10-Q 1 a09-32133_110q.htm 10-Q

 

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, 2009

 

OR

 

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

Commission file number 1-11840

 

THE ALLSTATE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

36-3871531

(State of Incorporation)

(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, or a smaller reporting company.  See the definitions of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Do not check if a smaller reporting company)

 

 

 

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 30, 2009, the registrant had 536,478,617 common shares, $.01 par value, outstanding.

 



 

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2009

 

PART I

FINANCIAL INFORMATION

PAGE

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three-Month and Nine-Month Periods Ended September 30, 2009 and 2008 (unaudited)

1

 

 

 

 

Condensed Consolidated Statements of Financial Position as of September 30, 2009 (unaudited) and December 31, 2008

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2009 and 2008 (unaudited)

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

4

 

 

 

 

Report of Independent Registered Public Accounting Firm

44

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

Highlights

45

 

Consolidated Net Income (Loss)

46

 

Property-Liability Highlights

47

 

Allstate Protection Segment

51

 

Discontinued Lines and Coverages Segment

62

 

Property-Liability Investment Results

63

 

Allstate Financial Highlights

64

 

Allstate Financial Segment

64

 

Investment Highlights

72

 

Investments

72

 

Fair Value of Assets and Liabilities

92

 

Deferred Taxes

93

 

Capital Resources and Liquidity Highlights

94

 

Capital Resources and Liquidity

94

 

 

 

Item 4.

Controls and Procedures

100

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

101

 

 

 

Item 1A.

Risk Factors

101

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

103

 

 

 

Item 6.

Exhibits

103

 



 

PART I. FINANCIAL INFORMATION

 

ITEM I. 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,

 

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

(unaudited)

 

(unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property-liability insurance premiums earned

 

$

6,535

 

$

6,785

 

$

19,677

 

$

20,299

 

 

Life and annuity premiums and contract charges

 

 

482

 

 

468

 

 

1,460

 

 

1,391

 

 

Net investment income

 

 

1,084

 

 

1,355

 

 

3,368

 

 

4,293

 

 

Realized capital gains and losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses

 

 

(539

)

 

(1,119

)

 

(1,735

)

 

(2,842

)

 

Portion of loss recognized in other comprehensive income

 

 

147

 

 

--

 

 

301

 

 

--

 

 

Net other-than-temporary impairment losses recognized in earnings

 

 

(392

)

 

(1,119

)

 

(1,434

)

 

(2,842

)

 

Sales and other realized capital gains and losses

 

 

(127

)

 

(169

)

 

884

 

 

(316

)

 

Total realized capital gains and losses

 

 

(519

)

 

(1,288

)

 

(550

)

 

(3,158

)

 

 

 

 

7,582

 

 

7,320

 

 

23,955

 

 

22,825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property-liability insurance claims and claims expense

 

 

4,573

 

 

5,971

 

 

14,295

 

 

15,423

 

 

Life and annuity contract benefits

 

 

382

 

 

418

 

 

1,176

 

 

1,210

 

 

Interest credited to contractholder funds

 

 

496

 

 

586

 

 

1,636

 

 

1,773

 

 

Amortization of deferred policy acquisition costs

 

 

1,023

 

 

980

 

 

3,649

 

 

3,014

 

 

Operating costs and expenses

 

 

744

 

 

814

 

 

2,247

 

 

2,334

 

 

Restructuring and related charges

 

 

35

 

 

10

 

 

112

 

 

4

 

 

Interest expense

 

 

106

 

 

88

 

 

291

 

 

264

 

 

 

 

 

7,359

 

 

8,867

 

 

23,406

 

 

24,022

 

 

Gain (loss) on disposition of operations

 

 

2

 

 

3

 

 

6

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations before income tax expense (benefit)

 

 

225

 

 

(1,544

)

 

555

 

 

(1,203

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

 

4

 

 

(621

)

 

219

 

 

(653

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

221

 

$

(923

)

$

336

 

$

(550

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - Basic

 

$

0.41

 

$

(1.70

)

$

0.62

 

$

(1.00

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - Basic

 

 

539.9

 

 

542.4

 

 

539.5

 

 

551.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - Diluted

 

$

0.41

 

$

(1.70

)

$

0.62

 

$

(1.00

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - Diluted

 

 

541.5

 

 

542.4

 

 

540.5

 

 

551.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.20

 

$

0.41

 

$

0.60

 

$

1.23

 

 

 

See notes to condensed consolidated financial statements.

 

1



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

($ in millions, except par value data)

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

Assets

 

(unaudited)

 

 

 

 

Investments:

 

 

 

 

 

 

 

Fixed income securities, at fair value (amortized cost $81,367 and $77,104)

$

78,561

 

$

68,608

 

 

Equity securities, at fair value (cost $4,274 and $3,137)

 

4,603

 

 

2,805

 

 

Mortgage loans

 

8,853

 

 

10,229

 

 

Limited partnership interests

 

2,770

 

 

2,791

 

 

Short-term, at fair value (amortized cost $3,470 and $8,903)

 

3,470

 

 

8,906

 

 

Other

 

2,369

 

 

2,659

 

 

Total investments

 

100,626

 

 

95,998

 

 

Cash

 

727

 

 

415

 

 

Premium installment receivables, net

 

4,970

 

 

4,842

 

 

Deferred policy acquisition costs

 

6,916

 

 

8,542

 

 

Reinsurance recoverables, net

 

6,460

 

 

6,403

 

 

Accrued investment income

 

901

 

 

884

 

 

Deferred income taxes

 

1,520

 

 

3,794

 

 

Property and equipment, net

 

1,013

 

 

1,059

 

 

Goodwill

 

874

 

 

874

 

 

Other assets

 

2,471

 

 

3,748

 

 

Separate Accounts

 

9,026

 

 

8,239

 

 

Total assets

$

135,504

 

$

134,798

 

 

Liabilities

 

 

 

 

 

 

 

Reserve for property-liability insurance claims and claims expense

$

19,176

 

$

19,456

 

 

Reserve for life-contingent contract benefits

 

12,849

 

 

12,881

 

 

Contractholder funds

 

53,336

 

 

58,413

 

 

Unearned premiums

 

10,069

 

 

10,024

 

 

Claim payments outstanding

 

772

 

 

790

 

 

Other liabilities and accrued expenses

 

6,081

 

 

6,663

 

 

Long-term debt

 

6,661

 

 

5,659

 

 

Separate Accounts

 

9,026

 

 

8,239

 

 

Total liabilities

 

117,970

 

 

122,125

 

 

 

 

 

 

 

 

 

 

Commitments and Contingent Liabilities (Note 10)

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

Preferred stock, $1 par value, 25 million shares authorized, none issued

 

--

 

 

--

 

 

Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 536 million and 536 million shares outstanding

 

9

 

 

9

 

 

Additional capital paid-in

 

3,160

 

 

3,130

 

 

Retained income

 

31,083

 

 

30,207

 

 

Deferred ESOP expense

 

(47

)

 

(49

)

 

Treasury stock, at cost (364 million and 364 million shares)

 

(15,832

)

 

(15,855

)

 

Accumulated other comprehensive income:

 

 

 

 

 

 

 

Unrealized net capital gains and losses:

 

 

 

 

 

 

 

Unrealized net capital losses on fixed income securities with OTTI

 

(411

)

 

-

-

 

Other unrealized net capital gains and losses

 

(1,218

)

 

(5,767

)

 

Unrealized adjustment to DAC, DSI and insurance reserves

 

1,741

 

 

2,029

 

 

Total unrealized net capital gains and losses

 

112

 

 

(3,738

)

 

Unrealized foreign currency translation adjustments

 

42

 

 

5

 

 

Unrecognized pension and other postretirement benefit cost

 

(1,022

)

 

(1,068

)

 

Total accumulated other comprehensive loss

 

(868

)

 

(4,801

)

 

Total shareholders’ equity

 

17,505

 

 

12,641

 

 

Noncontrolling interest

 

29

 

 

32

 

 

Total equity

 

17,534

 

 

12,673

 

 

Total liabilities and equity

$

135,504

 

$

134,798

 

 

 

See notes to condensed consolidated financial statements.

 

2



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ in millions)

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

 

 

(unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income (loss)

$

336

 

$

(550

)

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation, amortization and other non-cash items

 

(87

)

 

(267

)

 

Realized capital gains and losses

 

550

 

 

3,158

 

 

(Gain) loss on disposition of operations

 

(6

)

 

6

 

 

Interest credited to contractholder funds

 

1,636

 

 

1,773

 

 

Changes in:

 

 

 

 

 

 

 

Policy benefits and other insurance reserves

 

(460

)

 

1,158

 

 

Unearned premiums

 

6

 

 

21

 

 

Deferred policy acquisition costs

 

471

 

 

(456

)

 

Premium installment receivables, net

 

(108

)

 

(156

)

 

Reinsurance recoverables, net

 

(101

)

 

(319

)

 

Income taxes

 

1,175

 

 

(1,176

)

 

Other operating assets and liabilities

 

103

 

 

364

 

 

Net cash provided by operating activities

 

3,515

 

 

3,556

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Proceeds from sales:

 

 

 

 

 

 

 

Fixed income securities

 

16,098

 

 

19,289

 

 

 Equity securities

 

4,636

 

 

8,008

 

 

 Limited partnership interests

 

293

 

 

270

 

 

 Mortgage loans

 

140

 

 

228

 

 

Other investments

 

429

 

 

167

 

 

Investment collections:

 

 

 

 

 

 

 

 Fixed income securities

 

3,947

 

 

3,158

 

 

 Mortgage loans

 

1,093

 

 

605

 

 

 Other investments

 

99

 

 

79

 

 

Investment purchases:

 

 

 

 

 

 

 

 Fixed income securities

 

(22,694

)

 

(12,360

)

 

 Equity securities

 

(5,991

)

 

(8,420

)

 

 Limited partnership interests

 

(674

)

 

(810

)

 

 Mortgage loans

 

(23

)

 

(501

)

 

 Other investments

 

(54

)

 

(122

)

 

Change in short-term investments, net

 

5,437

 

 

(6,780

)

 

Change in other investments, net

 

(144

)

 

(420

)

 

Disposition (acquisition) of operations

 

12

 

 

(120

)

 

Purchases of property and equipment, net

 

(143

)

 

(153

)

 

Net cash provided by investing activities

 

2,461

 

 

2,118

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

1,003

 

 

19

 

 

Repayment of long-term debt

 

(1

)

 

--

 

 

Contractholder fund deposits

 

3,252

 

 

8,698

 

 

Contractholder fund withdrawals

 

(9,485

)

 

(12,497

)

 

Dividends paid

 

(434

)

 

(668

)

 

Treasury stock purchases

 

(3

)

 

(1,318

)

 

Shares reissued under equity incentive plans, net

 

2

 

 

31

 

 

Excess tax benefits on share-based payment arrangements

 

(6

)

 

3

 

 

Other

 

8

 

 

(9

)

 

Net cash used in financing activities

 

(5,664

)

 

(5,741

)

 

Net increase (decrease) in cash

 

312

 

 

(67

)

 

Cash at beginning of period

 

415

 

 

422

 

 

Cash at end of period

$

727

 

$

355

 

 

 

See notes to condensed consolidated financial statements.

 

3



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.  General

 

Basis of presentation

 

The accompanying condensed consolidated financial statements include the accounts of The Allstate Corporation and its wholly owned subsidiaries, primarily Allstate Insurance Company (“AIC”), a property-liability insurance company with various property-liability and life and investment subsidiaries, including Allstate Life Insurance Company (“ALIC”) (collectively referred to as the “Company” or “Allstate”).

 

The condensed consolidated financial statements and notes as of September 30, 2009, and for the three-month and nine-month periods ended September 30, 2009 and 2008 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, 2008.  The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

 

Subsequent events were evaluated through November 4, 2009, the date the consolidated financial statements were issued.

 

Adopted accounting standards

 

Recognition and Presentation of Other-Than-Temporary Impairments

 

In April 2009, the FASB issued new accounting guidance for the recognition of other-than-temporary impairments (“OTTI”) of debt securities.  If the fair value of a debt security is less than its amortized cost basis at the reporting date, an entity shall assess whether the impairment is an OTTI.  When an entity intends to sell an impaired security or more likely than not will be required to sell an impaired security before recovery of its amortized cost basis, an OTTI is recognized in earnings.  If the entity does not expect to recover the entire amortized cost basis of an impaired debt security, even if it does not intend to sell the security and it is not more likely than not that it would be required to sell the security before recovery of its amortized cost basis, the entity must consider, based upon an estimate of the present value of cash flows expected to be collected on the debt security as compared to its amortized cost basis, whether a credit loss exists.  The portion of the total OTTI related to a credit loss shall be recognized in earnings while the portion of the total OTTI related to factors other than credit shall be recognized in other comprehensive income (“OCI”).  The statement of operations is required to present the total OTTI with an offset for the amount of the total OTTI that is recognized in OCI.  The statement disclosing accumulated other comprehensive income (“AOCI”) is required to separately present amounts recognized for debt securities for which a portion of an OTTI has been recognized in earnings.

 

The new guidance expands disclosure requirements for both debt and equity securities and requires a more detailed, risk-oriented breakdown of security types and related information, and requires that the annual disclosures be made for interim periods.  In addition, new disclosures are required about significant inputs used in determining credit losses as well as a rollforward of credit losses each period.  The disclosures are not required for earlier periods presented for comparative purposes.  The new guidance applies to existing and new investments held as of the beginning of the interim period of adoption.

 

The Company adopted the provisions of the new guidance as of April 1, 2009.  The adoption resulted in the reclassification of $1.15 billion of previously recorded OTTI write-downs from retained income to unrealized capital losses.  The cumulative effect of adoption, net of related deferred policy acquisition costs (“DAC”), deferred sales inducements (“DSI”) and tax adjustments, was an increase in retained income of $863 million and a decrease in unrealized net capital gains and losses of $578 million, with a net benefit to equity of $285 million.  The benefit to equity resulted from a decrease in a deferred tax asset valuation allowance.  The adoption did not have an impact on the Company’s Condensed Consolidated Statement of Operations.  The effect of the adoption on net income and related per share amounts for interim periods after adoption is not determinable.  The accounting standard incorporates management’s intent as a critical component to the determination of the amount recorded and this assessment process was changed as of April 1, 2009 to an intent to sell model from an intent to hold model.

 

4



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

 

In April 2009, the FASB issued new accounting guidance relating to fair value measurement to provide additional guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased.  Guidance on identifying circumstances that indicate a transaction is not orderly is also provided.  If it is concluded that there has been a significant decrease in the volume and level of market activity for an asset or liability in relation to normal market activity, transaction or quoted prices may not be determinative of fair value and further analysis of transaction or quoted prices may be necessary.  A significant adjustment to transaction or quoted prices may be necessary to estimate fair value under the current market conditions.  Determination of whether a transaction is orderly is based on the weight of relevant evidence.

 

The disclosure requirements are expanded to include the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs during the quarterly reporting period.  Disclosures of assets and liabilities measured at fair value are to be presented by major security type.  Disclosures are not required for earlier periods presented for comparative purposes.  Revisions resulting from a change in valuation technique or its application shall be accounted for as a change in accounting estimate and disclosed, along with the total effect of the change in valuation technique and related inputs, if practicable, by major category.  The Company adopted the provisions of the new guidance as of April 1, 2009.  The adoption had no effect on the Company’s results of operations or financial position.

 

Interim Disclosures about Fair Value of Financial Instruments

 

In April 2009, the FASB issued new accounting guidance to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements.  The disclosures are not required for earlier periods presented for comparative purposes.  The Company adopted the provisions of the new guidance as of June 30, 2009.  The new guidance affects disclosures only and therefore the adoption had no impact on the Company’s results of operations or financial position.

 

Noncontrolling Interests in Consolidated Financial Statements

 

In December 2007, the FASB issued new accounting guidance which clarifies that a noncontrolling interest in a subsidiary is that portion of the subsidiary’s equity that is attributable to owners of the subsidiary other than its parent or parent’s affiliates.  Noncontrolling interests are required to be reported as equity in the consolidated financial statements and as such, net income will include amounts attributable to both the parent and the noncontrolling interest with disclosure of the amounts attributable to each on the face of the consolidated statements of operations, if material.  All changes in a parent’s ownership interest in a subsidiary when control of the subsidiary is retained should be accounted for as equity transactions.  In contrast, when control over a subsidiary is relinquished and the subsidiary is deconsolidated, a parent is required to recognize a gain or loss in net income as well as provide certain associated expanded disclosures.  The new guidance requires prospective application as of the beginning of the fiscal year in which the standard is initially applied, except for the presentation and disclosure requirements which are to be applied retrospectively for all periods presented.  The adoption of the new guidance in first quarter 2009 resulted in $32 million of noncontrolling interest being reclassified from total liabilities to total equity on the December 31, 2008 Condensed Consolidated Statement of Financial Position presented.  The adoption did not have a material effect on the Company’s results of operations.

 

Disclosures about Derivative Instruments and Hedging Activities

 

In March 2008, the FASB issued new accounting guidance, which amends and expands the disclosure requirements for derivatives.  The new disclosures are designed to enhance the understanding of how and why an entity uses derivative instruments and how derivative instruments affect an entity’s financial position, results of operations, and cash flows.  The standard requires, on a quarterly basis, quantitative disclosures about the potential cash outflows associated with the triggering of credit-risk-contingent features, if any; tabular disclosures about the classification and fair value amounts of derivative instruments reported in the statement of financial position; disclosure of the location and amount of gains and losses on derivative instruments reported in the statement of operations; and qualitative information about how and why an entity uses derivative instruments and how derivative instruments and related hedged items affect the entity’s financial statements.  Disclosures are not required for earlier periods presented for comparative purposes.  The new guidance affects disclosures only and therefore the adoption as of March 31, 2009 had no impact on the Company’s results of operations or financial position.

 

5



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities

 

In June 2008, the FASB issued new accounting guidance clarifying that non-forfeitable instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method.  The two-class method is an earnings allocation formula that treats participating securities as having the same rights to earnings as available to common shareholders.  The adoption of the new guidance in first quarter 2009 impacted previously reported basic and diluted earnings per share amounts as follows: changed from $(1.71) to $(1.70) for the three months ended September 30, 2008, changed from $(2.11) to $(2.10) for the three months ended December 31, 2008, and changed from $(3.07) to $(3.06) for the year ended December 31, 2008.  The basic and diluted earnings per share amounts for other 2008 periods were unchanged.

 

Pending accounting standards

 

Employers’ Disclosures about Postretirement Benefit Plan Assets

 

In January 2009, the FASB issued new accounting guidance relating to an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan.  Since plan assets measured at fair value are reported net of benefit obligations in an employer’s statements of financial position, the disclosures are intended to increase transparency surrounding the types of assets and associated risks in the employer approved benefit plans.  Companies are required to disclose information about how investment allocation decisions are made in the plans, the fair value of each major category of plan assets at each annual reporting date for each individual plan, information that would enable users to assess the assumptions and valuation techniques used in the development of the fair value measurements at the reporting date, and information that provides an understanding of significant concentrations of risk in plan assets.  The new accounting guidance is effective for fiscal years ending after December 15, 2009.  The disclosures are not required for earlier periods that are presented for comparative purposes.  The new guidance affects disclosures and therefore implementation will not impact the Company’s results of operations or financial position.

 

Consolidation of Variable Interest Entities

 

In June 2009, the FASB issued new accounting guidance which requires an entity to perform a qualitative analysis to determine whether it holds a controlling financial interest (i.e., primary beneficiary (“PB”)) in a variable interest entity (“VIE”).  The analysis identifies the PB of a VIE as the entity that has both the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE.  Additional amendments include the requirement to perform ongoing reassessments to determine whether the entity is the PB of a VIE and the elimination of the quantitative approach for determining the PB of a VIE.  The new guidance is effective for fiscal years beginning after November 15, 2009.  The Company is in the process of evaluating the impact of adoption on the Company’s results of operations or financial position.

 

Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

 

In September 2009, the FASB issued new accounting guidance relating to investments that are required or permitted to be measured or disclosed at fair value when the investment does not have a readily determinable fair value and is accounted for under the measurement principles pertaining to investment companies.  As a practical expedient, this guidance allows a reporting entity to measure the fair value of these investments on the basis of the net asset value per share of the investment (or its equivalent).  The amendments include additional disclosure requirements. The new guidance is effective for years ending after December 15, 2009.  The new guidance will affect the Company’s disclosures and the impact of adoption is not expected to be material to the Company’s results of operations or financial position.

 

2.  Earnings per share

 

Basic earnings per share is computed based on the weighted average number of common shares outstanding, including unvested restricted stock units.  Diluted earnings per share is computed based on the weighted average number of common and dilutive potential common shares outstanding.  For Allstate, dilutive potential common shares consist of outstanding stock options.

 

6



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The computation of basic and diluted earnings per share is presented in the following table.

 

 

($ in millions, except per share data)

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss)

$

221

$

(923)

$

336

$

(550)

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

539.9

 

542.4

 

539.5

 

551.6

 

Effect of dilutive potential common shares:

 

 

 

 

 

 

 

 

 

Stock options

 

1.6

 

--

 

1.0

 

--

 

Weighted average common and dilutive potential common shares outstanding

 

541.5

 

542.4

 

540.5

 

551.6

 

 

 

 

 

 

 

 

 

 

 

Earnings per share – Basic

$

0.41

$

(1.70)

$

0.62

$

(1.00)

 

Earnings per share - Diluted

$

0.41

$

(1.70)

$

0.62

$

(1.00)

 

 

The effect of dilutive potential common shares does not include the effect of options with an anti-dilutive effect on earnings per share because their exercise prices exceed the average market price of Allstate common shares during the period or for which the unrecognized compensation cost would have an anti-dilutive effect.  Options to purchase 25.0 million and 20.4 million Allstate common shares, with exercise prices ranging from $23.13 to $64.53 and $45.32 to $65.38, were outstanding at September 30, 2009 and 2008, respectively, but were not included in the computation of diluted earnings per share for the three-month periods.  Options to purchase 26.2 million and 18.5 million Allstate common shares, with exercise prices ranging from $23.13 to $65.38 and $45.32 to $65.38, were outstanding at September 30, 2009 and 2008, respectively, but were not included in the computation of diluted earnings per share for the nine-month periods.

 

As a result of the net loss for the three-month and nine-month periods ended September 30, 2008, weighted average dilutive potential common shares outstanding resulting from stock options of 1.2 million and 1.8 million, respectively, were not included in the computation of diluted earnings per share since the inclusion of these securities would have an anti-dilutive effect.  In the absence of the net loss, weighted average common and dilutive potential common shares outstanding would have totaled 543.6 million and 553.4 million for the three-month and nine-month periods ended September 30, 2008, respectively.

 

3.  Supplemental Cash Flow Information

 

Non-cash investment exchanges, including modifications of certain fixed income securities, mortgage loans and other investments, as well as mergers completed with equity securities and limited partnerships, totaled $342 million and $20 million for the nine-month periods ended September 30, 2009 and 2008, respectively.

 

7



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Liabilities for collateral received in conjunction with the Company’s securities lending and over-the-counter (“OTC”) derivatives and for funds received from the Company’s security repurchase business activities are reported in other liabilities and accrued expenses or other investments in the Condensed Consolidated Statements of Financial Position.  The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which are as follows:

 

($ in millions)

 

Nine months ended September 30,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Net change in proceeds managed

 

 

 

 

 

Net change in fixed income securities

$

-- 

$

526 

 

Net change in short-term investments

 

(190)

 

1,236 

 

Operating cash flow (used) provided

 

(190)

 

1,762 

 

Net change in cash

 

-- 

 

 

Net change in proceeds managed

$

(190)

$

1,765 

 

 

 

 

 

 

 

Net change in liabilities

 

 

 

 

 

Liabilities for collateral and security repurchase, beginning of year

$

(340)

$

(3,461)

 

Liabilities for collateral and security repurchase, end of period

 

(530)

 

(1,696)

 

Operating cash flow provided (used)

$

190 

$

(1,765)

 

 

4.  Investments

 

Fair values

 

The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:

 

($ in millions)

 

Amortized

 

Gross unrealized

 

Fair

 

 

 

cost

 

Gains

 

Losses

 

value

 

At September 30, 2009

 

 

 

 

 

 

 

 

 

U.S. government and agencies

7,877

256

(1)

8,132

 

Municipal

 

22,128

 

800

 

(761)

 

22,167

 

Corporate

 

31,853

 

1,265

 

(1,059)

 

32,059

 

Foreign government

 

2,544

 

334

 

(4)

 

2,874

 

Residential mortgage-backed securities (“RMBS”)

 

9,833

 

158

 

(1,914)

 

8,077

 

Commercial mortgage-backed securities (“CMBS”)

 

3,737

 

27

 

(1,186)

 

2,578

 

Asset-backed securities (“ABS”)

 

3,357

 

34

 

(754)

 

2,637

 

Redeemable preferred stock

 

38

 

1

 

(2)

 

37

 

Total fixed income securities

81,367

2,875

(5,681)

78,561

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2008

 

 

 

 

 

 

 

 

 

U.S. government and agencies

3,272

963

(1)

4,234

 

Municipal

 

23,565

 

467

 

(2,184)

 

21,848

 

Corporate

 

31,040

 

463

 

(3,876)

 

27,627

 

Foreign government

 

2,206

 

544

 

(75)

 

2,675

 

RMBS

 

8,010

 

93

 

(1,538)

 

6,565

 

CMBS

 

5,840

 

10

 

(2,004)

 

3,846

 

ABS

 

3,135

 

5

 

(1,353)

 

1,787

 

Redeemable preferred stock

 

36

 

-- 

 

(10)

 

26

 

Total fixed income securities

77,104

2,545

(11,041)

68,608

 

 

8



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Scheduled maturities

 

The scheduled maturities for fixed income securities are as follows at September 30, 2009:

 

($ in millions)

 

Amortized

 

Fair

 

 

 

cost

 

value

 

Due in one year or less

2,843

2,853

 

Due after one year through five years

 

23,538

 

24,060

 

Due after five years through ten years

 

13,896

 

14,378

 

Due after ten years

 

27,900

 

26,556

 

 

 

68,177

 

67,847

 

Residential mortgage- and asset-backed securities

 

13,190

 

10,714

 

Total

81,367

78,561

 

 

Actual maturities may differ from those scheduled as a result of prepayments by the issuers.  Because of the potential for prepayment on residential mortgage and asset-backed securities, they are not categorized by contractual maturity.  The commercial mortgage-backed securities are categorized by contractual maturity because they generally are not subject to prepayment risk.

 

Net investment income

 

Net investment income is as follows:

($ in millions)

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Fixed income securities

987 

1,181 

3,022 

3,657 

 

Equity securities

 

15 

 

24 

 

50 

 

87 

 

Mortgage loans

 

121 

 

154 

 

389 

 

470 

 

Limited partnership interests

 

 

(24)

 

11 

 

66 

 

Other

 

-- 

 

69 

 

16 

 

191 

 

Investment income, before expense

 

1,127 

 

1,404 

 

3,488 

 

4,471 

 

Investment expense

 

(43)

 

(49)

 

(120)

 

(178)

 

Net investment income

1,084 

1,355 

3,368 

4,293 

 

 

Realized capital gains and losses

 

Realized capital gains and losses by security type are as follows:

 

($ in millions)

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Fixed income securities

(33)

(803)

89 

(2,298)

 

Equity securities

 

(21)

 

(404)

 

(157)

 

(513)

 

Mortgage loans

 

(66)

 

(11)

 

(114)

 

(48)

 

Limited partnership interests

 

(20)

 

(37)

 

(443)

 

(42)

 

Derivatives

 

(364)

 

(31)

 

151 

 

(237)

 

Other

 

(15)

 

(2)

 

(76)

 

(20)

 

Realized capital gains and losses

(519)

(1,288)

(550)

(3,158)

 

 

9



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Realized capital gains and losses by transaction type are as follows:

 

($ in millions)

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Impairment write-downs (1)

(381)

(666)

(1,292)

(1,331)

 

Change in intent write-downs (2)

 

(11)

 

(453)

 

(142)

 

(1,511)

 

Net OTTI losses recognized in earnings

 

(392)

 

(1,119)

 

(1,434)

 

(2,842)

 

Sales

 

201 

 

(137)

 

882 

 

(107)

 

Valuation of derivative instruments

 

(269)

 

(111)

 

201 

 

(396)

 

Settlements of derivative instruments

 

(92)

 

79 

 

(52)

 

187 

 

EMA LP income (3)

 

33 

 

-- 

 

(147)

 

-- 

 

Realized capital gains and losses

(519)

(1,288)

(550)

(3,158)

 

 


(1)           Beginning April 1, 2009 for fixed income securities, impairment write-downs reflect the credit loss component of issue specific other-than-temporary declines in fair value where the amortized cost basis is not expected to be entirely recovered.  For periods prior to April 1, 2009 for fixed income securities and all periods for equity securities, impairment write-downs reflect issue specific other-than-temporary declines in fair value, including instances where the Company could not reasonably assert that the recovery period would be temporary.

 

(2)           Beginning April 1, 2009 for fixed income securities, change in intent write-downs reflect instances where the Company has made a decision to sell the security or it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis.  For periods prior to April 1, 2009 for fixed income securities and all periods for equity securities, change in intent write-downs reflect instances where the Company could not assert a positive intent to hold until recovery.

 

(3)           Beginning in the fourth quarter of 2008, income from limited partnership interests accounted for utilizing the equity method of accounting (“EMA LP”) is reported in realized capital gains and losses.  EMA LP income for periods prior to the fourth quarter of 2008 is reported in net investment income.

 

Gross gains of $341 million and $223 million and gross losses of $144 million and $127 million were realized on sales of fixed income securities during the three months ended September 30, 2009 and 2008, respectively.  Gross gains of $1.12 billion and $521 million and gross losses of $303 million and $444 million were realized on sales of fixed income securities during the nine months ended September 30, 2009 and 2008, respectively.

 

Other-than-temporary impairment losses by asset type are as follows:

 

($ in millions)

 

Three months ended
September 30, 2009

 

Nine months ended
September 30, 2009

 

 

 

Total

 

Included in OCI

 

Net

 

Total

 

Included in OCI

 

Net

 

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

$

(6)

(4)

(92)

(86)

 

Corporate

 

(112)

 

(1)

 

(113)

 

(204)

 

(10)

 

(214)

 

Foreign government

 

-- 

 

-- 

 

-- 

 

(17)

 

-- 

 

(17)

 

RMBS

 

(174)

 

115 

 

(59)

 

(433)

 

266 

 

(167)

 

CMBS

 

(90)

 

62 

 

(28)

 

(142)

 

61 

 

(81)

 

ABS

 

(10)

 

(31)

 

(41)

 

(185)

 

(22)

 

(207)

 

Total fixed income securities

 

(392)

 

147 

 

(245)

 

(1,073)

 

301 

 

(772)

 

Equity securities

 

(61)

 

-- 

 

(61)

 

(247)

 

-- 

 

(247)

 

Mortgage loans

 

(31)

 

-- 

 

(31)

 

(80)

 

-- 

 

(80)

 

Limited partnership interests

 

(53)

 

-- 

 

(53)

 

(296)

 

-- 

 

(296)

 

Other

 

(2)

 

-- 

 

(2)

 

(39)

 

-- 

 

(39)

 

Other-than-temporary impairment losses

$

(539)

147 

(392)

(1,735)

301 

(1,434)

 

 

10



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The total amount of other-than-temporary impairment losses included in accumulated other comprehensive income for fixed income securities at September 30, 2009, which were not included in earnings, are presented in the following table.  The amount excludes $135 million of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.

 

 

($ in millions)

 

 

 

Municipal

(5)

 

Corporate

 

(75)

 

RMBS

 

(507)

 

CMBS

 

(86)

 

ABS

 

(94)

 

Total

(767)

 

 

Rollforwards of the amount recognized in earnings related to credit losses for fixed income securities are presented in the following tables.

 

($ in millions)

 

 

Balance at June 30, 2009

(1,506)

Additional credit loss for securities previously other-than-temporarily impaired

 

(88)

Additional credit loss for securities not previously other-than-temporarily impaired

 

(157)

Reduction in credit loss for securities disposed or collected

 

396 

Reduction in credit loss for securities other-than-temporarily impaired to fair value

 

--   

Change in credit loss due to accretion of increase in cash flows and time value of cash flows for securities previously other-than-temporarily impaired

 

--   

Ending balance at September 30, 2009

(1,355)

 

Beginning balance of cumulative credit loss for securities held at April 1, 2009

(1,357)

Additional credit loss for securities previously other-than-temporarily impaired

 

(122)

Additional credit loss for securities not previously other-than-temporarily impaired

 

(315)

Reduction in credit loss for securities disposed or collected

 

439 

Reduction in credit loss for securities other-than-temporarily impaired to fair value

 

-- 

Change in credit loss due to accretion of increase in cash flows and time value of cash flows for securities previously other-than-temporarily impaired

 

-- 

Ending balance at September 30, 2009

(1,355)

 

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

 

11



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

determine a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and is recorded in earnings.

 

Unrealized net capital gains and losses

 

Unrealized net capital gains and losses included in accumulated other comprehensive income are as follows:

 

($ in millions)

 

Fair

 

Gross unrealized

 

Unrealized net

 

At September 30, 2009

 

value

 

Gains

 

Losses

 

gains (losses)

 

Fixed income securities (1)

$

78,561 

$

2,875

$

(5,681)

$

(2,806)

 

Equity securities

 

4,603 

 

498

 

(169)

 

329 

 

Short-term investments

 

3,470 

 

--

 

-- 

 

-- 

 

Derivative instruments (2)

 

(21)

 

2

 

(26)

 

(24)

 

Unrealized net capital gains and losses, pre-tax

 

 

 

 

 

 

 

(2,501)

 

Amounts recognized for:

 

 

 

 

 

 

 

 

 

Insurance reserves (3)

 

 

 

 

 

 

 

-- 

 

DAC and DSI (4)

 

 

 

 

 

 

 

2,679 

 

Amounts recognized

 

 

 

 

 

 

 

2,679 

 

Deferred income taxes

 

 

 

 

 

 

 

(66)

 

Unrealized net capital gains and losses, after-tax

 

 

 

 

 

 

$

112 

 

 


(1)

Unrealized net capital gains and losses for fixed income securities comprise $(632) million related to unrealized net capital losses on fixed income securities with OTTI and $(2,174) million related to other unrealized net capital gains and losses.

 

 

(2)

Included in the fair value of derivative securities are $(4) million classified as assets and $17 million classified as liabilities.

 

 

(3)

The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. Although the Company evaluates premium deficiencies on the combined performance of our life insurance and immediate annuities with life contingencies, the adjustment primarily relates to structured settlement annuities with life contingencies, in addition to annuity buy-outs and certain payout annuities with life contingencies.

 

 

(4)

The DAC and DSI adjustment represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized.

 

 

 

Fair

 

Gross unrealized

 

Unrealized net

 

At December 31, 2008

 

value

 

Gains

 

Losses

 

gains (losses)

 

Fixed income securities

$

68,608

$

2,545

$

(11,041)

$

(8,496)

 

Equity securities

 

2,805

 

112

 

(444)

 

(332)

 

Short-term investments

 

8,906

 

4

 

(1)

 

 

Derivative instruments (1)

 

15

 

25

 

(14)

 

11 

 

Unrealized net capital gains and losses, pre-tax

 

 

 

 

 

 

 

(8,814)

 

Amounts recognized for:

 

 

 

 

 

 

 

 

 

Insurance reserves

 

 

 

 

 

 

 

(378)

 

DAC and DSI

 

 

 

 

 

 

 

3,500 

 

Amounts recognized

 

 

 

 

 

 

 

3,122 

 

Deferred income taxes

 

 

 

 

 

 

 

1,954 

 

Unrealized net capital gains and losses, after-tax

 

 

 

 

 

 

$

(3,738)

 

 


(1)           Included in the fair value of derivative securities are $4 million classified as assets and $(11) million classified as liabilities.

 

12



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Change in unrealized net capital gains and losses

 

The change in unrealized net capital gains and losses for the nine months ended September 30, 2009 is as follows:

 

($ in millions)

 

 

 

 

 

 

 

Fixed income securities

$

5,690 

 

Equity securities

 

661 

 

Short-term investments

 

(3)

 

Derivative instruments

 

(35)

 

Total

 

6,313 

 

 

 

 

 

Amounts recognized for:

 

 

 

Insurance reserves

 

378 

 

DAC and DSI

 

(821)

 

Decrease in amounts recognized

 

(443)

 

Deferred income taxes

 

(2,020)

 

Increase in unrealized net capital gains and losses

$

3,850 

 

 

Portfolio monitoring

 

The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired.

 

For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made a decision to sell or whether it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes.  If a security meets either of these criteria, the security’s decline in fair value is deemed other than temporary and is recorded in earnings.

 

If the Company has not made the decision to sell the fixed income security and it is not more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company evaluates if it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security by comparing the estimated recovery value calculated by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, with the amortized cost of the security.  If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss deemed to be related to other factors and recognized in OCI.

 

For equity securities, the Company considers various factors, including whether the Company has the intent and ability to hold the equity security for a period of time sufficient to recover its cost basis.  Where the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the equity security’s decline in fair value is considered other than temporary and is recorded in earnings.

 

Our portfolio monitoring process includes a quarterly review of all securities through a screening process which identifies instances where the fair value compared to amortized cost for fixed income securities and cost for equity securities is below established thresholds, and also includes the monitoring of other criteria such as ratings, ratings downgrades or payment defaults.  The securities identified, in addition to other securities for which the Company may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security.  Inherent in the Company’s evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about the financial condition of the issue or issuer and its future earnings potential.  Some of the factors considered in evaluating whether a decline in fair value is other than temporary are: 1) the length of time and extent to which the fair value has been less than amortized cost for fixed income securities, or cost for equity securities; 2) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; and 3) the specific reasons that a security is in a significant unrealized loss position, including overall market conditions which could affect liquidity.

 

13



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the gross unrealized losses and fair value of fixed income and equity securities by the length of time that individual securities have been in a continuous unrealized loss position.

 

($ in millions)

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Number

 

Fair

 

Unrealized

 

Number

 

Fair

 

Unrealized

 

unrealized

 

 

 

of issues

 

value

 

losses

 

of issues

 

value

 

losses

 

losses

 

At September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

4

477

(1)

 

--

--

-- 

(1)

 

Municipal

 

232

 

1,703

 

(100)

 

761

 

4,702

 

(661)

 

(761)

 

Corporate

 

231

 

2,819

 

(203)

 

580

 

6,344

 

(856)

 

(1,059)

 

Foreign government

 

13

 

81

 

(4)

 

3

 

7

 

-- 

 

(4)

 

RMBS

 

189

 

381

 

(82)

 

464

 

2,676

 

(1,832)

 

(1,914)

 

CMBS

 

13

 

120

 

(2)

 

294

 

2,185

 

(1,184)

 

(1,186)

 

ABS

 

15

 

171

 

(9)

 

197

 

1,563

 

(745)

 

(754)

 

Redeemable preferred stock

 

2

 

--

 

-- 

 

1

 

20

 

(2)

 

(2)

 

Total fixed income securities (1)

 

699

 

5,752

 

(401)

 

2,300

 

17,497

 

(5,280)

 

(5,681)

 

Equity securities

 

129

 

813

 

(83)

 

43

 

403

 

(86)

 

(169)

 

Total fixed income and equity securities

 

828

6,565

(484)

 

2,343

17,900

(5,366)

(5,850)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade fixed income securities

 

580

5,223

(250)

 

1,735

14,167

(3,156)

(3,406)

 

Below investment grade fixed income securities

 

119

 

529

 

(151)

 

565

 

3,330

 

(2,124)

 

(2,275)

 

Total fixed income securities

 

699

5,752

(401)

 

2,300

17,497

(5,280)

(5,681)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

5

230

(1)

 

--

--

-- 

(1)

 

Municipal

 

2,648

 

11,981

 

(1,983)

 

117

 

598

 

(201)

 

(2,184)

 

Corporate

 

1,632

 

14,827

 

(2,050)

 

448

 

4,504

 

(1,826)

 

(3,876)

 

Foreign government

 

58

 

349

 

(63)

 

3

 

13

 

(12)

 

(75)

 

RMBS

 

465

 

1,875

 

(457)

 

317

 

1,685

 

(1,081)

 

(1,538)

 

CMBS

 

295

 

2,729

 

(797)

 

179

 

899

 

(1,207)

 

(2,004)

 

ABS

 

81

 

551

 

(124)

 

181

 

1,092

 

(1,229)

 

(1,353)

 

Redeemable preferred stock

 

3

 

17

 

(10)

 

1

 

1

 

-- 

 

(10)

 

Total fixed income securities

 

5,187

 

32,559

 

(5,485)

 

1,246

 

8,792

 

(5,556)

 

(11,041)

 

Equity securities

 

325

 

1,897

 

(398)

 

10

 

53

 

(46)

 

(444)

 

Total fixed income and equity securities

 

5,512

34,456

(5,883)

 

1,256

8,845

(5,602)

(11,485)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade fixed income securities

 

4,687

30,484

(4,813)

 

1,081

7,988

(4,961)

(9,774)

 

Below investment grade fixed income securities

 

500

 

2,075

 

(672)

 

165

 

804

 

(595)

 

(1,267)

 

Total fixed income securities

 

5,187

32,559

(5,485)

 

1,246

8,792

(5,556)

(11,041)

 

 


(1)           Gross unrealized losses resulting from factors other than credit on fixed income securities with other-than-temporary impairments for which the Company has recorded a credit loss in earnings total $56 million for the less than 12 month category and $616 million for the 12 months or greater category.

 

As of September 30, 2009, $1.34 billion of unrealized losses are related to securities with an unrealized loss position less than 20% of cost or amortized cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired.  Of the $1.34 billion, $1.05 billion are related to unrealized losses on investment grade fixed income securities.  Investment grade is defined as a security having a rating from the National Association of Insurance Commissioners (“NAIC”) of 1 or 2; a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from Standard & Poor’s (“S&P”), Fitch or Dominion, or aaa, aa, a or bbb from A.M. Best; or a comparable internal rating if an externally provided rating is not available.  Unrealized losses on investment grade securities are principally related to rising interest rates or changes in credit spreads since the securities were acquired.

 

As of September 30, 2009, the remaining $4.51 billion of unrealized losses are related to securities in unrealized loss positions greater than or equal to 20% of cost or amortized cost.  Investment grade securities comprising the $2.35 billion of unrealized losses were evaluated based on factors such as the financial condition and near-term and

 

14



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

long-term prospects of the issue or issuer and were determined to have adequate resources to fulfill contractual obligations, such as recent financings or bank loans, cash flows from operations, collateral or the position of a subsidiary with respect to its parent’s bankruptcy.  Of the $4.51 billion, $2.11 billion are related to below investment grade fixed income securities and $47 million are related to equity securities.  Of these amounts, $1.56 billion of the below investment grade fixed income securities had been in an unrealized loss position for a period of twelve or more consecutive months as of September 30, 2009.  Unrealized losses on below investment grade securities are principally related to RMBS, CMBS and ABS and were the result of wider credit spreads since the time of initial purchase which was largely due to the impact of macroeconomic conditions and credit market deterioration on real estate valuations.  Unrealized losses were evaluated based on credit ratings, as well as the performance of the underlying collateral relative to the securities’ positions in the securities’ respective capital structure. The unrealized losses on RMBS and ABS were evaluated with credit enhancements from bond insurers where applicable.  The unrealized losses on municipal bonds were evaluated based on the quality of the underlying security, as well as with credit enhancements from bond insurers, where applicable.  Unrealized losses on equity securities are primarily related to equity market fluctuations.

 

As of September 30, 2009, the Company has not made a decision to sell and it is not more likely than not the Company will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis.  As of September 30, 2009, the Company had the intent and ability to hold the equity securities with unrealized losses for a period of time sufficient for them to recover.

 

Limited partnership impairment

 

As of September 30, 2009 and December 31, 2008, equity-method limited partnership interests totaled $1.70 billion and $1.56 billion, respectively.  The Company recognizes a loss in value for equity-method investments when evidence demonstrates that it is other-than-temporarily impaired.  Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment.  The Company did not have any write-downs for the three months ended September 30, 2009 related to equity-method limited partnership interests.  The Company had write-downs of $3 million for the three months ended September 30, 2008, and write-downs of $10 million and $11 million for the nine months ended September 30, 2009 and 2008, respectively, related to equity-method limited partnership interests.

 

As of September 30, 2009 and December 31, 2008, the carrying value for cost-method limited partnership interests was $1.07 billion and $1.23 billion, respectively, which primarily included limited partnership interests in fund investments.  The fair value for cost-method investments is estimated to be equivalent to the reported net asset value of the underlying funds.  To determine if an other-than-temporary impairment has occurred, the Company evaluates whether an impairment indicator has occurred in the period that may have a significant adverse effect on the carrying value of the investment.  Impairment indicators may include: actual recent cash flows received being significantly less than expected cash flows; reduced valuations based on financing completed at a lower value; completed sale of a material underlying investment at a price significantly lower than expected; significantly reduced valuations of the investments held by limited partnerships; or any other adverse events since the last financial statements received that might affect the fair value of the investee’s capital.  Additionally, the Company uses a screening process to identify those investments whose net asset value is below established thresholds for certain periods of time, and investments that are performing below expectations for consideration for inclusion on its watch-list.  The Company had write-downs of $53 million and $36 million for the three months ended September 30, 2009 and 2008, respectively, and write-downs of $286 million and $48 million for the nine months ended September 30, 2009 and 2008, respectively, related to cost method investments that were other-than-temporarily impaired.

 

5.  Fair Value of Assets and Liabilities

 

The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.  Assets and liabilities recorded on the Condensed Consolidated Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:

 

Level 1:     Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.

 

15



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Level 2:     Assets and liabilities whose values are based on the following:

(a)  Quoted prices for similar assets or liabilities in active markets;

(b)  Quoted prices for identical or similar assets or liabilities in markets that are not active; or

(c)  Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3:     Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.  Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.

 

The availability of observable inputs varies by instrument.  In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment.  The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3.  In many instances, valuation inputs used to measure fair value fall into different levels of the fair value hierarchy.  The category level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.  The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption.  In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.  This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3.

 

Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans, limited partnership interests, bank loans and policy loans.  Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after initial recognition and the resulting remeasurement is reflected in the condensed consolidated financial statements.  In addition, equity options embedded in fixed income securities are not disclosed in the hierarchy with free-standing derivatives as the embedded derivatives are presented with the host contract in fixed income securities.  As of September 30, 2009, 71.2% of total assets are measured at fair value and 0.8% of total liabilities are measured at fair value.

 

Summary of significant valuation techniques for assets and liabilities measured at fair value on a recurring basis

 

Level 1 measurements

 

·                  Fixed income securities:  Comprise U.S. Treasuries.  Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

 

·                  Equity securities:  Comprise actively traded, exchange-listed U.S. and international equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

 

·                  Short-term:  Comprise actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access.

 

·                  Separate account assets:  Comprise actively traded mutual funds that have daily quoted net asset values for identical assets that the Company can access.  Net asset values for the actively traded mutual funds in which the separate account assets are invested are obtained daily from the fund managers.

 

Level 2 measurements

 

·                  Fixed income securities:

 

U.S. government and agencies:  Valued based on inputs including quoted prices for identical or similar assets in markets that are not active.

 

Municipal:  Externally rated municipals are valued based on inputs including quoted prices for identical or similar assets in markets that are not active.  Included in municipals are auction rate securities (“ARS”) other than those backed by student loans.  ARS backed by student loans are included in Level 3.

 

Corporate, including privately placed:  Valued based on inputs including quoted prices for identical or similar assets in markets that are not active.  Also includes privately placed securities which have market-observable external ratings from independent third party rating agencies.

 

16



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Foreign government; RMBS - U.S. government sponsored entities (“U.S. Agency”), Prime residential mortgage-backed securities (“Prime”) and Alt-A residential mortgage-backed securities (“Alt-A”); ABS - credit card, auto and student loans; Redeemable preferred stock:  Valued based on inputs including quoted prices for identical or similar assets in markets that are not active.

 

CMBS:  Valuation is principally based on inputs including quoted prices for identical or similar assets in markets that are not active.

 

·                  Equity securities:  Valued based on inputs including quoted prices for identical or similar assets in markets that are not active.

 

·                  Short-term:  Commercial paper and other short-term investments are valued based on quoted prices for identical or similar assets in markets that are not active or amortized cost.

 

·                  Other investments:  Free-standing exchange listed derivatives that are not actively traded are valued based on quoted prices for identical instruments in markets that are not active.

 

OTC derivatives, including interest rate swaps, foreign currency swaps, foreign exchange forward contracts, certain credit default swaps, and commodity swaps, are valued using models that rely on inputs such as interest rate yield curves, currency rates, adjustment for counterparty credit risks, and commodity prices that are observable for substantially the full term of the contract.  The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.

 

·                  Contractholder funds:  Derivatives embedded in certain annuity contracts are valued based on internal models that rely on inputs such as interest rate yield curves and equity index volatility assumptions that are market observable for substantially the full term of the contract.  The valuation techniques are widely accepted in the financial services industry and do not include significant judgment.

 

Level 3 measurements

 

·                  Fixed income securities:

 

Municipal:  ARS primarily backed by student loans that have become illiquid due to failures in the auction market and municipal bonds that are not rated by third party credit rating agencies but are generally rated by the NAIC are included in Level 3.  ARS backed by student loans are valued based on a discounted cash flow model with certain inputs to the valuation model that are significant to the valuation, but are not market observable, including estimates of future coupon rates if auction failures continue, maturity assumptions, and illiquidity premium.  Non-rated municipal bonds are valued based on valuation models that are widely accepted in the financial services industry and are categorized as Level 3 as a result of the significance of non-market observable inputs, which may include projections of future cash flows.

 

Corporate:  Valued based on non-binding broker quotes.

 

Corporate privately placed:  Valued based on non-binding broker quotes and models that are widely accepted in the financial services industry and use internally assigned credit ratings as inputs and instrument specific inputs.  Instrument specific inputs used in internal fair value determinations include coupon rate, coupon type, weighted average life, sector of the issuer and call provisions.  Privately placed securities are categorized as Level 3 as a result of the significance of non-market observable inputs.  The internally modeled securities are valued based on internal ratings, which are not observable in the market.  Multiple internal ratings comprise an NAIC rating category and when used in the internal model provide a more refined determination of fair value.  The Company’s internal ratings are primarily consistent with the NAIC ratings which are generally updated annually.

 

RMBS - Subprime residential mortgage-backed securities (“Subprime”) and Alt-A:  Subprime and certain Alt-A are principally valued based on inputs including quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements.  Certain Subprime and Alt-A are valued based on non-binding broker quotes.  Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, Subprime and certain Alt-A are categorized as Level 3.

 

17



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

CMBS:  Valued based on non-binding broker quotes or based on inputs including quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements.  Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, certain CMBS are categorized as Level 3.

 

ABS - Collateralized debt obligations (“CDO”):  Valued based on non-binding broker quotes received from brokers who are familiar with the investments.  Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, all CDO are categorized as Level 3.

 

ABS - student loans and other:  Valued based on inputs including quoted prices for identical or similar assets in markets that are not active.  Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, certain ABS are categorized as Level 3.

 

·                  Other investments:  Certain free-standing OTC derivatives, such as interest rate caps and floors, certain credit default swaps and OTC options (including swaptions), are valued using valuation models that are widely accepted in the financial services industry.  Non-market observable inputs such as volatility assumptions may be significant to the valuation of the instruments.

 

·                  Contractholder funds:  Derivatives embedded in certain annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for the embedded derivatives within a block of contractholder liabilities.  The models use stochastically determined cash flows based on the contractual elements of embedded derivatives and other applicable market data.  These are categorized as Level 3 as a result of the significance of non-market observable inputs.

 

Assets and liabilities measured at fair value on a non-recurring basis

 

Mortgage loans and other investments written-down to fair value in connection with recognizing other-than-temporary impairments are valued using valuation models that are widely accepted in the financial services industry.  Inputs to the valuation models include non-market observable inputs such as credit spreads.  Limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments are valued using net asset values and other sources.

 

18



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2009:

 

($ in millions)

 

Quoted
prices in
active
markets for
identical
assets

 

Significant
other
observable
inputs

 

Significant
unobservable
inputs

 

Counterparty
and cash
collateral

 

Balance
as of
September 30,

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

netting

 

2009

Assets

 

 

 

 

 

 

 

 

 

 

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

$

5,277

$

2,855

$

--

 

 

$

8,132

Municipal

 

--

 

19,460

 

2,707

 

 

 

22,167

Corporate

 

--

 

22,081

 

9,978

 

 

 

32,059

Foreign government

 

--

 

2,794

 

80

 

 

 

2,874

RMBS

 

--

 

6,367

 

1,710

 

 

 

8,077

CMBS

 

--

 

1,191

 

1,387

 

 

 

2,578

ABS

 

--

 

862

 

1,775

 

 

 

2,637