10-Q 1 allcorp-6301810xq.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, 2018
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
allstatebrandcolora11.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, 2018, the registrant had 346,232,355 common shares, $.01 par value, outstanding.



The Allstate Corporation
Index to Quarterly Report on Form 10-Q
June 30, 2018
Part I Financial Information
Page
 
 
 
 
 
 
 
Condensed Consolidated Statements of Operations for the Three Month and Six Month Periods Ended June 30, 2018 and 2017 (unaudited)
 
Condensed Consolidated Statements of Comprehensive Income for the Three Month and Six Month Periods Ended June 30, 2018 and 2017 (unaudited)
 
Condensed Consolidated Statements of Financial Position as of June 30, 2018 (unaudited) and December 31, 2017
 
Condensed Consolidated Statements of Shareholders’ Equity for the Six Month Periods Ended June 30, 2018 and 2017 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2018 and 2017 (unaudited)
 
 
 
 
 
 
 
 
 
 
Highlights
 
 
segmentresultsverticlea01.jpg
Allstate brand
Esurance brand
Encompass brand
Discontinued Lines and Coverages
Service Businesses
Allstate Life
Allstate Benefits
Allstate Annuities
 
 
 
 
 
 
 
 
 
 
Part II Other Information


Condensed Consolidated Financial Statements

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,
 
2018
 
2017
 
2018
 
2017
 
 
(unaudited)
 
(unaudited)
Revenues
 
 

 
 

 
 

 
 

Property and casualty insurance premiums
 
$
8,460

 
$
8,018

 
$
16,746

 
$
15,977

Life premiums and contract charges
 
612

 
591

 
1,228

 
1,184

Other revenue
 
228

 
226

 
444

 
436

Net investment income
 
824

 
897

 
1,610

 
1,645

Realized capital gains and losses:
 
 

 
 

 
 

 
 

Total other-than-temporary impairment (“OTTI”) losses
 
(4
)
 
(47
)
 
(4
)
 
(109
)
OTTI losses reclassified (from) to other comprehensive income
 

 
(3
)
 
(1
)
 

Net OTTI losses recognized in earnings
 
(4
)
 
(50
)
 
(5
)
 
(109
)
Sales and valuation changes on equity investments and derivatives
 
(21
)
 
131

 
(154
)
 
324

Total realized capital gains and losses
 
(25
)
 
81

 
(159
)
 
215

Total revenues
 
10,099

 
9,813

 
19,869

 
19,457

 
 
 
 
 
 
 
 
 
Costs and expenses
 
 

 
 

 
 

 
 

Property and casualty insurance claims and claims expense
 
5,792

 
5,689

 
10,941

 
11,105

Life contract benefits
 
483

 
486

 
987

 
960

Interest credited to contractholder funds
 
165

 
175

 
326

 
348

Amortization of deferred policy acquisition costs
 
1,296

 
1,176

 
2,569

 
2,345

Operating costs and expenses
 
1,407

 
1,312

 
2,762

 
2,619

Restructuring and related charges
 
27

 
53

 
49

 
63

Interest expense
 
86

 
83

 
169

 
168

Total costs and expenses
 
9,256

 
8,974

 
17,803

 
17,608

 
 
 
 
 
 
 
 
 
Gain on disposition of operations
 
2

 
12

 
3

 
14

 
 
 
 
 
 
 
 
 
Income from operations before income tax expense
 
845

 
851

 
2,069

 
1,863

 
 
 
 
 
 
 
 
 
Income tax expense
 
169

 
272

 
418

 
589

 
 
 
 
 
 
 
 
 
Net income
 
676

 
579

 
1,651

 
1,274

 
 
 
 
 
 
 
 
 
Preferred stock dividends
 
39

 
29

 
68

 
58

 
 
 
 
 
 
 
 
 
Net income applicable to common shareholders
 
$
637

 
$
550

 
$
1,583

 
$
1,216

 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 

 
 

 
 

 
 

Net income applicable to common shareholders per common share - Basic
 
$
1.82

 
$
1.51

 
$
4.50

 
$
3.34

Weighted average common shares - Basic
 
349.2

 
363.6

 
351.6

 
364.6

Net income applicable to common shareholders per common share - Diluted
 
$
1.80

 
$
1.49

 
$
4.43

 
$
3.29

Weighted average common shares - Diluted
 
354.6

 
369.0

 
357.2

 
370.1

Cash dividends declared per common share
 
$
0.46

 
$
0.37

 
$
0.92

 
$
0.74









See notes to condensed consolidated financial statements.

Second Quarter 2018 Form 10-Q 1

Condensed Consolidated Financial Statements

The Allstate Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
($ in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 (unaudited)
 
 (unaudited)
Net income
 
$
676

 
$
579

 
$
1,651

 
$
1,274

 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, after-tax
 
 

 
 

 
 

 
 

Changes in:
 
 

 
 

 
 

 
 

Unrealized net capital gains and losses
 
(133
)
 
270

 
(698
)
 
473

Unrealized foreign currency translation adjustments
 
(7
)
 
11

 
(11
)
 
8

Unrecognized pension and other postretirement benefit cost
 
22

 
18

 
45

 
37

Other comprehensive (loss) income, after-tax
 
(118
)
 
299

 
(664
)
 
518

 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
558

 
$
878

 
$
987

 
$
1,792

 
































See notes to condensed consolidated financial statements.

2 allstatelogohandsa10.jpg www.allstate.com

Condensed Consolidated Financial Statements

The Allstate Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Position
($ in millions, except par value data)
 
June 30, 2018
 
December 31, 2017
Assets
 
(unaudited)
 
 

Investments
 
 

 
 

Fixed income securities, at fair value (amortized cost $56,750 and $57,525)
 
$
56,891

 
$
58,992

Equity securities, at fair value (cost $5,846 and $5,461)
 
6,888

 
6,621

Mortgage loans
 
4,535

 
4,534

Limited partnership interests
 
7,679

 
6,740

Short-term, at fair value (amortized cost $3,123 and $1,944)
 
3,123

 
1,944

Other
 
4,125

 
3,972

Total investments
 
83,241

 
82,803

Cash
 
489

 
617

Premium installment receivables, net
 
5,953

 
5,786

Deferred policy acquisition costs
 
4,533

 
4,191

Reinsurance recoverables, net
 
8,910

 
8,921

Accrued investment income
 
589

 
569

Property and equipment, net
 
1,040

 
1,072

Goodwill
 
2,189

 
2,181

Other assets
 
3,154

 
2,838

Separate Accounts
 
3,271

 
3,444

Total assets
 
$
113,369

 
$
112,422

Liabilities
 
 

 
 

Reserve for property and casualty insurance claims and claims expense
 
$
26,623

 
$
26,325

Reserve for life-contingent contract benefits
 
12,213

 
12,549

Contractholder funds
 
18,888

 
19,434

Unearned premiums
 
13,824

 
13,473

Claim payments outstanding
 
894

 
875

Deferred income taxes
 
723

 
782

Other liabilities and accrued expenses
 
7,363

 
6,639

Long-term debt
 
6,448

 
6,350

Separate Accounts
 
3,271

 
3,444

Total liabilities
 
90,247

 
89,871

Commitments and Contingent Liabilities (Note 12)
 


 


Shareholders’ equity
 
 

 
 

Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 95.2 thousand and 72.2 thousand shares issued and outstanding, $2,380 and $1,805 aggregate liquidation preference
 
2,303

 
1,746

Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 347 million and 355 million shares outstanding
 
9

 
9

Additional capital paid-in
 
3,391

 
3,313

Retained income
 
45,508

 
43,162

Deferred ESOP expense
 
(3
)
 
(3
)
Treasury stock, at cost (553 million and 545 million shares)
 
(26,818
)
 
(25,982
)
Accumulated other comprehensive income:
 
 

 
 

Unrealized net capital gains and losses:
 
 

 
 

Unrealized net capital gains and losses on fixed income securities with OTTI
 
83

 
85

Other unrealized net capital gains and losses
 
28

 
1,981

Unrealized adjustment to DAC, DSI and insurance reserves
 
(57
)
 
(404
)
Total unrealized net capital gains and losses
 
54

 
1,662

Unrealized foreign currency translation adjustments
 
(20
)
 
(9
)
Unrecognized pension and other postretirement benefit cost
 
(1,302
)
 
(1,347
)
Total accumulated other comprehensive income (“AOCI”)
 
(1,268
)
 
306

Total shareholders’ equity
 
23,122

 
22,551

Total liabilities and shareholders’ equity
 
$
113,369

 
$
112,422


See notes to condensed consolidated financial statements.

Second Quarter 2018 Form 10-Q 3

Condensed Consolidated Financial Statements

The Allstate Corporate and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
($ in millions)
 
Six months ended June 30,
 
2018
 
2017
 
 
(unaudited)
Preferred stock par value
 
$

 
$

Preferred stock additional capital paid-in
 
 

 
 

Balance, beginning of period
 
1,746

 
1,746

Preferred stock issuance
 
557

 

Preferred stock additional capital paid-in
 
2,303

 
1,746

 
 
 
 
 
Common stock
 
9

 
9

Additional capital paid-in
 
 

 
 

Balance, beginning of period
 
3,313

 
3,303

Forward contract on accelerated share repurchase agreement
 
45

 
(38
)
Equity incentive plans activity
 
33

 
4

Balance, end of period
 
3,391

 
3,269

 
 
 
 
 
Retained income
 
 

 
 

Balance, beginning of period
 
43,162

 
40,678

Cumulative effect of change in accounting principle
 
1,088

 

Net income
 
1,651

 
1,274

Dividends on common stock
 
(325
)
 
(272
)
Dividends on preferred stock
 
(68
)
 
(58
)
Balance, end of period
 
45,508

 
41,622

 
 
 
 
 
Deferred ESOP expense
 
(3
)
 
(6
)
 
 
 
 
 
Treasury stock
 
 

 
 

Balance, beginning of period
 
(25,982
)
 
(24,741
)
Shares acquired
 
(892
)
 
(646
)
Shares reissued under equity incentive plans, net
 
56

 
146

Balance, end of period
 
(26,818
)
 
(25,241
)
 
 
 
 
 
Accumulated other comprehensive income
 
 

 
 

Balance, beginning of period
 
306

 
(416
)
Cumulative effect of change in accounting principle
 
(910
)
 

Change in unrealized net capital gains and losses
 
(698
)
 
473

Change in unrealized foreign currency translation adjustments
 
(11
)
 
8

Change in unrecognized pension and other postretirement benefit cost
 
45

 
37

Balance, end of period
 
(1,268
)
 
102

Total shareholders’ equity
 
$
23,122

 
$
21,501

 








See notes to condensed consolidated financial statements.

4 allstatelogohandsa10.jpg www.allstate.com

Condensed Consolidated Financial Statements

The Allstate Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
($ in millions)
 
Six months ended June 30,
 
2018
 
2017
Cash flows from operating activities
 
(unaudited)
Net income
 
$
1,651

 
$
1,274

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

 
 

Depreciation, amortization and other non-cash items
 
248

 
238

Realized capital gains and losses
 
159

 
(215
)
Gain on disposition of operations
 
(3
)
 
(14
)
Interest credited to contractholder funds
 
326

 
348

Changes in:
 
 

 
 

Policy benefits and other insurance reserves
 
(22
)
 
228

Unearned premiums
 
211

 
34

Deferred policy acquisition costs
 
(80
)
 
(65
)
Premium installment receivables, net
 
(185
)
 
(51
)
Reinsurance recoverables, net
 
(9
)
 
6

Income taxes
 
(257
)
 
(42
)
Other operating assets and liabilities
 
51

 
(393
)
Net cash provided by operating activities
 
2,090

 
1,348

Cash flows from investing activities
 
 

 
 

Proceeds from sales
 
 

 
 

Fixed income securities
 
19,515

 
14,521

Equity securities
 
3,576

 
3,430

Limited partnership interests
 
182

 
481

Other investments
 
135

 
118

Investment collections
 
 

 
 

Fixed income securities
 
1,442

 
2,063

Mortgage loans
 
315

 
305

Other investments
 
235

 
337

Investment purchases
 
 

 
 

Fixed income securities
 
(20,401
)
 
(17,214
)
Equity securities
 
(3,901
)
 
(3,473
)
Limited partnership interests
 
(873
)
 
(578
)
Mortgage loans
 
(316
)
 
(148
)
Other investments
 
(535
)
 
(532
)
Change in short-term investments, net
 
(512
)
 
2,142

Change in other investments, net
 
(35
)
 
107

Purchases of property and equipment, net
 
(128
)
 
(146
)
Acquisition of operations
 
(10
)
 
(1,356
)
Net cash (used in) provided by investing activities
 
(1,311
)
 
57

Cash flows from financing activities
 
 

 
 

Proceeds from issuance of long-term debt
 
498

 

Redemption and repayment of long-term debt
 
(401
)
 

Proceeds from issuance of preferred stock
 
557

 

Contractholder fund deposits
 
506

 
515

Contractholder fund withdrawals
 
(997
)
 
(957
)
Dividends paid on common stock
 
(295
)
 
(257
)
Dividends paid on preferred stock
 
(58
)
 
(58
)
Treasury stock purchases
 
(838
)
 
(657
)
Shares reissued under equity incentive plans, net
 
28

 
108

Other
 
93

 
(53
)
Net cash used in financing activities
 
(907
)
 
(1,359
)
Net (decrease) increase in cash
 
(128
)
 
46

Cash at beginning of period
 
617

 
436

Cash at end of period
 
$
489

 
$
482

See notes to condensed consolidated financial statements.

Second Quarter 2018 Form 10-Q 5

Notes to Condensed Consolidated Financial Statements


The Allstate Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 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 and casualty insurance company with various property and casualty 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, 2018 and for the three month and six month periods ended June 30, 2018 and 2017 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, 2017. 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
Recognition and Measurement of Financial Assets and Financial Liabilities
Effective January 1, 2018, the Company adopted new Financial Accounting Standards Board (“FASB”) guidance requiring equity investments, including equity securities and limited partnership interests not accounted for under the equity method of accounting or that do not result in consolidation to be measured at fair value with changes in fair value recognized in net income. The guidance clarifies that an entity should evaluate the realizability of deferred tax assets related to available-for-sale fixed income securities in combination with the entity’s other deferred tax assets. The Company’s adoption of the new FASB guidance included adoption of the relevant elements of Technical Corrections and Improvements to Financial Instruments, issued in February 2018.
Upon adoption of the new guidance on January 1, 2018, $1.16 billion of pre-tax unrealized net capital gains for equity securities were reclassified from AOCI to retained income. The after-tax change in accounting for equity securities did not affect the Company’s total shareholders’ equity and the unrealized net capital
 
gains of $910 million, reclassified to retained income will never be recognized in net income.
Upon adoption of the new guidance on January 1, 2018, the carrying value of cost method limited partnership interests increased $224 million, pre-tax, to fair value. The after-tax cumulative-effect increase in retained income of $177 million increased the Company’s shareholders’ equity but will never be recognized in net income thereby negatively impacting calculations of returns on equity.
Revenue from Contracts with Customers
Effective January 1, 2018, the Company adopted new FASB guidance which revises the criteria for revenue recognition. Insurance contracts are excluded from the scope of the new guidance. The Company’s principal activities impacted by the new guidance are those related to the issuance of protection plans for consumer products and automobiles and service contracts that provide roadside assistance. Under the guidance, the transaction price is attributed to underlying performance obligations in the contract and revenue is recognized as the entity satisfies 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.
Adoption of the guidance on January 1, 2018 under the modified retrospective approach resulted in the recognition of an immaterial after-tax net cumulative effect increase to the beginning balance of retained income. In addition to the net cumulative effect, the Company also recorded in the statement of financial position an increase of approximately $160 million pre-tax in unearned premiums with a corresponding $160 million pre-tax increase in DAC for protection plans sold directly to retailers for which SquareTrade Holding Company, Inc. (“SquareTrade”) is deemed to be the principal in the transaction. This impact offsets fully and did not impact retained income at the date of adoption.
Presentation of Net Periodic Pension and Postretirement Benefits Costs
Effective January 1, 2018, the Company adopted new FASB guidance requiring identification, 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 adoption had no impact on the Company’s results of operations or financial position.
Goodwill Impairment
In January 2017, the FASB issued guidance to simplify the accounting for goodwill impairment which

6 allstatelogohandsa10.jpg www.allstate.com

Notes to Condensed Consolidated Financial Statements


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 to be applied on a prospective basis, with the effects, if any, recognized in net income in the period of adoption. The Company elected to early adopt the new guidance as of January 1, 2018. The adoption had no impact on the Company’s results of operations or financial position.
Changes to significant accounting policies
Investments
Changes were made to the Company’s Significant Accounting Policies upon adoption of new FASB guidance related to the recognition and measurement of financial assets. Equity securities primarily include common stocks, exchange traded and mutual funds, non-redeemable preferred stocks and real estate investment trust equity investments. Equity securities are carried at fair value. Equity securities without readily determinable or estimable fair values are measured using the measurement alternative which is cost less impairment, if any, and adjustments resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The periodic change in fair value of equity securities is recognized within realized capital gains and losses on the Condensed Consolidated Statements of Operations effective January 1, 2018.
Investments in limited partnership interests include interests in private equity funds, real estate funds and other funds. Where the Company’s interest is so minor that it exercises virtually no influence over operating and financial policies, investments in limited partnership interests purchased prior to January 1, 2018 are accounted for at fair value primarily utilizing the net asset value as a practical expedient (“NAV”) to determine fair value. All other investments in limited partnership interests, including those purchased subsequent to January 1, 2018, are accounted for in accordance with the equity method of accounting (“EMA”).
Investment income from limited partnership interests carried at fair value is recognized based upon the changes in fair value of the investee’s equity primarily determined using NAV. Income from EMA limited partnership interests is recognized based on the Company’s share of the partnerships’ earnings. Income from EMA limited partnership interests is generally recognized on a three month delay due to the availability of the related financial statements.
Recognition of Revenue
Revenues related to protection plans, other contracts (primarily finance and insurance products)
 
and roadside assistance are deferred and earned over the term of the contract in a manner that recognizes revenue as obligations under the contracts are performed. Revenues from these products are classified as premiums as the products are backed by insurance. Protection plans and finance and insurance premiums are recognized using a cost-based incurrence method. Roadside assistance premiums are recognized evenly over the term of the contract as performance obligations are fulfilled.
Tax Reform
On December 22, 2017, Public Law 115-97, known as the Tax Cuts and Jobs Act of 2017 (“Tax Legislation”) became effective, permanently reducing the U.S. corporate income tax rate from 35% to 21% beginning January 1, 2018. As a result, the corporate tax rate is not comparable between periods. During 2017, the Company revalued its deferred tax assets and liabilities and recorded liabilities related to the transition to the modified territorial system for international taxation.  The impact of the Tax Legislation may differ from the Company’s preliminary estimates due to, among other things, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Tax Legislation. During the period ended June 30, 2018, the Company has not recorded any material adjustments to these provisional amounts.  The Company continues to refine the analysis and calculations, which could impact the provisional estimates previously recorded.  Accordingly, as of June 30, 2018, the Company has not fully completed the accounting for the Tax Legislation.
Pending accounting standards
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 (“ROU”) asset and lease liability for all leases other than those that are less than one year. The lease liability will be equal to the present value of lease payments. A ROU asset will be based on the lease liability adjusted for qualifying initial direct costs. The Company currently estimates that the recognition of the ROU asset and lease liability will result in an increase in both total assets and liabilities in the Condensed Consolidated Statement of Financial Position of approximately $500 million. The new guidance requires sellers in a sale-leaseback transaction to recognize the entire gain from the sale of an underlying asset at the time the sale is recognized rather than over the leaseback term. The carrying value of unrecognized gains on sale-leaseback transactions prior to January 1, 2019 are approximately $20 million, after-tax, and will be recorded as an increase to retained income.
The expense of operating leases under the new guidance will be recognized in the income statement on a straight-line basis by adjusting the amortization of the ROU asset to produce a straight-line expense when combined with the interest expense on the lease liability. For finance leases, the expense components

Second Quarter 2018 Form 10-Q 7

Notes to Condensed Consolidated Financial Statements


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 ROU 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, and will be implemented using the optional transition method that allows application of the transition provisions at the adoption date instead of the earliest date presented.
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 relevant information available 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 reporting 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.
 
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 reporting periods beginning after December 15, 2018. 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.
Other revenue presentation
Concurrent with the adoption of new FASB guidance on revenue from contracts with customers and the Company’s objective of providing more information related to revenues for our Service Businesses, the Company revised the presentation of total revenue to include other revenue. Previously, components of other revenue were presented within operating costs and expenses and primarily represent fees collected from policyholders relating to premium installment payments, commissions on sales of non-proprietary products, fee-based services and other revenue transactions. Other revenue is recognized when performance obligations are fulfilled. Prior periods have been reclassified to conform to current separate presentation of other revenue.

8 allstatelogohandsa10.jpg www.allstate.com

Notes to Condensed Consolidated Financial Statements


Note 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.
Computation of basic and diluted earnings per common share
 
 
 
 
($ in millions, except per share data)
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
 
Net income
 
$
676

 
$
579

 
$
1,651

 
$
1,274

Less: Preferred stock dividends
 
39

 
29

 
68

 
58

Net income applicable to common shareholders (1)
 
$
637

 
$
550

 
$
1,583

 
$
1,216

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
349.2

 
363.6

 
351.6

 
364.6

Effect of dilutive potential common shares:
 
 
 
 
 
 
 
 
Stock options
 
3.8

 
4.3

 
3.9

 
4.2

Restricted stock units (non-participating) and performance stock awards
 
1.6

 
1.1

 
1.7

 
1.3

Weighted average common and dilutive potential common shares outstanding
 
354.6

 
369.0

 
357.2

 
370.1

 
 
 
 
 
 
 
 
 
Earnings per common share - Basic
 
$
1.82

 
$
1.51

 
$
4.50

 
$
3.34

Earnings per common share - Diluted
 
$
1.80

 
$
1.49

 
$
4.43

 
$
3.29

(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 2.3 million and 2.5 million Allstate common shares, with exercise prices ranging from $81.42 to $102.84 and $74.03 to $86.61, were
 
outstanding for the three month periods ended June 30, 2018 and 2017, respectively, but were not included in the computation of diluted earnings per common share in those periods. Options to purchase 1.7 million and 2.6 million Allstate common shares, with exercise prices ranging from $81.42 to $102.84 and $69.95 to $86.61, were outstanding for the six month periods ended June 30, 2018 and 2017, respectively, but were not included in the computation of diluted earnings per common share in those periods.
Note 3
Acquisition
On January 3, 2017, the Company acquired 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 covering a variety of consumer electronics and appliances. This acquisition broadens Allstate’s unique product offerings to better meet consumers’ needs.
In connection with the acquisition, the Company recorded goodwill of $1.10 billion, commissions paid to retailers (reported in deferred policy acquisition costs) of $66 million, other intangible assets (reported in other assets) of $555 million, contractual liability insurance policy premium expenses (reported in other assets) of $205 million, unearned premiums of $389
 
million and net deferred income tax liability of $138 million. These amounts reflect re-measurement adjustments to the fair value of the opening balance sheet assets and liabilities.
Of the $555 million assigned to other intangible assets, $465 million was attributable to acquired customer relationships and $69 million was assigned to the SquareTrade trade name which is considered to have an indefinite useful life. The amortization expense of intangible assets was $20 million and $23 million for the three months ended June 30, 2018 and 2017, respectively, and was $41 million and $46 million for the six months ended June 30, 2018 and 2017, respectively.

Second Quarter 2018 Form 10-Q 9

Notes to Condensed Consolidated Financial Statements


Note 4
Reportable Segments
Reportable segments revenue information
 
 
 
 
($ in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Property-Liability
 
 

 
 

 
 

 
 

Insurance premiums
 
 

 
 

 
 

 
 

Auto
 
$
5,705

 
$
5,438

 
$
11,296

 
$
10,826

Homeowners
 
1,864

 
1,815

 
3,712

 
3,630

Other personal lines
 
455

 
436

 
899

 
867

Commercial lines
 
165

 
118

 
301

 
243

Allstate Protection
 
8,189

 
7,807

 
16,208

 
15,566

Discontinued Lines and Coverages
 

 

 

 

Total property-liability insurance premiums
 
8,189

 
7,807

 
16,208

 
15,566

Other revenue
 
184

 
181

 
358

 
348

Net investment income
 
353

 
387

 
690

 
695

Realized capital gains and losses
 
(15
)
 
85

 
(110
)
 
220

Total Property-Liability
 
8,711

 
8,460

 
17,146

 
16,829

 
 
 
 
 
 
 
 
 
Service Businesses
 
 
 
 
 
 

 
 

Consumer product protection plans
 
121

 
70

 
244

 
129

Roadside assistance
 
68

 
67

 
132

 
135

Finance and insurance products
 
82

 
74

 
162

 
147

Intersegment premiums and service fees (1)
 
29

 
28

 
58

 
56

Other revenue
 
16

 
17

 
32

 
33

Net investment income
 
6

 
4

 
11

 
7

Realized capital gains and losses
 
(2
)
 

 
(6
)
 

Total Service Businesses
 
320

 
260

 
633

 
507

 
 
 
 
 
 
 
 
 
Allstate Life
 
 
 
 
 
 
 
 
Traditional life insurance premiums
 
148

 
139

 
294

 
279

Accident and health insurance premiums
 
1

 
1

 
1

 
1

Interest-sensitive life insurance contract charges
 
177

 
179

 
358

 
360

Other revenue
 
28

 
28

 
54

 
55

Net investment income
 
130

 
123

 
252

 
243

Realized capital gains and losses
 
(3
)
 
1

 
(6
)
 
2

Total Allstate Life
 
481

 
471

 
953

 
940

 
 
 
 
 
 
 
 
 
Allstate Benefits
 
 
 
 
 
 
 
 
Traditional life insurance premiums
 
10

 
9

 
19

 
18

Accident and health insurance premiums
 
245

 
232

 
493

 
464

Interest-sensitive life insurance contract charges
 
28

 
28

 
57

 
56

Net investment income
 
19

 
19

 
38

 
36

Realized capital gains and losses
 

 

 
(2
)
 

Total Allstate Benefits
 
302

 
288

 
605

 
574

 
 
 
 
 
 
 
 
 
Allstate Annuities
 
 
 
 
 
 
 
 
Fixed annuities contract charges
 
3

 
3

 
6

 
6

Net investment income
 
293

 
354

 
583

 
643

Realized capital gains and losses
 
6

 
(5
)
 
(23
)
 
(7
)
Total Allstate Annuities
 
302

 
352

 
566

 
642

 
 
 
 
 
 
 
 
 
Corporate and Other
 
 

 
 

 
 

 
 

Net investment income
 
23

 
10

 
36

 
21

Realized capital gains and losses
 
(11
)
 

 
(12
)
 

 
 
 
 
 
 
 
 
 
Total Corporate and Other
 
12

 
10

 
24

 
21

Intersegment eliminations (1)
 
(29
)
 
(28
)
 
(58
)
 
(56
)
Consolidated revenues
 
$
10,099

 
$
9,813

 
$
19,869

 
$
19,457

(1) Intersegment insurance premiums and service fees are primarily related to Arity and Allstate Roadside Services and are eliminated in the condensed consolidated financial statements.

10 allstatelogohandsa10.jpg www.allstate.com

Notes to Condensed Consolidated Financial Statements


Reportable segments financial performance
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
 
2018
 
2017
 
2018
 
2017
Property-Liability
 
 
 
 
 
 
 
 
Allstate Protection
 
$
419

 
$
270

 
$
1,381

 
$
820

Discontinued Lines and Coverages
 
(3
)
 
(5
)
 
(6
)
 
(7
)
Total underwriting income
 
416

 
265

 
1,375

 
813

Net investment income
 
353

 
387

 
690

 
695

Income tax expense on operations
 
(157
)
 
(207
)
 
(425
)
 
(475
)
Realized capital gains and losses, after-tax
 
(12
)
 
56

 
(87
)
 
145

Gain on disposition of operations, after-tax
 

 
6

 

 
6

Property-Liability net income applicable to common shareholders
 
600

 
507

 
1,553

 
1,184

 
 
 
 
 
 
 
 
 
Service Businesses
 
 
 
 
 
 
 
 
Adjusted net income (loss)
 
1

 
(8
)
 
(4
)
 
(18
)
Realized capital gains and losses, after-tax
 
(1
)
 

 
(4
)
 

Amortization of purchased intangible assets, after-tax
 
(16
)
 
(15
)
 
(32
)
 
(30
)
Service Businesses net loss applicable to common shareholders
 
(16
)
 
(23
)
 
(40
)
 
(48
)
 
 
 
 
 
 
 
 
 
Allstate Life
 
 
 
 
 
 
 
 
Adjusted net income
 
78

 
63

 
147

 
122

Realized capital gains and losses, after-tax
 
(2
)
 

 
(4
)
 
1

DAC and DSI amortization related to realized capital gains and losses, after-tax
 
(3
)
 
(3
)
 
(5
)
 
(6
)
Allstate Life net income applicable to common shareholders
 
73

 
60

 
138

 
117

 
 
 
 
 
 
 
 
 
Allstate Benefits
 
 
 
 
 
 
 
 
Adjusted net income
 
34

 
25

 
62

 
47

Realized capital gains and losses, after-tax
 

 

 
(2
)
 

Allstate Benefits net income applicable to common shareholders
 
34

 
25

 
60

 
47

 
 
 
 
 
 
 
 
 
Allstate Annuities
 
 
 
 
 
 
 
 
Adjusted net income
 
44

 
65

 
79

 
94

Realized capital gains and losses, after-tax
 
5

 
(3
)
 
(18
)
 
(5
)
Valuation changes on embedded derivatives not hedged, after-tax
 

 
(1
)
 
4

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

 

 
2

 
2

Allstate Annuities net income applicable to common shareholders
 
50

 
61

 
67

 
90

 
 
 
 
 
 
 
 
 
Corporate and Other
 
 
 
 
 
 
 
 
Adjusted net loss
 
(95
)
 
(80
)
 
(185
)
 
(161
)
Realized capital gains and losses, after-tax
 
(9
)
 

 
(10
)
 

Business combination expenses, after-tax
 

 

 

 
(13
)
Corporate and Other net loss applicable to common shareholders
 
(104
)
 
(80
)
 
(195
)
 
(174
)
 
 
 
 
 
 
 
 
 
Consolidated net income applicable to common shareholders
 
$
637

 
$
550

 
$
1,583

 
$
1,216


Second Quarter 2018 Form 10-Q 11

Notes to Condensed Consolidated Financial Statements


Note 5
Investments
Amortized cost, gross unrealized gains and losses and fair value for fixed income securities
($ in millions)
 
Amortized cost
 
Gross unrealized
 
Fair
value
 
 
Gains
 
Losses
 
June 30, 2018
 
 

 
 

 
 

 
 

U.S. government and agencies
 
$
3,182

 
$
40

 
$
(16
)
 
$
3,206

Municipal
 
9,454

 
245

 
(71
)
 
9,628

Corporate
 
41,584

 
590

 
(759
)
 
41,415

Foreign government
 
917

 
18

 
(9
)
 
926

Asset-backed securities (“ABS”)
 
1,084

 
9

 
(8
)
 
1,085

Residential mortgage-backed securities (“RMBS”)
 
424

 
98

 
(2
)
 
520

Commercial mortgage-backed securities (“CMBS”)
 
84

 
6

 
(2
)
 
88

Redeemable preferred stock
 
21

 
2

 

 
23

Total fixed income securities
 
$
56,750

 
$
1,008

 
$
(867
)
 
$
56,891

 
 
 
 
 
 
 
 
 
December 31, 2017
 
 

 
 

 
 

 
 

U.S. government and agencies
 
$
3,580

 
$
56

 
$
(20
)
 
$
3,616

Municipal
 
8,053

 
311

 
(36
)
 
8,328

Corporate
 
42,996

 
1,234

 
(204
)
 
44,026

Foreign government
 
1,005

 
27

 
(11
)
 
1,021

ABS
 
1,266

 
13

 
(7
)
 
1,272

RMBS
 
480

 
101

 
(3
)
 
578

CMBS
 
124

 
6

 
(2
)
 
128

Redeemable preferred stock
 
21

 
2

 

 
23

Total fixed income securities
 
$
57,525

 
$
1,750

 
$
(283
)
 
$
58,992

Scheduled maturities for fixed income securities
($ in millions)
 
As of June 30, 2018
 
Amortized cost
 
Fair value
Due in one year or less
 
$
4,289

 
$
4,293

Due after one year through five years
 
28,481

 
28,384

Due after five years through ten years
 
15,933

 
15,673

Due after ten years
 
6,455

 
6,848

 
 
55,158

 
55,198

ABS, RMBS and CMBS
 
1,592

 
1,693

Total
 
$
56,750

 
$
56,891

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.
Net investment income
 
 
 
 
($ in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Fixed income securities
 
$
509

 
$
527

 
$
1,017

 
$
1,045

Equity securities
 
61

 
49

 
95

 
93

Mortgage loans
 
60

 
50

 
111

 
105

Limited partnership interests (1)(2)
 
173

 
253

 
353

 
373

Short-term investments
 
19

 
6

 
31

 
12

Other
 
68

 
60

 
134

 
116

Investment income, before expense
 
890

 
945

 
1,741

 
1,744

Investment expense
 
(66
)
 
(48
)
 
(131
)
 
(99
)
Net investment income 
 
$
824

 
$
897

 
$
1,610

 
$
1,645

(1) 
Due to the adoption of the recognition and measurement accounting standard, limited partnerships previously reported using the cost method are now reported at fair value with changes in fair value recognized in net investment income.
(2) 
Includes net investment income of $143 million and $246 million for EMA limited partnership interests and $30 million and $107 million for limited partnership interests carried at fair value for the three and six months ended June 30, 2018, respectively.

12 allstatelogohandsa10.jpg www.allstate.com

Notes to Condensed Consolidated Financial Statements


Realized capital gains and losses by asset type
 
 
 
 
 
 
 
 
($ in millions)
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Fixed income securities
 
$
(80
)
 
$
32

 
$
(123
)
 
$
37

Equity securities
 
74

 
19

 
(19
)
 
125

Mortgage loans
 
2

 

 
2

 

Limited partnership interests
 
(43
)
 
31

 
(33
)
 
71

Derivatives
 
23

 
(8