10-Q 1 allcorp-9301810xq.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, 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
allstatebrandcolora12.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 every Interactive Data File required to be submitted 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 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
        
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 15, 2018, the registrant had 344,442,270 common shares, $.01 par value, outstanding.



The Allstate Corporation
Index to Quarterly Report on Form 10-Q
September 30, 2018
Part I Financial Information
Page
 
 
 
 
 
 
 
Condensed Consolidated Statements of Operations for the Three Month and Nine Month Periods Ended September 30, 2018 and 2017 (unaudited)
 
Condensed Consolidated Statements of Comprehensive Income for the Three Month and Nine Month Periods Ended September 30, 2018 and 2017 (unaudited)
 
Condensed Consolidated Statements of Financial Position as of September 30, 2018 (unaudited) and December 31, 2017
 
Condensed Consolidated Statements of Shareholders’ Equity for the Nine Month Periods Ended September 30, 2018 and 2017 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2018 and 2017 (unaudited)
 
 
 
 
 
 
 
 
 
 
Highlights
 
 
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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 September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
(unaudited)
 
(unaudited)
Revenues
 
 

 
 

 
 

 
 

Property and casualty insurance premiums
 
$
8,595

 
$
8,121

 
$
25,341

 
$
24,098

Life premiums and contract charges
 
612

 
593

 
1,840

 
1,777

Other revenue
 
238

 
228

 
682

 
664

Net investment income
 
844

 
843

 
2,454

 
2,488

Realized capital gains and losses:
 
 

 
 

 
 

 
 

Total other-than-temporary impairment (“OTTI”) losses
 
(4
)
 
(26
)
 
(8
)
 
(135
)
OTTI losses reclassified (from) to other comprehensive income (“OCI”)
 
(1
)
 
(2
)
 
(2
)
 
(2
)
Net OTTI losses recognized in earnings
 
(5
)
 
(28
)
 
(10
)
 
(137
)
Sales and valuation changes on equity investments and derivatives
 
181

 
131

 
27

 
455

Total realized capital gains and losses
 
176

 
103

 
17

 
318

Total revenues
 
10,465

 
9,888

 
30,334

 
29,345

 
 
 
 
 
 
 
 
 
Costs and expenses
 
 

 
 

 
 

 
 

Property and casualty insurance claims and claims expense
 
5,817

 
5,545

 
16,758

 
16,650

Life contract benefits
 
498

 
456

 
1,485

 
1,416

Interest credited to contractholder funds
 
163

 
174

 
489

 
522

Amortization of deferred policy acquisition costs
 
1,317

 
1,200

 
3,886

 
3,545

Operating costs and expenses
 
1,534

 
1,446

 
4,296

 
4,065

Restructuring and related charges
 
16

 
14

 
65

 
77

Interest expense
 
82

 
83

 
251

 
251

Total costs and expenses
 
9,427

 
8,918

 
27,230

 
26,526

 
 
 
 
 
 
 
 
 
Gain on disposition of operations
 
1

 
1

 
4

 
15

 
 
 
 
 
 
 
 
 
Income from operations before income tax expense
 
1,039

 
971

 
3,108

 
2,834

 
 
 
 
 
 
 
 
 
Income tax expense
 
169

 
305

 
587

 
894

 
 
 
 
 
 
 
 
 
Net income
 
870

 
666

 
2,521

 
1,940

 
 
 
 
 
 
 
 
 
Preferred stock dividends
 
37

 
29

 
105

 
87

 
 
 
 
 
 
 
 
 
Net income applicable to common shareholders
 
$
833

 
$
637

 
$
2,416

 
$
1,853

 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 

 
 

 
 

 
 

Net income applicable to common shareholders per common share - Basic
 
$
2.41

 
$
1.76

 
$
6.91

 
$
5.10

Weighted average common shares - Basic
 
346.0

 
361.3

 
349.7

 
363.5

Net income applicable to common shareholders per common share - Diluted
 
$
2.37

 
$
1.74

 
$
6.80

 
$
5.02

Weighted average common shares - Diluted
 
351.7

 
367.1

 
355.4

 
369.1

Cash dividends declared per common share
 
$
0.46

 
$
0.37

 
$
1.38

 
$
1.11









See notes to condensed consolidated financial statements.

Third 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 September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 (unaudited)
 
 (unaudited)
Net income
 
$
870

 
$
666

 
$
2,521

 
$
1,940

 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, after-tax
 
 

 
 

 
 

 
 

Changes in:
 
 

 
 

 
 

 
 

Unrealized net capital gains and losses
 
(70
)
 
125

 
(768
)
 
598

Unrealized foreign currency translation adjustments
 
(14
)
 
28

 
(25
)
 
36

Unrecognized pension and other postretirement benefit cost
 
68

 
73

 
113

 
110

Other comprehensive (loss) income, after-tax
 
(16
)
 
226

 
(680
)
 
744

 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
854

 
$
892

 
$
1,841

 
$
2,684

 
































See notes to condensed consolidated financial statements.

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Condensed Consolidated Financial Statements

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

Investments
 
 

 
 

Fixed income securities, at fair value (amortized cost $57,618 and $57,525)
 
$
57,663

 
$
58,992

Equity securities, at fair value (cost $5,741 and $5,461)
 
6,965

 
6,621

Mortgage loans
 
4,592

 
4,534

Limited partnership interests
 
7,602

 
6,740

Short-term, at fair value (amortized cost $3,071 and $1,944)
 
3,071

 
1,944

Other
 
4,075

 
3,972

Total investments
 
83,968

 
82,803

Cash
 
460

 
617

Premium installment receivables, net
 
6,196

 
5,786

Deferred policy acquisition costs
 
4,667

 
4,191

Reinsurance recoverables, net
 
8,994

 
8,921

Accrued investment income
 
616

 
569

Property and equipment, net
 
1,032

 
1,072

Goodwill
 
2,189

 
2,181

Other assets
 
3,061

 
2,838

Separate Accounts
 
3,307

 
3,444

Total assets
 
$
114,490

 
$
112,422

Liabilities
 
 

 
 

Reserve for property and casualty insurance claims and claims expense
 
$
26,939

 
$
26,325

Reserve for life-contingent contract benefits
 
12,214

 
12,549

Contractholder funds
 
18,650

 
19,434

Unearned premiums
 
14,408

 
13,473

Claim payments outstanding
 
904

 
875

Deferred income taxes
 
660

 
782

Other liabilities and accrued expenses
 
7,325

 
6,639

Long-term debt
 
6,450

 
6,350

Separate Accounts
 
3,307

 
3,444

Total liabilities
 
90,857

 
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, 345 million and 355 million shares outstanding
 
9

 
9

Additional capital paid-in
 
3,441

 
3,313

Retained income
 
46,178

 
43,162

Deferred Employee Stock Ownership Plan (“ESOP”) expense
 
(3
)
 
(3
)
Treasury stock, at cost (555 million and 545 million shares)
 
(27,011
)
 
(25,982
)
Accumulated other comprehensive income:
 
 

 
 

Unrealized net capital gains and losses:
 
 

 
 

Unrealized net capital gains and losses on fixed income securities with OTTI
 
86

 
85

Other unrealized net capital gains and losses
 
(53
)
 
1,981

Unrealized adjustment to DAC, DSI and insurance reserves
 
(49
)
 
(404
)
Total unrealized net capital gains and losses
 
(16
)
 
1,662

Unrealized foreign currency translation adjustments
 
(34
)
 
(9
)
Unrecognized pension and other postretirement benefit cost
 
(1,234
)
 
(1,347
)
Total accumulated other comprehensive income (“AOCI”)
 
(1,284
)
 
306

Total shareholders’ equity
 
23,633

 
22,551

Total liabilities and shareholders’ equity
 
$
114,490

 
$
112,422


See notes to condensed consolidated financial statements.

Third Quarter 2018 Form 10-Q 3

Condensed Consolidated Financial Statements

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

 

Balance, end of period
 
2,303

 
1,746

 
 
 
 
 
Common stock par value
 
9

 
9

Common stock additional capital paid-in
 
 

 
 

Balance, beginning of period
 
3,313

 
3,303

Forward contract on accelerated share repurchase agreement
 
45

 

Equity incentive plans activity
 
83

 
27

Balance, end of period
 
3,441

 
3,330

 
 
 
 
 
Retained income
 
 

 
 

Balance, beginning of period
 
43,162

 
40,678

Cumulative effect of change in accounting principle
 
1,088

 

Net income
 
2,521

 
1,940

Dividends on common stock
 
(488
)
 
(406
)
Dividends on preferred stock
 
(105
)
 
(87
)
Balance, end of period
 
46,178

 
42,125

 
 
 
 
 
Deferred ESOP expense
 
(3
)
 
(6
)
 
 
 
 
 
Treasury stock
 
 

 
 

Balance, beginning of period
 
(25,982
)
 
(24,741
)
Shares acquired
 
(1,117
)
 
(845
)
Shares reissued under equity incentive plans, net
 
88

 
173

Balance, end of period
 
(27,011
)
 
(25,413
)
 
 
 
 
 
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
 
(768
)
 
598

Change in unrealized foreign currency translation adjustments
 
(25
)
 
36

Change in unrecognized pension and other postretirement benefit cost
 
113

 
110

Balance, end of period
 
(1,284
)
 
328

Total shareholders’ equity
 
$
23,633

 
$
22,119

 









See notes to condensed consolidated financial statements.

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Condensed Consolidated Financial Statements

The Allstate Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
($ in millions)
 
Nine months ended September 30,
 
2018
 
2017
Cash flows from operating activities
 
(unaudited)
Net income
 
$
2,521

 
$
1,940

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

 
 

Depreciation, amortization and other non-cash items
 
376

 
358

Realized capital gains and losses
 
(17
)
 
(318
)
Gain on disposition of operations
 
(4
)
 
(15
)
Interest credited to contractholder funds
 
489

 
522

Changes in:
 
 

 
 

Policy benefits and other insurance reserves
 
90

 
1,276

Unearned premiums
 
785

 
525

Deferred policy acquisition costs
 
(203
)
 
(176
)
Premium installment receivables, net
 
(422
)
 
(267
)
Reinsurance recoverables, net
 
(103
)
 
(1,017
)
Income taxes
 
(227
)
 
119

Other operating assets and liabilities
 
533

 
267

Net cash provided by operating activities
 
3,818

 
3,214

Cash flows from investing activities
 
 

 
 

Proceeds from sales
 
 

 
 

Fixed income securities
 
26,223

 
19,508

Equity securities
 
4,637

 
5,179

Limited partnership interests
 
490

 
767

Other investments
 
234

 
170

Investment collections
 
 

 
 

Fixed income securities
 
2,388

 
3,038

Mortgage loans
 
378

 
477

Other investments
 
370

 
458

Investment purchases
 
 

 
 

Fixed income securities
 
(29,049
)
 
(23,935
)
Equity securities
 
(4,791
)
 
(5,296
)
Limited partnership interests
 
(1,317
)
 
(1,082
)
Mortgage loans
 
(435
)
 
(311
)
Other investments
 
(686
)
 
(700
)
Change in short-term investments, net
 
(665
)
 
2,257

Change in other investments, net
 
(28
)
 
(28
)
Purchases of property and equipment, net
 
(195
)
 
(216
)
Acquisition of operations
 
(10
)
 
(1,356
)
Net cash used in investing activities
 
(2,456
)
 
(1,070
)
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
 
756

 
767

Contractholder fund withdrawals
 
(1,474
)
 
(1,416
)
Dividends paid on common stock
 
(455
)
 
(391
)
Dividends paid on preferred stock
 
(97
)
 
(87
)
Treasury stock purchases
 
(1,062
)
 
(848
)
Shares reissued under equity incentive plans, net
 
66

 
132

Other
 
93

 
(47
)
Net cash used in financing activities
 
(1,519
)
 
(1,890
)
Net (decrease) increase in cash
 
(157
)
 
254

Cash at beginning of period
 
617

 
436

Cash at end of period
 
$
460

 
$
690

See notes to condensed consolidated financial statements.

Third 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 September 30, 2018 and for the three month and nine month periods ended September 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 and amortized 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 deferred policy acquisition costs (“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

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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 of 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 (“NAV”) as a practical expedient 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 from investees.
 
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 was adjusted from the Company’s preliminary estimate due to, among other things, changes in interpretations and assumptions the Company previously made, guidance that was issued and actions the Company took as a result of the Tax Legislation. During the third quarter of 2018, the Company recorded a reduction of $31 million to income tax expense related to these provisional amounts.  The Company may make adjustments to these provisional amounts as additional information becomes available and future guidance is issued by the Internal Revenue Service.
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 with a term 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 $525 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 executed 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

Third Quarter 2018 Form 10-Q 7

Notes to Condensed Consolidated Financial Statements


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 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 are designed to 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.
Changes to the Disclosure Requirements for Deferred Benefit Plans
In August 2018, the FASB issued amendments to modify certain disclosure requirements for defined benefit plans. Disclosure additions relate to the weighted-average interest crediting rates for cash balance plans and other plans with interest crediting rates and explanations for significant gains and losses related to changes in the benefit obligation for the period. Disclosures to be removed include those that identify amounts that are expected to be reclassified out of AOCI and into the income statement in the coming year and the anticipated impact of a one-percentage point change in assumed health care cost trend rate on service and interest cost and on the accumulated benefit obligation. The amendments are effective for annual reporting periods beginning after December 15, 2020. The impacts of adoption are to the Company’s disclosures only.
Accounting for Long-Duration Insurance Contracts
In August 2018, the FASB issued guidance revising the accounting for certain long-duration insurance contracts. The new guidance changes the measurement of the Company’s reserves for traditional life, life-contingent immediate annuities and certain voluntary accident and health insurance products.
Under the new guidance, measurement assumptions, including those for mortality, morbidity and policy terminations, will be required to be reviewed and updated at least annually. The effect of updating measurement assumptions other than the discount rate are required to be determined on a retrospective basis and reported in net income. In addition, cash flows under the new guidance are required to be discounted using an upper-medium grade fixed income instrument yield that is updated through OCI at each reporting date. These changes will replace current GAAP, which utilizes assumptions set at policy issuance until such time as the assumptions result in reserves that are deficient when compared to reserves computed using current assumptions. When this occurs under current GAAP, premium deficiency reserves are recognized by unlocking reserve assumptions to eliminate a reserve deficiency.
The new guidance requires DAC and other capitalized balances currently amortized in proportion to premiums or gross profits to be amortized on a constant level basis over the expected term for all long-duration insurance contracts. DAC will not be subject to loss recognition testing but rather will be

8 allstatelogohandsa13.jpg www.allstate.com

Notes to Condensed Consolidated Financial Statements


reduced when actual experience exceeds expected experience (i.e. as a result of unexpected contract terminations). The new guidance will no longer require adjustments to DAC and deferred sales inducement costs (“DSI”) related to unrealized gains and losses.
Market risk benefit product features are required to be measured at fair value with changes in fair value recorded in net income with the exception of changes in the fair value attributable to a change in the instrument’s credit risk, which are required to be recognized in OCI. Substantially all of the Company’s market risk benefits are reinsured and therefore these impacts are not expected to be material to the Company.
The guidance is to be included in the comparable financial statements issued in reporting periods beginning after December 15, 2020, thereby requiring restatement of prior periods presented. Early adoption is permitted. The new guidance will be applied to affected contracts and DAC on the basis of existing carrying amounts at the earliest period presented or the new guidance may be applied retrospectively using actual historical experience as of contract inception. The guidance for market risk benefits is required to be adopted retrospectively.
The Company is evaluating the anticipated impacts of applying the new guidance to both retained income and AOCI. While the requirements of the new guidance represent a material change from existing GAAP, the underlying economics of the business and related cash flows are unchanged. The Company has
 
not completed an evaluation of the specific impacts of adopting the new guidance, but anticipates the financial statement impact of migrating from existing GAAP to that required by the new guidance to be material, largely attributed to the impact of transitioning from an original investment-based discount rate to one based on an upper-medium grade fixed income investment yield and updates to mortality assumptions that had previously been locked in at issuance. The Company expects the most significant impacts will occur in the run-off annuity segment. The revised accounting for DAC will be applied prospectively using the new model and any DAC effects existing in AOCI as a result of applying existing GAAP at the date of adoption will be reversed.
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.
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 September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
 
Net income
 
$
870

 
$
666

 
$
2,521

 
$
1,940

Less: Preferred stock dividends
 
37

 
29

 
105

 
87

Net income applicable to common shareholders (1)
 
$
833

 
$
637

 
$
2,416

 
$
1,853

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
346.0

 
361.3

 
349.7

 
363.5

Effect of dilutive potential common shares:
 
 
 
 
 
 
 
 
Stock options
 
3.8

 
4.4

 
3.8

 
4.3

Restricted stock units (non-participating) and performance stock awards
 
1.9

 
1.4

 
1.9

 
1.3

Weighted average common and dilutive potential common shares outstanding
 
351.7

 
367.1

 
355.4

 
369.1

 
 
 
 
 
 
 
 
 
Earnings per common share - Basic
 
$
2.41

 
$
1.76

 
$
6.91

 
$
5.10

Earnings per common share - Diluted
 
$
2.37

 
$
1.74

 
$
6.80

 
$
5.02

(1) 
Net income applicable to common shareholders is net income less preferred stock dividends.


 


Third Quarter 2018 Form 10-Q 9

Notes to Condensed Consolidated Financial Statements


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 0.2 million Allstate common shares, with exercise prices ranging from $84.93 to $102.84 and $78.35 to $93.93, were outstanding for the three month periods ended
 
September 30, 2018 and 2017, respectively, but were not included in the computation of diluted earnings per common share in those periods. Options to purchase 1.9 million and 2.5 million Allstate common shares, with exercise prices ranging from $84.93 to $102.84 and $74.03 to $93.93, were outstanding for the nine month periods ended September 30, 2018 and 2017, respectively, but were not included in the computation of diluted earnings per common share in those periods.
Note 3
Acquisitions
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 broadened Allstate’s unique product offerings to better meet consumers’ needs.
In connection with the SquareTrade 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 September 30, 2018 and 2017, respectively, and was $61 million and $69 million for the nine months ended September 30, 2018 and 2017, respectively.
Subsequent event On October 5, 2018, the Company acquired InfoArmor, Inc. (“InfoArmor”), a leading provider of identity protection in the employee benefits market, for $525 million in cash. InfoArmor primarily offers identity protection to employees and their family members through voluntary benefit programs at over 1,400 firms, including more than 100 of the Fortune 500 companies. Due to the limited time since the closing date, the Company is currently evaluating the allocation of the purchase price and is unable to provide amounts recognized as of the closing date for the major classes of assets acquired and liabilities assumed. The Company will include this information in its annual report on Form 10-K for the year ended December 31, 2018.

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Notes to Condensed Consolidated Financial Statements


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

 
 

 
 

 
 

Insurance premiums
 
 

 
 

 
 

 
 

Auto
 
$
5,798

 
$
5,501

 
$
17,094

 
$
16,327

Homeowners
 
1,891

 
1,832

 
5,603

 
5,462

Other personal lines
 
455

 
439

 
1,354

 
1,306

Commercial lines
 
176

 
124

 
477

 
367

Allstate Protection
 
8,320

 
7,896

 
24,528

 
23,462

Discontinued Lines and Coverages
 

 

 

 

Total property-liability insurance premiums
 
8,320

 
7,896

 
24,528

 
23,462

Other revenue
 
192

 
185

 
550

 
533

Net investment income
 
410

 
368

 
1,100

 
1,063

Realized capital gains and losses
 
126

 
82

 
16

 
302

Total Property-Liability
 
9,048

 
8,531

 
26,194

 
25,360

 
 
 
 
 
 
 
 
 
Service Businesses
 
 
 
 
 
 

 
 

Consumer product protection plans
 
125

 
78

 
369

 
207

Roadside assistance
 
66

 
69

 
198

 
204

Finance and insurance products
 
84

 
78

 
246

 
225

Intersegment premiums and service fees (1)
 
31

 
26

 
89

 
82

Other revenue
 
16

 
17

 
48

 
50

Net investment income
 
7

 
4

 
18

 
11

Realized capital gains and losses
 

 

 
(6
)
 

Total Service Businesses
 
329

 
272

 
962

 
779

 
 
 
 
 
 
 
 
 
Allstate Life
 
 
 
 
 
 
 
 
Traditional life insurance premiums
 
149

 
141

 
443

 
420

Accident and health insurance premiums
 

 

 
1

 
1

Interest-sensitive life insurance contract charges
 
173

 
175

 
531

 
535

Other revenue
 
30

 
26

 
84

 
81

Net investment income
 
128

 
119

 
380

 
362

Realized capital gains and losses
 
(3
)
 
2

 
(9
)
 
4

Total Allstate Life
 
477

 
463

 
1,430

 
1,403

 
 
 
 
 
 
 
 
 
Allstate Benefits
 
 
 
 
 
 
 
 
Traditional life insurance premiums
 
13

 
12

 
32

 
30

Accident and health insurance premiums
 
246

 
232

 
739

 
696

Interest-sensitive life insurance contract charges
 
26

 
29

 
83

 
85

Net investment income
 
19

 
18

 
57

 
54

Realized capital gains and losses
 
2

 
1

 

 
1

Total Allstate Benefits
 
306

 
292

 
911

 
866

 
 
 
 
 
 
 
 
 
Allstate Annuities
 
 
 
 
 
 
 
 
Fixed annuities contract charges
 
5

 
4

 
11

 
10

Net investment income
 
260

 
324

 
843

 
967

Realized capital gains and losses
 
51

 
18

 
28

 
11

Total Allstate Annuities
 
316

 
346

 
882

 
988

 
 
 
 
 
 
 
 
 
Corporate and Other
 
 

 
 

 
 

 
 

Net investment income
 
20

 
10

 
56

 
31

Realized capital gains and losses
 

 

 
(12
)
 

 
 
 
 
 
 
 
 
 
Total Corporate and Other
 
20

 
10

 
44

 
31

Intersegment eliminations (1)
 
(31
)
 
(26
)
 
(89
)
 
(82
)
Consolidated revenues
 
$
10,465

 
$
9,888

 
$
30,334

 
$
29,345

(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.

Third Quarter 2018 Form 10-Q 11

Notes to Condensed Consolidated Financial Statements


Reportable segments financial performance
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
 
2018
 
2017
 
2018
 
2017
Property-Liability
 
 
 
 
 
 
 
 
Allstate Protection
 
$
553

 
$
572

 
$
1,934

 
$
1,392

Discontinued Lines and Coverages
 
(80
)
 
(88
)
 
(86
)
 
(95
)
Total underwriting income
 
473

 
484

 
1,848

 
1,297

Net investment income
 
410

 
368

 
1,100

 
1,063

Income tax expense on operations
 
(178
)
 
(271
)
 
(603
)
 
(746
)
Realized capital gains and losses, after-tax
 
103

 
54

 
16

 
199

Gain on disposition of operations, after-tax
 

 
1

 

 
7

Tax Legislation expense
 
(3
)
 

 
(3
)
 

Property-Liability net income applicable to common shareholders
 
805

 
636

 
2,358

 
1,820

 
 
 
 
 
 
 
 
 
Service Businesses
 
 
 
 
 
 
 
 
Adjusted net income (loss)
 

 
(17
)
 
(4
)
 
(35
)
Realized capital gains and losses, after-tax
 
(1
)
 

 
(5
)
 

Amortization of purchased intangible assets, after-tax
 
(16
)
 
(15
)
 
(48
)
 
(45
)
Tax Legislation expense
 
(4
)
 

 
(4
)
 

Service Businesses net loss applicable to common shareholders
 
(21
)
 
(32
)
 
(61
)
 
(80
)
 
 
 
 
 
 
 
 
 
Allstate Life
 
 
 
 
 
 
 
 
Adjusted net income
 
74

 
74

 
221

 
196

Realized capital gains and losses, after-tax
 
(3
)
 
1

 
(7
)
 
2

DAC and DSI amortization related to realized capital gains and losses, after-tax
 
(1
)
 
(2
)
 
(6
)
 
(8
)
Tax Legislation expense
 
(16
)
 

 
(16
)
 

Allstate Life net income applicable to common shareholders
 
54

 
73

 
192

 
190

 
 
 
 
 
 
 
 
 
Allstate Benefits
 
 
 
 
 
 
 
 
Adjusted net income
 
32

 
28

 
94

 
75

Realized capital gains and losses, after-tax
 
2

 
1

 

 
1

Allstate Benefits net income applicable to common shareholders
 
34

 
29

 
94

 
76

 
 
 
 
 
 
 
 
 
Allstate Annuities
 
 
 
 
 
 
 
 
Adjusted net income
 
20

 
55

 
99

 
149

Realized capital gains and losses, after-tax
 
40

 
11

 
22

 
6

Valuation changes on embedded derivatives not hedged, after-tax
 
1

 
(1
)
 
5

 
(2
)
Gain on disposition of operations, after-tax
 
1

 
1

 
3

 
3

Tax Legislation benefit
 
69

 

 
69

 

Allstate Annuities net income applicable to common shareholders
 
131

 
66

 
198

 
156

 
 
 
 
 
 
 
 
 
Corporate and Other
 
 
 
 
 
 
 
 
Adjusted net loss
 
(155
)
 
(134
)
 
(340
)
 
(295
)
Realized capital gains and losses, after-tax
 

 

 
(10
)
 

Business combination expenses, after-tax
 

 
(1
)
 

 
(14
)
Tax Legislation expense
 
(15
)
 

 
(15
)
 

Corporate and Other net loss applicable to common shareholders
 
(170
)
 
(135
)
 
(365
)
 
(309
)
 
 
 
 
 
 
 
 
 
Consolidated net income applicable to common shareholders
 
$
833

 
$
637

 
$
2,416

 
$
1,853





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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
 
September 30, 2018
 
 

 
 

 
 

 
 

U.S. government and agencies
 
$
3,142

 
$
36

 
$
(27
)
 
$
3,151

Municipal
 
9,316

 
204

 
(105
)
 
9,415

Corporate
 
42,828

 
557

 
(723
)
 
42,662

Foreign government
 
854

 
12

 
(12
)
 
854

Asset-backed securities (“ABS”)
 
979

 
8

 
(8
)
 
979

Residential mortgage-backed securities (“RMBS”)
 
404

 
98

 
(2
)
 
500

Commercial mortgage-backed securities (“CMBS”)
 
74

 
7

 
(1
)
 
80

Redeemable preferred stock
 
21

 
1

 

 
22

Total fixed income securities
 
$
57,618

 
$
923

 
$
(878
)
 
$
57,663

 
 
 
 
 
 
 
 
 
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 September 30, 2018
 
Amortized cost
 
Fair value
Due in one year or less
 
$
4,038

 
$
4,042

Due after one year through five years
 
28,963

 
28,812

Due after five years through ten years
 
16,216

 
15,987

Due after ten years
 
6,944

 
7,263

 
 
56,161

 
56,104

ABS, RMBS and CMBS
 
1,457

 
1,559

Total
 
$
57,618

 
$
57,663

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 September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Fixed income securities
 
$
527

 
$
519

 
$
1,544

 
$
1,564

Equity securities
 
35

 
37

 
130

 
130

Mortgage loans
 
52

 
52

 
163

 
157

Limited partnership interests (1)(2)
 
210

 
223

 
563

 
596

Short-term investments
 
19

 
9

 
50

 
21

Other
 
71

 
58

 
205

 
174

Investment income, before expense
 
914

 
898

 
2,655

 
2,642

Investment expense
 
(70
)
 
(55
)
 
(201
)
 
(154
)
Net investment income 
 
$
844

 
$
843

 
$
2,454

 
$
2,488