unrealized foreign currency translation adjustments
28

 
(7
)
 
36

 
12

Unrecognized pension and other postretirement benefit cost
73

 
21

 
110

 
48

Other comprehensive income, after-tax
226

 
207

 
744

 
1,257

 
 
 
 
 
 
 
 
Comprehensive income
$
892

 
$
727

 
$
2,684

 
$
2,294

 































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)
September 30, 2017
 
December 31, 2016
Assets
(unaudited)
 
 

Investments
 

 
 

Fixed income securities, at fair value (amortized cost $57,608 and $56,576)
$
59,391

 
$
57,839

Equity securities, at fair value (cost $5,468 and $5,157)
6,434

 
5,666

Mortgage loans
4,322

 
4,486

Limited partnership interests
6,600

 
5,814

Short-term, at fair value (amortized cost $2,198 and $4,288)
2,198

 
4,288

Other
3,826

 
3,706

Total investments
82,771

 
81,799

Cash
690

 
436

Premium installment receivables, net
5,922

 
5,597

Deferred policy acquisition costs
4,147

 
3,954

Reinsurance recoverables, net
9,748

 
8,745

Accrued investment income
590

 
567

Property and equipment, net
1,067

 
1,065

Goodwill
2,309

 
1,219

Other assets
2,966

 
1,835

Separate Accounts
3,422

 
3,393

Total assets
$
113,632

 
$
108,610

Liabilities
 

 
 

Reserve for property-liability insurance claims and claims expense
$
27,154

 
$
25,250

Reserve for life-contingent contract benefits
12,227

 
12,239

Contractholder funds
19,650

 
20,260

Unearned premiums
13,535

 
12,583

Claim payments outstanding
959

 
879

Deferred income taxes
1,249

 
487

Other liabilities and accrued expenses
6,968

 
6,599

Long-term debt
6,349

 
6,347

Separate Accounts
3,422

 
3,393

Total liabilities
91,513

 
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, 360 million and 366 million shares outstanding
9

 
9

Additional capital paid-in
3,330

 
3,303

Retained income
42,125

 
40,678

Deferred ESOP expense
(6
)
 
(6
)
Treasury stock, at cost (540 million and 534 million shares)
(25,413
)
 
(24,741
)
Accumulated other comprehensive income:
 

 
 

Unrealized net capital gains and losses:
 

 
 

Unrealized net capital gains and losses on fixed income securities with OTTI
68

 
57

Other unrealized net capital gains and losses
1,715

 
1,091

Unrealized adjustment to DAC, DSI and insurance reserves
(132
)
 
(95
)
Total unrealized net capital gains and losses
1,651

 
1,053

Unrealized foreign currency translation adjustments
(14
)
 
(50
)
Unrecognized pension and other postretirement benefit cost
(1,309
)
 
(1,419
)
Total accumulated other comprehensive income (loss)
328

 
(416
)
Total shareholders’ equity
22,119

 
20,573

Total liabilities and shareholders’ equity
$
113,632

 
$
108,610

See notes to condensed consolidated financial statements.

The Allstate Corporation allstatelogohands03.jpg 3


The Allstate Corporate and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
($ in millions)
Nine months ended September 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

 
(37
)
Equity incentive plans activity
27

 
29

Balance, end of period
3,330

 
3,237

 
 
 
 
Retained income
 

 
 

Balance, beginning of period
40,678

 
39,413

Net income
1,940

 
1,037

Dividends on common stock
(406
)
 
(373
)
Dividends on preferred stock
(87
)
 
(87
)
Balance, end of period
42,125

 
39,990

 
 
 
 
Deferred ESOP expense
(6
)
 
(13
)
 
 
 
 
Treasury stock
 

 
 

Balance, beginning of period
(24,741
)
 
(23,620
)
Shares acquired
(845
)
 
(1,094
)
Shares reissued under equity incentive plans, net
173

 
177

Balance, end of period
(25,413
)
 
(24,537
)
 
 
 
 
Accumulated other comprehensive income
 

 
 

Balance, beginning of period
(416
)
 
(755
)
Change in unrealized net capital gains and losses
598

 
1,197

Change in unrealized foreign currency translation adjustments
36

 
12

Change in unrecognized pension and other postretirement benefit cost
110

 
48

Balance, end of period
328

 
502

Total shareholders’ equity
$
22,119

 
$
20,934

 









See notes to condensed consolidated financial statements.

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The Allstate Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
($ in millions)
Nine months ended September 30,
 
2017
 
2016
Cash flows from operating activities
(unaudited)
Net income
$
1,940

 
$
1,037

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

 
 

Depreciation, amortization and other non-cash items
358

 
285

Realized capital gains and losses
(318
)
 
92

Gain on disposition of operations
(15
)
 
(4
)
Interest credited to contractholder funds
522

 
558

Changes in:
 

 
 

Policy benefits and other insurance reserves
1,276

 
978

Unearned premiums
525

 
540

Deferred policy acquisition costs
(176
)
 
(159
)
Premium installment receivables, net
(267
)
 
(236
)
Reinsurance recoverables, net
(1,017
)
 
(420
)
Income taxes
119

 
30

Other operating assets and liabilities
267

 
41

Net cash provided by operating activities
3,214

 
2,742

Cash flows from investing activities
 

 
 

Proceeds from sales
 

 
 

Fixed income securities
19,508

 
19,132

Equity securities
5,179

 
4,069

Limited partnership interests
767

 
634

Other investments
170

 
206

Investment collections
 

 
 

Fixed income securities
3,038

 
3,430

Mortgage loans
477

 
403

Other investments
458

 
281

Investment purchases
 

 
 

Fixed income securities
(23,935
)
 
(22,282
)
Equity securities
(5,296
)
 
(4,113
)
Limited partnership interests
(1,082
)
 
(1,128
)
Mortgage loans
(311
)
 
(460
)
Other investments
(700
)
 
(674
)
Change in short-term investments, net
2,257

 
94

Change in other investments, net
(28
)
 
(60
)
Purchases of property and equipment, net
(216
)
 
(190
)
Acquisition of operations
(1,356
)
 

Net cash used in investing activities
(1,070
)
 
(658
)
Cash flows from financing activities
 

 
 

Repayments of long-term debt

 
(16
)
Contractholder fund deposits
767

 
785

Contractholder fund withdrawals
(1,416
)
 
(1,537
)
Dividends paid on common stock
(391
)
 
(364
)
Dividends paid on preferred stock
(87
)
 
(87
)
Treasury stock purchases
(848
)
 
(1,154
)
Shares reissued under equity incentive plans, net
132

 
123

Excess tax benefits on share-based payment arrangements

 
25

Other
(47
)
 
35

Net cash used in financing activities
(1,890
)
 
(2,190
)
Net increase (decrease) in cash
254

 
(106
)
Cash at beginning of period
436

 
495

Cash at end of period
$
690

 
$
389



See notes to condensed consolidated financial statements.

The Allstate Corporation allstatelogohands03.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 September 30, 2017 and for the three-month and nine-month periods ended September 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’s principal activities impacted by the standard are those related to the issuance of protection plans for consumer products and automobiles and service contracts that provide roadside assistance. The impacts include an increase in deferred revenue with a corresponding increase in deferred costs for protection plans that are sold directly to retailers for which Allstate is deemed to be the principal in the transaction. The anticipated impacts of this adjustment offset and will not impact net income, but result in an increase in unearned premiums and deferred policy acquisition costs of approximately $145 million to $175 million, pre-tax. The Company also anticipates impacts related to recognizing revenue for SquareTrade based on expected losses, accounting for variable consideration and the deferral of certain costs associated with acquiring service contracts that provide roadside

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assistance, the net impact of which is not expected to materially reduce shareholders’ equity at the date of adoption. Based on the Company’s assessment, the total impact of adoption will not 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 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 which results in no impact to the Company’s results of operations at 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 September 30, 2017, relate to the change in accounting for equity securities, where $966 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 of these investments would increase by approximately $200 million, pre-tax, with the offsetting after-tax adjustment recognized in retained income. The after-tax change in accounting for equity securities will not affect the Company’s shareholders’ equity and the unrealized net capital gains reclassified to retained income will never be recognized in net income. The after-tax change in accounting for cost method limited partnerships, if adopted at the end of this reporting period, would increase the Company’s shareholders’ equity, while also decreasing net income return on shareholders’ equity. The amount by which the fair value of cost method limited partnerships exceeds their carrying value will never be recognized in net income.
Accounting for Leases
In February 2016, the FASB issued guidance revising 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. 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

The Allstate Corporation allstatelogohands03.jpg 7


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 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.
Accounting for Hedging Activities
In August 2017, the FASB issued amendments intended to better align hedge accounting with an organization’s risk management activities. The amendments expand hedge accounting for nonfinancial and financial risk components and revise the measurement methodologies to better align with an organization’s risk management activities. Separate presentation of hedge ineffectiveness is eliminated to provide greater transparency of the full impact of hedging by requiring presentation of the results of the hedged item and hedging instrument in a single financial statement line item. In addition, the amendments reduce complexity by simplifying the manner in which assessments of hedge effectiveness may be performed. The guidance is effective for annual periods beginning after December 15, 2018 and for interim periods within those annual periods. The presentation and disclosure guidance is effective on a prospective basis. 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.

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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 September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 

 
 

 
 

 
 

Net income
$
666

 
$
520

 
$
1,940

 
$
1,037

Less: Preferred stock dividends
29

 
29

 
87

 
87

Net income applicable to common shareholders (1)
$
637

 
$
491

 
$
1,853

 
$
950

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Weighted average common shares outstanding
361.3

 
371.5

 
363.5

 
374.4

Effect of dilutive potential common shares:
 

 
 

 
 

 
 

Stock options
4.4

 
3.2

 
4.3

 
3.3

Restricted stock units (non-participating) and performance stock awards
1.4

 
1.2

 
1.3

 
1.2

Weighted average common and dilutive potential common shares outstanding
367.1

 
375.9

 
369.1

 
378.9

 
 
 
 
 
 
 
 
Earnings per common share - Basic
$
1.76

 
$
1.32

 
$
5.10

 
$
2.54

Earnings per common share - Diluted
$
1.74

 
$
1.31

 
$
5.02

 
$
2.51

_____________________________
(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 0.2 million and 3.6 million Allstate common shares, with exercise prices ranging from $78.35 to $93.93 and $58.14 to $71.29, were outstanding for the three-month periods ended September 30, 2017 and 2016, respectively, but were not included in the computation of diluted earnings per common share in those periods. Options to purchase 2.5 million and 4.7 million Allstate common shares, with exercise prices ranging from $74.03 to $93.93 and $57.29 to $71.29, were outstanding for the nine-month periods ended September 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 by $14 million through third quarter 2017 related to an adjustment to the fair value of the opening balance sheet liabilities.
As of September 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.

The Allstate Corporation allstatelogohands03.jpg 9


4. Reportable Segments
Summarized revenue data for each of the Company’s reportable segments are as follows:
($ in millions)
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Property-Liability
 

 
 

 
 

 
 

Property-liability insurance premiums
 

 
 

 
 

 
 

Auto
$
5,502

 
$
5,353

 
$
16,327

 
$
15,879

Homeowners
1,832

 
1,813

 
5,462

 
5,438

Other personal lines
439

 
426

 
1,306

 
1,271

Commercial lines
124

 
127

 
367

 
383

Other business lines
146

 
150

 
429

 
435

SquareTrade
78

 

 
207

 

Allstate Protection
8,121

 
7,869

 
24,098

 
23,406

Discontinued Lines and Coverages

 

 

 

Total property-liability insurance premiums
8,121

 
7,869

 
24,098

 
23,406

Net investment income
372

 
310

 
1,074

 
928

Realized capital gains and losses
82

 
53

 
302

 
(20
)
Total Property-Liability
8,575

 
8,232

 
25,474

 
24,314

Allstate Financial
 

 
 

 
 

 
 

Life and annuity premiums and contract charges
 

 
 

 
 

 
 

Premiums
 
 
 
 
 
 
 
Traditional life insurance
153

 
145

 
450

 
422

Accident and health insurance
232

 
216

 
697

 
646

Total premiums
385

 
361

 
1,147

 
1,068

Contract charges
 
 
 
 
 
 
 
Interest-sensitive life insurance
204

 
206

 
620

 
623

Fixed annuities
4

 
4

 
10

 
10

Total contract charges
208

 
210

 
630

 
633

Total life and annuity premiums and contract charges
593

 
571

 
1,777

 
1,701

Net investment income
461

 
427

 
1,383

 
1,281

Realized capital gains and losses
21

 
(21
)
 
16

 
(70
)
Total Allstate Financial
1,075

 
977

 
3,176

 
2,912

Corporate and Other
 

 
 

 
 

 
 

Net investment income
10

 
11

 
31

 
32

Realized capital gains and losses

 
1

 

 
(2
)
Total Corporate and Other
10

 
12

 
31

 
30

Consolidated revenues
$
9,660

 
$
9,221

 
$
28,681

 
$
27,256


10 allstatelogohands03.jpg www.allstate.com


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

 
 

 
 

 
 

Underwriting income
 

 
 

 
 

 
 

Allstate Protection
$
517

 
$
455

 
$
1,258

 
$
518

Discontinued Lines and Coverages
(88
)
 
(100
)
 
(95
)
 
(104
)
Total underwriting income
429

 
355

 
1,163

 
414

Net investment income
372

 
310

 
1,074

 
928

Income tax expense on operations
(252
)
 
(218
)
 
(703
)
 
(429
)
Realized capital gains and losses, after-tax
54

 
36

 
199

 
(10
)
Gain on disposition of operations, after-tax
1

 

 
7

 

Property-Liability net income applicable to common shareholders
604

 
483

 
1,740

 
903

Allstate Financial
 

 
 

 
 

 
 

Life and annuity premiums and contract charges
593

 
571

 
1,777

 
1,701

Net investment income
461

 
427

 
1,383

 
1,281

Contract benefits and interest credited to contractholder funds
(629
)
 
(667
)
 
(1,935
)
 
(1,939
)
Operating costs and expenses and amortization of deferred policy acquisition costs
(188
)
 
(194
)
 
(597
)
 
(577
)
Restructuring and related charges
(1
)
 

 
(2
)
 
(1
)
Income tax expense on operations
(79
)
 
(43
)
 
(206
)
 
(147
)
Operating income
157

 
94

 
420

 
318

Realized capital gains and losses, after-tax
13

 
(14
)
 
9

 
(46
)
Valuation changes on embedded derivatives that are not hedged, after-tax
(1
)
 

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

 
1

 
3

 
3

Allstate Financial net income applicable to common shareholders
168

 
80

 
422

 
264

Corporate and Other
 

 
 

 
 

 
 
Net investment income
10

 
11

 
31

 
32

Operating costs and expenses
(175
)
 
(80
)
 
(360
)
 
(238
)
Income tax benefit on operations
60

 
26

 
121

 
77

Preferred stock dividends
(29
)
 
(29
)
 
(87
)
 
(87
)
Operating loss
(134
)
 
(72
)
 
(295
)
 
(216
)
Realized capital gains and losses, after-tax

 

 

 
(1
)
Business combination expenses, after-tax
(1
)
 

 
(14
)
 

Corporate and Other net loss applicable to common shareholders
(135
)
 
(72
)
 
(309
)
 
(217
)
Consolidated net income applicable to common shareholders
$
637

 
$
491

 
$
1,853

 
$
950




The Allstate Corporation allstatelogohands03.jpg 11


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
 
September 30, 2017
 

 
 

 
 

 
 

U.S. government and agencies
$
3,843

 
$
65

 
$
(8
)
 
$
3,900

Municipal
7,484

 
332

 
(22
)
 
7,794

Corporate
43,259

 
1,419

 
(132
)
 
44,546

Foreign government
1,077

 
30

 
(14
)
 
1,093

Asset-backed securities (“ABS”)
1,263

 
16

 
(9
)
 
1,270

Residential mortgage-backed securities (“RMBS”)
512

 
101

 
(2
)
 
611

Commercial mortgage-backed securities (“CMBS”)
149

 
8

 
(4
)
 
153

Redeemable preferred stock
21

 
3

 

 
24

Total fixed income securities
$
57,608

 
$
1,974

 
$
(191
)
 
$
59,391

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 September 30, 2017:
($ in millions)
Amortized cost
 
Fair value
Due in one year or less
$
4,392

 
$
4,415

Due after one year through five years
29,466

 
30,044

Due after five years through ten years
16,604

 
17,042

Due after ten years
5,222

 
5,856

 
55,684

 
57,357

ABS, RMBS and CMBS
1,924

 
2,034

Total
$
57,608

 
$
59,391

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.

12 allstatelogohands03.jpg www.allstate.com


Net investment income
Net investment income is as follows:
($ in millions)
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Fixed income securities
$
519

 
$
508

 
$
1,564

 
$
1,546

Equity securities
37

 
31

 
130

 
103

Mortgage loans
52

 
56

 
157

 
162

Limited partnership interests
223

 
136

 
596

 
383

Short-term investments
9

 
4

 
21

 
11

Other
58

 
55

 
174

 
163

Investment income, before expense
898

 
790

 
2,642

 
2,368

Investment expense
(55
)
 
(42
)
 
(154
)
 
(127
)
Net investment income
$
843

 
$
748

 
$
2,488

 
$
2,241

Realized capital gains and losses
Realized capital gains and losses by asset type are as follows:
($ in millions)
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Fixed income securities
$
41

 
$
(1
)
 
$
78

 
$
(48
)
Equity securities
57

 
45

 
182

 
(34
)
Mortgage loans
1

 

 
1

 
1

Limited partnership interests
21

 
12

 
92

 
25

Derivatives
(17
)
 
(15
)
 
(40
)
 
(22
)
Other

 
(8
)
 
5

 
(14
)
Realized capital gains and losses
$
103

 
$
33

 
$
318

 
$
(92
)
Realized capital gains and losses by transaction type are as follows:
($ in millions)
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Impairment write-downs
$
(23
)
 
$
(63
)
 
$
(94
)
 
$
(185
)
Change in intent write-downs
(5
)
 
(10
)
 
(43
)
 
(48
)
Net other-than-temporary impairment losses recognized in earnings
(28
)
 
(73
)
 
(137
)
 
(233
)
Sales and other
148

 
121

 
495

 
166

Valuation and settlements of derivative instruments
(17
)
 
(15
)
 
(40
)
 
(25
)
Realized capital gains and losses
$
103

 
$
33

 
$
318

 
$
(92
)
Gross gains of $145 million and $150 million and gross losses of $36 million and $62 million were realized on sales of fixed income and equity securities during the three months ended September 30, 2017 and 2016, respectively. Gross gains of $521 million and $456 million and gross losses of $161 million and $347 million were realized on sales of fixed income and equity securities during the nine months ended September 30, 2017 and 2016, respectively.

The Allstate Corporation allstatelogohands03.jpg 13


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

 
 

 
 

 
 

 
 

 
 

Corporate
$

 
$

 
$

 
$
(13
)
 
$

 
$
(13
)
ABS

 
(1
)
 
(1
)
 

 

 

RMBS

 

 

 
(1
)
 

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

 
(3
)
Total fixed income securities
(1
)
 
(2
)
 
(3
)
 
(17
)
 

 
(17
)
Equity securities
(8
)
 

 
(8
)
 
(27
)
 

 
(27
)
Mortgage loans
(1
)
 

 
(1
)
 

 

 

Limited partnership interests
(16
)
 

 
(16
)
 
(22
)
 

 
(22
)
Other

 

 

 
(7
)
 

 
(7
)
Other-than-temporary impairment losses
$
(26
)
 
$
(2
)
 
$
(28
)
 
$
(73
)
 
$

 
$
(73
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2017
 
Nine months ended September 30, 2016
 
Gross
 
Included
 in OCI
 
Net
 
Gross
 
Included
in OCI
 
Net
Fixed income securities:
 

 
 

 
 

 
 

 
 

 
 

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

 
$

 
$

Corporate
(9
)
 
3

 
(6
)
 
(30
)
 
7

 
(23
)
ABS
(1
)
 
(1
)
 
(2
)
 
(6
)
 

 
(6
)
RMBS
(1
)
 
(3
)
 
(4
)
 
(1
)
 

 
(1
)
CMBS
(9
)
 
1

 
(8
)
 
(7
)
 
1

 
(6
)
Total fixed income securities
(21
)
 
(2
)
 
(23
)
 
(44
)
 
8

 
(36
)
Equity securities
(77
)
 

 
(77
)
 
(155
)
 

 
(155
)
Mortgage loans
(1
)
 

 
(1
)
 

 

 

Limited partnership interests
(32
)
 

 
(32
)
 
(33
)
 

 
(33
)
Other
(4
)
 

 
(4
)
 
(9
)
 

 
(9
)
Other-than-temporary impairment losses
$
(135
)
 
$
(2
)
 
$
(137
)
 
$
(241
)
 
$
8

 
$
(233
)
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 $213 million and $221 million as of September 30, 2017 and December 31, 2016, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.
($ in millions)
September 30, 2017
 
December 31, 2016
Municipal
$
(5
)
 
$
(8
)
Corporate
(3
)
 
(7
)
ABS
(15
)
 
(21
)
RMBS
(80
)
 
(90
)
CMBS
(5
)
 
(7
)
Total
$
(108
)
 
$
(133
)

14 allstatelogohands03.jpg www.allstate.com


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 September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Beginning balance
$
(281
)
 
$
(331
)
 
$
(318
)
 
$
(392
)
Additional credit loss for securities previously other-than-temporarily impaired
(3
)
 
(3
)
 
(15
)
 
(14
)
Additional credit loss for securities not previously other-than-temporarily impaired

 
(14
)
 
(8
)
 
(22
)
Reduction in credit loss for securities disposed or collected
20

 
12

 
76

 
92

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

 

 
1

 

Ending balance
$
(264
)
 
$
(336
)
 
$
(264
)
 
$
(336
)
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.

The Allstate Corporation allstatelogohands03.jpg 15


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)
September 30, 2017
 
Gains
 
Losses
 
Fixed income securities
$
59,391

 
$
1,974

 
$
(191
)
 
$
1,783

Equity securities
6,434

 
1,006

 
(40
)
 
966

Short-term investments
2,198

 

 

 

Derivative instruments (1)
1

 
2

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

 
 

 
 

 

Unrealized net capital gains and losses, pre-tax
 

 
 

 
 

 
2,747

Amounts recognized for:
 

 
 

 
 

 
 

Insurance reserves (3)
 

 
 

 
 

 

DAC and DSI (4)
 

 
 

 
 

 
(203
)
Amounts recognized
 

 
 

 
 

 
(203
)
Deferred income taxes
 

 
 

 
 

 
(893
)
Unrealized net capital gains and losses, after-tax
 

 
 

 
 

 
$
1,651

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