10-Q 1 a11-8146_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 March 31, 2011

 

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 or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

2775 Sanders Road, Northbrook, Illinois

60062

(Address of principal executive offices)

(Zip Code)

 

(847) 402-5000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   X                     No ___

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes   X                     No ___

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

  X  

Accelerated filer

___

 

 

 

 

Non-accelerated filer

___  (Do not check if a smaller reporting company)

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 April 18, 2011, the registrant had 522,960,958 common shares, $.01 par value, outstanding.

 



 

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31, 2011

 

PART I

FINANCIAL INFORMATION

PAGE

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three-Month Periods Ended March 31, 2011 and 2010 (unaudited)

1

 

 

 

 

Condensed Consolidated Statements of Financial Position as of March 31, 2011 (unaudited) and December 31, 2010

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2011 and 2010 (unaudited)

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

4

 

 

 

 

Report of Independent Registered Public Accounting Firm

43

 

 

 

Item 2.

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

 

 

 

 

 

Highlights

44

 

Consolidated Net Income

45

 

Property-Liability Highlights

45

 

Allstate Protection Segment

49

 

Discontinued Lines and Coverages Segment

56

 

Property-Liability Investment Results

57

 

Allstate Financial Highlights

58

 

Allstate Financial Segment

58

 

Investments Highlights

64

 

Investments

64

 

Capital Resources and Liquidity Highlights

88

 

Capital Resources and Liquidity

88

 

 

 

Item 4.

Controls and Procedures

92

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

93

 

 

 

Item 1A.

Risk Factors

93

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

93

 

 

 

Item 6.

Exhibits

94

 



 

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

 

 

March 31,

 

 

2011

 

2010

 

 

(unaudited)

Revenues

 

 

 

 

Property-liability insurance premiums

6,448

6,503

Life and annuity premiums and contract charges

 

569

 

544

Net investment income

 

982

 

1,050

Realized capital gains and losses:

 

 

 

 

Total other-than-temporary impairment losses

 

(156)

 

(250)

Portion of loss recognized in other comprehensive income

 

(27)

 

(5)

Net other-than-temporary impairment losses recognized in earnings

 

(183)

 

(255)

Sales and other realized capital gains and losses

 

279

 

(93)

Total realized capital gains and losses

 

96

 

(348)

 

 

8,095

 

7,749

 

 

 

 

 

Costs and expenses

 

 

 

 

Property-liability insurance claims and claims expense

 

4,476

 

4,792

Life and annuity contract benefits

 

454

 

442

Interest credited to contractholder funds

 

418

 

463

Amortization of deferred policy acquisition costs

 

1,051

 

1,014

Operating costs and expenses

 

838

 

829

Restructuring and related charges

 

9

 

11

Interest expense

 

92

 

92

 

 

7,338

 

7,643

 

 

 

 

 

(Loss) gain on disposition of operations

 

(23)

 

1

 

 

 

 

 

Income from operations before income tax expense (benefit)

 

734

 

107

 

 

 

 

 

Income tax expense (benefit)

 

215

 

(13)

 

 

 

 

 

Net income

519

120

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Net income per share - Basic

0.98

0.22

 

 

 

 

 

Weighted average shares - Basic

 

531.0

 

540.5

 

 

 

 

 

Net income per share - Diluted

0.97

0.22

 

 

 

 

 

Weighted average shares - Diluted

 

533.6

 

541.8

 

 

 

 

 

Cash dividends declared per share

0.21

0.20

 

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)

 

March 31,

 

December 31,

 

 

2011

 

2010

Assets

 

(unaudited)

 

 

Investments

 

 

 

 

Fixed income securities, at fair value (amortized cost $79,292 and $78,786)

80,242

79,612

Equity securities, at fair value (cost $3,792 and $4,228)

 

4,437

 

4,811

Mortgage loans

 

6,582

 

6,679

Limited partnership interests

 

4,077

 

3,816

Short-term, at fair value (amortized cost $1,986 and $3,279)

 

1,986

 

3,279

Other

 

2,287

 

2,286

Total investments

 

99,611

 

100,483

Cash

 

641

 

562

Premium installment receivables, net

 

4,842

 

4,839

Deferred policy acquisition costs

 

4,697

 

4,769

Reinsurance recoverables, net

 

6,589

 

6,552

Accrued investment income

 

885

 

809

Deferred income taxes

 

612

 

784

Property and equipment, net

 

912

 

921

Goodwill

 

874

 

874

Other assets

 

2,159

 

1,605

Separate Accounts

 

8,603

 

8,676

Total assets

130,425

130,874

 

 

 

 

 

Liabilities

 

 

 

 

Reserve for property-liability insurance claims and claims expense

19,494

19,468

Reserve for life-contingent contract benefits

 

13,552

 

13,482

Contractholder funds

 

46,834

 

48,195

Unearned premiums

 

9,563

 

9,800

Claim payments outstanding

 

761

 

737

Other liabilities and accrued expenses

 

6,369

 

5,564

Long-term debt

 

5,908

 

5,908

Separate Accounts

 

8,603

 

8,676

Total liabilities

 

111,084

 

111,830

 

 

 

 

 

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, 524 million and 533 million shares outstanding

 

9

 

9

Additional capital paid-in

 

3,156

 

3,176

Retained income

 

32,377

 

31,969

Deferred ESOP expense

 

(42)

 

(44)

Treasury stock, at cost (376 million and 367 million shares)

 

(16,173)

 

(15,910)

Accumulated other comprehensive income:

 

 

 

 

Unrealized net capital gains and losses:

 

 

 

 

Unrealized net capital losses on fixed income securities with OTTI

 

(167)

 

(190)

Other unrealized net capital gains and losses

 

1,186

 

1,089

Unrealized adjustment to DAC, DSI and insurance reserves

 

60

 

36

Total unrealized net capital gains and losses

 

1,079

 

935

Unrealized foreign currency translation adjustments

 

79

 

69

Unrecognized pension and other postretirement benefit cost

 

(1,173)

 

(1,188)

Total accumulated other comprehensive loss

 

(15)

 

(184)

Total shareholders’ equity

 

19,312

 

19,016

Noncontrolling interest

 

29

 

28

Total equity

 

19,341

 

19,044

Total liabilities and equity

130,425

130,874

 

See notes to condensed consolidated financial statements.

 

2



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ in millions)

 

Three months ended

 

 

March 31,

 

 

 

 

 

2011

 

2010

Cash flows from operating activities

 

(unaudited)

Net income

519

120

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

 

 

 

 

Depreciation, amortization and other non-cash items

 

31

 

16

Realized capital gains and losses

 

(96)

 

348

Loss (gain) on disposition of operations

 

23

 

(1)

Interest credited to contractholder funds

 

418

 

463

Changes in:

 

 

 

 

Policy benefits and other insurance reserves

 

(58)

 

188

Unearned premiums

 

(248)

 

(261)

Deferred policy acquisition costs

 

72

 

30

Premium installment receivables, net

 

3

 

24

Reinsurance recoverables, net

 

(117)

 

(72)

Income taxes

 

200

 

73

Other operating assets and liabilities

 

(21)

 

36

Net cash provided by operating activities

 

726

 

964

Cash flows from investing activities

 

 

 

 

Proceeds from sales

 

 

 

 

Fixed income securities

 

8,363

 

4,930

Equity securities

 

642

 

1,990

Limited partnership interests

 

113

 

146

Mortgage loans

 

26

 

3

Other investments

 

63

 

37

Investment collections

 

 

 

 

Fixed income securities

 

1,201

 

1,122

Mortgage loans

 

88

 

263

Other investments

 

77

 

18

Investment purchases

 

 

 

 

Fixed income securities

 

(10,207)

 

(7,099)

Equity securities

 

(144)

 

(556)

Limited partnership interests

 

(334)

 

(185)

Mortgage loans

 

(26)

 

(1)

Other investments

 

(58)

 

(43)

Change in short-term investments, net

 

1,649

 

411

Change in other investments, net

 

(119)

 

(49)

Purchases of property and equipment, net

 

(48)

 

(24)

Disposition of operations

 

(1)

 

--

Net cash provided by investing activities

 

1,285

 

963

Cash flows from financing activities

 

 

 

 

Contractholder fund deposits

 

596

 

828

Contractholder fund withdrawals

 

(2,122)

 

(2,569)

Dividends paid

 

(107)

 

(107)

Treasury stock purchases

 

(305)

 

(5)

Shares reissued under equity incentive plans, net

 

9

 

14

Excess tax benefits on share-based payment arrangements

 

(3)

 

(2)

Other

 

--

 

6

Net cash used in financing activities

 

(1,932)

 

(1,835)

Net increase in cash

 

79

 

92

Cash at beginning of period

 

562

 

612

Cash at end of period

641

704

 

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 March 31, 2011, and for the three-month periods ended March 31, 2011 and 2010 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, 2010.  The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

 

To conform to the current year presentation, certain amounts in the prior year condensed consolidated financial statements and notes have been reclassified.

 

Adopted accounting standards

 

Consolidation Analysis Considering Investments Held through Separate Accounts

 

In April 2010, the Financial Accounting Standards Board (“FASB”) issued guidance clarifying that an insurer is not required to combine interests in investments held in a qualifying separate account with its interests in the same investments held in the general account when performing a consolidation evaluation.  The adoption of this guidance as of January 1, 2011 had no impact on the Company’s results of operations or financial position.

 

Disclosure of Supplementary Pro Forma Information for Business Combinations

 

In December 2010, the FASB issued disclosure guidance for entities that enter into business combinations that are material.  The guidance specifies that if an entity presents comparative financial statements, the entity should disclose proforma revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  The guidance expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination.  The Company will apply the guidance to any business combinations entered into on or after January 1, 2011.

 

Pending accounting standards

 

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

 

In October 2010, the FASB issued guidance modifying the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts.  The guidance specifies that the costs must be based on successful efforts.  The guidance also specifies that advertising costs should be included as deferred acquisition costs only when the direct-response advertising accounting criteria are met.  If application of the guidance would result in the capitalization of acquisition costs that had not been capitalized prior to adoption, the entity may elect not to capitalize those additional costs.  The new guidance is effective for reporting periods beginning after December 15, 2011 and should be applied prospectively, with retrospective application permitted.  The Company is in the process of evaluating the impact of adoption on the Company’s results of operations and financial position.

 

Criteria for Classification as a Troubled Debt Restructuring (“TDR”)

 

In April 2011, the FASB issued clarifying guidance related to determining whether a loan modification or restructuring should be classified as a TDR.  The additional guidance provided pertains to the two criteria used to determine whether a TDR exists, specifically whether the creditor has granted a concession and whether the debtor is experiencing financial difficulties.  The new guidance is effective for reporting periods beginning on or after June 15, 2011 with early adoption permitted.  The guidance related to the identification of a TDR is to be applied retrospectively to the beginning of the annual period of adoption.  The measurement of impairment on a TDR

 

4



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

identified under this guidance is effective prospectively.  Disclosures about the credit quality of financing receivables and the allowance for credit losses previously deferred for TDRs, is also effective for reporting periods beginning on or after June 15, 2011.  The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations and financial position.

 

2.  Earnings per share

 

Basic earnings per share is computed using the weighted average number of common shares outstanding, including unvested participating restricted stock units.  Diluted earnings per 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.

 

The computation of basic and diluted earnings per share for the three months ended March 31 is presented in the following table.

 

($ in millions, except per share data)

 

2011

 

2010

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

519

120

 

 

 

 

 

Denominator:

 

 

 

 

Weighted average common shares outstanding

 

531.0

 

540.5

Effect of dilutive potential common shares:

 

 

 

 

Stock options

 

2.2

 

1.3

Restricted stock units (non-participating)

 

0.4

 

--

Weighted average common and dilutive potential common shares outstanding

 

533.6

 

541.8

 

 

 

 

 

Earnings per share - Basic

0.98

0.22

Earnings per share - Diluted

0.97

0.22

 

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 30.4 million and 24.4 million Allstate common shares, with exercise prices ranging from $27.36 to $62.84 and $27.36 to $64.53, were outstanding for the three-month periods ended March 31, 2011 and 2010, respectively, but were not included in the computation of diluted earnings per share in those periods.

 

3.  Supplemental Cash Flow Information

 

Non-cash investment exchanges, including modifications of certain mortgage loans (primarily refinances at maturity with no concessions granted to the borrower), fixed income securities, limited partnerships and other investments, as well as mergers completed with equity securities, totaled $53 million and $51 million for the three months ended March 31, 2011 and 2010, respectively.

 

5



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Liabilities for collateral received in conjunction with the Company’s securities lending program and over-the-counter (“OTC”) derivatives are reported in other liabilities and accrued expenses or other investments.  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 for the three months ended March 31 are as follows:

 

($ in millions)

 

2011

 

2010

 

 

 

 

 

Net change in proceeds managed

 

 

 

 

Net change in short-term investments

(351)

171

Operating cash flow (used) provided

 

(351)

 

171

Net change in cash

 

(3)

 

6

Net change in proceeds managed

(354)

177

 

 

 

 

 

Net change in liabilities

 

 

 

 

Liabilities for collateral, beginning of year

(484)

(658)

Liabilities for collateral, end of period

 

(838)

 

(481)

Operating cash flow provided (used)

354

(177)

 

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

March 31, 2011

 

 

 

 

 

 

 

 

U.S. government and agencies

6,509

277

(20)

6,766

Municipal

 

15,500

 

367

 

(621)

 

15,246

Corporate

 

41,095

 

1,675

 

(375)

 

42,395

Foreign government

 

2,822

 

306

 

(11)

 

3,117

Residential mortgage-backed securities (“RMBS”)

 

6,907

 

195

 

(572)

 

6,530

Commercial mortgage-backed securities (“CMBS”)

 

2,156

 

63

 

(166)

 

2,053

Asset-backed securities (“ABS”)

 

4,280

 

82

 

(251)

 

4,111

Redeemable preferred stock

 

23

 

1

 

--

 

24

Total fixed income securities

79,292

2,966

(2,016)

80,242

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

 

U.S. government and agencies

8,320

327

(51)

8,596

Municipal

 

16,201

 

379

 

(646)

 

15,934

Corporate

 

36,260

 

1,816

 

(421)

 

37,655

Foreign government

 

2,821

 

347

 

(10)

 

3,158

RMBS

 

8,509

 

216

 

(732)

 

7,993

CMBS

 

2,213

 

58

 

(277)

 

1,994

ABS

 

4,425

 

113

 

(294)

 

4,244

Redeemable preferred stock

 

37

 

1

 

--

 

38

Total fixed income securities

78,786

3,257

(2,431)

79,612

 

6



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Scheduled maturities

 

The scheduled maturities for fixed income securities are as follows as of March 31, 2011:

 

($ in millions)

 

Amortized

 

Fair

 

 

cost

 

value

 

 

 

 

 

Due in one year or less

2,699

2,741

Due after one year through five years

 

24,998

 

25,760

Due after five years through ten years

 

19,348

 

20,199

Due after ten years

 

21,060

 

20,901

 

 

68,105

 

69,601

RMBS and ABS

 

11,187

 

10,641

Total

79,292

80,242

 

Actual maturities may differ from those scheduled as a result of prepayments by the issuers.  Because of the potential for prepayment on RMBS and ABS, they are not categorized by contractual maturity.  CMBS are categorized by contractual maturity because they generally are not subject to prepayment risk.

 

Net investment income

 

Net investment income for the three months ended March 31 is as follows:

 

($ in millions)

 

2011

 

2010

 

 

 

 

 

Fixed income securities

900

959

Equity securities

 

19

 

21

Mortgage loans

 

89

 

104

Limited partnership interests

 

10

 

6

Short-term investments

 

2

 

2

Other

 

11

 

1

Investment income, before expense

 

1,031

 

1,093

Investment expense

 

(49)

 

(43)

Net investment income

982

1,050

 

Realized capital gains and losses

 

Realized capital gains and losses by asset type for the three months ended March 31 are as follows:

 

($ in millions)

 

2011

 

2010

Fixed income securities

(27)

(136)

Equity securities

 

122

 

14

Mortgage loans

 

(6)

 

(25)

Limited partnership interests

 

68

 

(21)

Derivatives

 

(67)

 

(185)

Other

 

6

 

5

Realized capital gains and losses

96

(348)

 

7



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Realized capital gains and losses by transaction type for the three months ended March 31 are as follows:

 

($ in millions)

 

2011

 

2010

Impairment write-downs

(114)

(223)

Change in intent write-downs

 

(69)

 

(32)

Net other-than-temporary impairment losses recognized in earnings

 

(183)

 

(255)

Sales

 

283

 

88

Valuation of derivative instruments

 

22

 

(155)

Settlements of derivative instruments

 

(89)

 

(30)

Equity method of accounting (“EMA”) limited partnership income

 

63

 

4

Realized capital gains and losses

96

(348)

 

Gross gains of $211 million and $142 million and gross losses of $88 million and $74 million were realized on sales of fixed income securities during the three months ended March 31, 2011 and 2010, respectively.

 

Other-than-temporary impairment losses by asset type for the three months ended March 31 are as follows:

 

($ in millions)

 

2011

 

2010

 

 

Gross

 

Included
in OCI

 

Net

 

Gross

 

Included
in OCI

 

Net

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

(27)

(2)

(29)

(37)

--

(37)

Corporate

 

(5)

 

1

 

(4)

 

(47)

 

3

 

(44)

Foreign government

 

(1)

 

--

 

(1)

 

--

 

--

 

--

RMBS

 

(72)

 

(25)

 

(97)

 

(88)

 

(7)

 

(95)

CMBS

 

(16)

 

(4)

 

(20)

 

(26)

 

--

 

(26)

ABS

 

(7)

 

3

 

(4)

 

(3)

 

(1)

 

(4)

Total fixed income securities

 

(128)

 

(27)

 

(155)

 

(201)

 

(5)

 

(206)

Equity securities

 

(20)

 

--

 

(20)

 

(6)

 

--

 

(6)

Mortgage loans

 

(6)

 

--

 

(6)

 

(19)

 

--

 

(19)

Limited partnership interests

 

(1)

 

--

 

(1)

 

(24)

 

--

 

(24)

Other

 

(1)

 

--

 

(1)

 

--

 

--

 

--

Other-than-temporary impairment losses

(156)

(27)

(183)

(250)

(5)

(255)

 

The total amount of other-than-temporary impairment losses included in accumulated other comprehensive income at the time of impairment for fixed income securities, which were not included in earnings, are presented in the following table.  The amount excludes $274 million and $322 million as of March 31, 2011 and December 31, 2010, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.

 

($ in millions)

 

March 31,

 

December 31,

 

 

2011

 

2010

Municipal

(14)

(27)

Corporate

 

(32)

 

(31)

RMBS

 

(417)

 

(467)

CMBS

 

(42)

 

(49)

ABS

 

(26)

 

(41)

Total

(531)

(615)

 

8


 


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Rollforwards of the cumulative credit losses recognized in earnings for fixed income securities held as of March 31 are as follows:

 

 

 

Three months ended
March 31

 

($ in millions)

 

2011

 

 

2010

 

Beginning balance

$

(1,046

)

$

(1,187

)

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

 

(59

)

 

(101

)

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

 

(27

)

 

(79

)

Reduction in credit loss for securities disposed or collected

 

153

 

 

131

 

Reduction in credit loss for securities the Company has made the decision to sell or more likely than not will be required to sell

 

15

 

 

--

 

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

 

1

 

 

--

 

Ending balance

$

(963

)

$

(1,236

)

 

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

 

9



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

March 31, 2011

 

value

 

 

Gains

 

 

Losses

 

 

gains (losses)

Fixed income securities

$

80,242

 

$

2,966

 

$

(2,016

)

 

$

950

 

Equity securities

 

4,437

 

 

707

 

 

(62

)

 

 

645

 

Short-term investments

 

1,986

 

 

--

 

 

--

 

 

 

--

 

Derivative instruments (1)

 

(26

)

 

--

 

 

(30

)

 

 

(30

)

EMA limited partnership interests (2)

 

 

 

 

 

 

 

 

 

 

 

7

 

Unrealized net capital gains and losses, pre-tax

 

 

 

 

 

 

 

 

 

 

 

1,572

 

Amounts recognized for:

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance reserves (3)

 

 

 

 

 

 

 

 

 

 

 

(2

)

DAC and DSI (4)

 

 

 

 

 

 

 

 

 

 

 

95

 

Amounts recognized

 

 

 

 

 

 

 

 

 

 

 

93

 

Deferred income taxes

 

 

 

 

 

 

 

 

 

 

 

(586

)

Unrealized net capital gains and losses, after-tax

 

 

 

 

 

 

 

 

 

 

$

1,079

 

 


(1)         Included in the fair value of derivative instruments are $(4) million classified as assets and $22 million classified as liabilities.

(2)         Unrealized net capital gains and losses for limited partnership interest represent the Company’s share of EMA limited partnerships’ other comprehensive income.  Fair value and gross gains and losses are not applicable.

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

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

 

 

 

Fair

 

 

Gross unrealized

 

Unrealized net

December 31, 2010

 

value

 

 

Gains

 

 

Losses

 

 

gains (losses)

Fixed income securities

$

79,612

 

$

3,257

 

$

(2,431

)

 

$

826

 

Equity securities

 

4,811

 

 

646

 

 

(63

)

 

 

583

 

Short-term investments

 

3,279

 

 

--

 

 

--

 

 

 

--

 

Derivative instruments (1)

 

(17

)

 

2

 

 

(24

)

 

 

(22

)

Unrealized net capital gains and losses, pre-tax

 

 

 

 

 

 

 

 

 

 

 

1,387

 

Amounts recognized for:

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance reserves

 

 

 

 

 

 

 

 

 

 

 

(41

)

DAC and DSI

 

 

 

 

 

 

 

 

 

 

 

97

 

Amounts recognized

 

 

 

 

 

 

 

 

 

 

 

56

 

Deferred income taxes

 

 

 

 

 

 

 

 

 

 

 

(508

)

Unrealized net capital gains and losses, after-tax

 

 

 

 

 

 

 

 

 

 

$

935

 

 


(1)    Included in the fair value of derivative instruments are $2 million classified as assets and $19 million classified as liabilities.

 

10



 

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 three months ended March 31, 2011 is as follows:

 

($ in millions)

 

 

 

 

 

 

 

 

 

Fixed income securities

$

124

 

 

Equity securities

 

62

 

 

Derivative instruments

 

(8

)

 

EMA limited partnership interests

 

7

 

 

Total

 

185

 

 

Amounts recognized for:

 

 

 

 

Insurance reserves

 

39

 

 

DAC and DSI

 

(2

)

 

Increase in amounts recognized

 

37

 

 

Deferred income taxes

 

(78

)

 

Increase in unrealized net capital gains and losses

$

144

 

 

 

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 the 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 considered 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 whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security.  The Company calculates the estimated recovery value by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, and compares this to 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 related to other factors recognized in other comprehensive income.

 

For equity securities, the Company considers various factors, including whether it 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.  For equity securities managed by a third party, the Company has contractually retained its decision making authority as it pertains to selling equity securities that are in an unrealized loss position.

 

The Company’s portfolio monitoring process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its amortized cost (for fixed income securities) or cost (for equity securities) is below established thresholds.  The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and 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 and future earnings potential of the issue or issuer.  Some of the factors considered in evaluating whether a decline in fair value is other than temporary are: 1) 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; 2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and 3) the length of time and extent to which the fair value has been less than amortized cost or cost.

 

11



 

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

 

March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

33

$

1,565

$

(20

)

 

--

$

--

$

--

 

$

(20

)

Municipal

 

815

 

3,767

 

(174

)

 

395

 

2,573

 

(447

)

 

(621

)

Corporate

 

597

 

9,339

 

(188

)

 

144

 

1,959

 

(187

)

 

(375

)

Foreign government

 

55

 

357

 

(11

)

 

1

 

10

 

--

 

 

(11

)

RMBS

 

281

 

493

 

(13

)

 

357

 

1,458

 

(559

)

 

(572

)

CMBS

 

13

 

128

 

(3

)

 

95

 

721

 

(163

)

 

(166

)

ABS

 

58

 

815

 

(6

)

 

122

 

1,268

 

(245

)

 

(251

)

Total fixed income securities

 

1,852

 

16,464

 

(415

)

 

1,114

 

7,989

 

(1,601

)

 

(2,016

)

Equity securities

 

788

 

600

 

(53

)

 

38

 

74

 

(9

)

 

(62

)

Total fixed income and equity Securities

 

2,640

$

17,064

$

(468

)

 

1,152

$

8,063

$

(1,610

)

$

(2,078

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade fixed income securities

 

1,702

$

15,130

$

(372

)

 

750

$

5,468

$

(721

)

$

(1,093

)

Below investment grade fixed income securities

 

150

 

1,334

 

(43

)

 

364

 

2,521

 

(880

)

 

(923

)

Total fixed income securities

 

1,852

$

16,464

$

(415

)

 

1,114

$

7,989

$

(1,601

)

$

(2,016

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

32

$

2,081

$

(51

)

 

--

$

--

$

--

 

$

(51

)

Municipal

 

847

 

4,130

 

(175

)

 

411

 

2,715

 

(471

)

 

(646

)

Corporate

 

438

 

5,994

 

(186

)

 

150

 

1,992

 

(235

)

 

(421

)

Foreign government

 

33

 

277

 

(9

)

 

1

 

10

 

(1

)

 

(10

)

RMBS

 

280

 

583

 

(12

)

 

422

 

1,939

 

(720

)

 

(732

)

CMBS

 

14

 

158

 

(3

)

 

114

 

835

 

(274

)

 

(277

)

ABS

 

68

 

762

 

(8

)

 

133

 

1,313

 

(286

)

 

(294

)

Total fixed income securities

 

1,712

 

13,985

 

(444

)

 

1,231

 

8,804

 

(1,987

)

 

(2,431

)

Equity securities

 

773

 

610

 

(48

)

 

44

 

91

 

(15

)

 

(63

)

Total fixed income and equity securities

 

2,485

$

14,595

$

(492

)

 

1,275

$

8,895

$

(2,002

)

$

(2,494

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade fixed income securities

 

1,607

$

13,280

$

(408

)

 

857

$

6,217

$

(943

)

$

(1,351

)

Below investment grade fixed income securities

 

105

 

705

 

(36

)

 

374

 

2,587

 

(1,044

)

 

(1,080

)

Total fixed income securities

 

1,712

$

13,985

$

(444

)

 

1,231

$

8,804

$

(1,987

)

$

(2,431

)

 

As of March 31, 2011, $1.04 billion of unrealized losses are related to securities with an unrealized loss position less than 20% of amortized cost or cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired.  Of the $1.04 billion, $805 million are related to unrealized losses on investment grade fixed income securities.  Investment grade is defined as a security having 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, Dominion or Realpoint, a rating of 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 widening credit spreads or rising interest rates since the time of initial purchase.

 

As of March 31, 2011, the remaining $1.04 billion of unrealized losses are related to securities in unrealized loss positions greater than or equal to 20% of amortized cost or cost.  Investment grade fixed income securities comprising $288 million of these unrealized losses were evaluated based on factors such as expected cash flows and the financial condition and near-term and long-term prospects of the issue or issuer and were determined to have adequate resources to fulfill contractual obligations.  Of the $1.04 billion, $734 million are related to below investment grade fixed income securities and $14 million are related to equity securities.  Of these amounts, $627 million 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 March 31, 2011.  Unrealized losses on below investment grade securities are principally related to RMBS, CMBS and ABS and were the result of wider credit spreads resulting from higher

 

12



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

risk premiums since the time of initial purchase, largely due to macroeconomic conditions and credit market deterioration, including the impact of lower real estate valuations.

 

RMBS, CMBS and ABS in an unrealized loss position were evaluated based on actual and projected collateral losses relative to the securities’ positions in the respective securitization trusts, security specific expectations of cash flows, and credit ratings.  This evaluation also takes into consideration credit enhancement, measured in terms of (i) subordination from other classes of securities in the trust that are contractually obligated to absorb losses before the class of security the Company owns, (ii) the expected impact of other structural features embedded in the securitization trust beneficial to the class of securities the Company owns, such as overcollateralization and excess spread, and (iii) for RMBS and ABS in an unrealized loss position, credit enhancements from reliable bond insurers, where applicable.  Municipal bonds in an unrealized loss position were evaluated based on the quality of the underlying securities, taking into consideration credit enhancements from reliable bond insurers, where applicable.  Unrealized losses on equity securities are primarily related to equity market fluctuations.

 

As of March 31, 2011, the Company has not made the 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 March 31, 2011, the Company had the intent and ability to hold equity securities with unrealized losses for a period of time sufficient for them to recover.

 

Limited partnerships

 

As of March 31, 2011 and December 31, 2010, the carrying value of equity method limited partnership interests totaled $2.70 billion and $2.47 billion, respectively.  The Company recognizes an impairment loss for equity method investments when evidence demonstrates that the loss is other than temporary.  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 a level of earnings that would justify the carrying amount of the investment.  The Company had no write-downs related to equity method limited partnership interests for the three months ended March 31, 2011 and 2010.

 

As of March 31, 2011 and December 31, 2010, the carrying value for cost method limited partnership interests was $1.38 billion and $1.35 billion, respectively.  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: significantly reduced valuations of the investments held by the limited partnerships; 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; 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’s portfolio monitoring process includes a quarterly review of all cost method limited partnerships to identify instances where the net asset value is below established thresholds for certain periods of time, as well as investments that are performing below expectations, for further impairment consideration.  If a cost method limited partnership is other-than-temporarily impaired, the carrying value is written down to fair value, generally estimated to be equivalent to the reported net asset value of the underlying funds.  The Company had write-downs related to cost method investments for the three months ended March 31, 2011 and 2010 of $1 million and $24 million, respectively.

 

Mortgage loans

 

Mortgage loans are evaluated for impairment on a specific loan basis through a quarterly credit monitoring process and review of key credit quality indicators.  Mortgage loans are considered impaired when it is probable that the Company will not collect the contractual principal and interest.  Valuation allowances are established for impaired loans to reduce the carrying value to the fair value of the collateral less costs to sell or the present value of the loan’s expected future repayment cash flows discounted at the loan’s original effective interest rate.  Impaired mortgage loans may not have a valuation allowance when the fair value of the collateral less costs to sell is higher than the carrying value.  Mortgage loan valuation allowances are charged off when there is no reasonable expectation of recovery.  The impairment evaluation is non-statistical in respect to the aggregate portfolio but considers facts and circumstances attributable to each loan.  It is not considered probable that additional impairment losses, beyond those identified on a specific loan basis, have been incurred as of March 31, 2011.

 

13



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Accrual of income is suspended for mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable.  Cash receipts on mortgage loans on nonaccrual status are generally recorded as a reduction of carrying value.

 

Debt service coverage ratio is considered a key credit quality indicator when mortgage loans are evaluated for impairment.  Debt service coverage ratio represents the amount of estimated cash flows from the property available to the borrower to meet principal and interest payment obligations.  Debt service coverage ratio estimates are updated annually or more frequently if conditions are warranted based on the Company’s credit monitoring process.  The following table reflects the carrying value of non-impaired fixed rate and variable rate mortgage loans summarized by debt service coverage ratio distribution:

 

($ in millions)

 

March 31, 2011

 

December 31, 2010

 

Debt service coverage
ratio distribution

 

Fixed rate
mortgage
loans

 

Variable rate
mortgage
loans

 

Total

 

Fixed rate
mortgage
loans

 

Variable rate
mortgage
loans

 

Total

 

Below 1.0

$

257

$

--

$

257

$

280

$

--

$

280

 

1.0 - 1.25

 

1,527

 

15

 

1,542

 

1,583

 

16

 

1,599

 

1.26 - 1.50

 

1,513

 

5

 

1,518

 

1,520

 

5

 

1,525

 

Above 1.50

 

2,577

 

518

 

3,095

 

2,540

 

546

 

3,086

 

Total non-impaired mortgage loans

$

5,874

$

538

$

6,412

$

5,923

$

567

$

6,490

 

 

Mortgage loans with a debt service coverage ratio below 1.0 that are not considered impaired primarily relate to instances where the borrower has the financial capacity to fund the revenue shortfalls from the properties for the foreseeable term, the decrease in cash flows from the properties is considered temporary, or there are other risk mitigating circumstances such as additional collateral, escrow balances or borrower guarantees.

 

The net carrying value of impaired mortgage loans is as follows:

 

($ in millions)

 

March 31,
2011

 

December 31,
2010

 

Impaired mortgage loans with a valuation allowance

$

148

$

168

 

Impaired mortgage loans without a valuation allowance

 

22

 

21

 

Total impaired mortgage loans

$

170

$

189

 

Valuation allowance on impaired mortgage loans

$

77

$

84

 

 

The average balance of impaired loans was $180 million during the three months ended March 31, 2011.

 

The rollforward of the valuation allowance on impaired mortgage loans for the three months ended March 31, 2011 is as follows:

 

($ in millions)

 

 

 

Beginning balance

$

84

 

Net increase in valuation allowance

 

6

 

Charge offs

 

(13

)

Ending balance

$

77

 

 

The carrying value of past due mortgage loans is as follows:

 

($ in millions)

 

March 31,
2011

 

December 31,
2010

 

Less than 90 days past due

$

1

$

12

 

90 days or greater past due

 

65

 

78

 

Total past due

 

66

 

90

 

Current loans

 

6,516

 

6,589

 

Total mortgage loans

$

6,582

$

6,679

 

 

14



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5.  Fair Value of Assets and Liabilities

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  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.

 

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.

 

The Company has two types of situations where investments are classified as Level 3 in the fair value hierarchy.  The first is where quotes continue to be received from independent third-party valuation service providers and all significant inputs are market observable; however, there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity such that the degree of market observability has declined to a point where categorization as a Level 3 measurement is considered appropriate.  The indicators considered in determining whether a significant decrease in the volume and level of activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, the level of credit spreads over historical levels, applicable bid-ask spreads, and price consensus among market participants and other pricing sources.

 

The second situation where the Company classifies securities in Level 3 is where specific inputs significant to the fair value estimation models are not market observable.  This occurs in two primary instances.  The first relates to the Company’s use of broker quotes.  The second relates to auction rate securities (“ARS”) backed by student loans for which a key input, the anticipated date liquidity will return to this market, is not market observable.

 

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, derivatives embedded in fixed income securities are not disclosed in the hierarchy as free-standing derivatives since they are presented with the host contracts in fixed income securities.

 

In determining fair value, the Company principally uses the market approach which generally utilizes market transaction data for the same or similar instruments.  To a lesser extent, the Company uses the income approach which involves determining fair values from discounted cash flow methodologies.  For the majority of Level 2 and Level 3 valuations, a combination of the market and income approaches is used.

 

15



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.

 

Municipal:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.

 

Corporate, including privately placed:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.  Also included are privately placed securities valued using a discounted cash flow model that is widely accepted in the financial services industry and uses market observable inputs and inputs derived principally from, or corroborated by, observable market data.  The primary inputs to the discounted cash flow model include an interest rate yield curve, as well as published credit spreads for similar assets in markets that are not active that incorporate the credit quality and industry sector of the issuer.

 

Foreign government:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.

 

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 - other:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads.

 

CMBS:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, collateral performance and credit spreads.

 

Redeemable preferred stock:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, underlying stock prices and credit spreads.

 

·                  Equity securities:  The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that are not active.

 

·                  Short-term:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.  For certain short-term investments, amortized cost is used as the best estimate of fair value.

 

·                  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.

 

16



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

OTC derivatives, including interest rate swaps, foreign currency swaps, foreign exchange forward contracts, and certain credit default swaps, are valued using models that rely on inputs such as interest rate yield curves, currency rates, and counterparty credit spreads 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.

 

Level 3 measurements

 

·                  Fixed income securities:

 

Municipal:  ARS primarily backed by student loans that have become illiquid due to failures in the auction market are valued using a discounted cash flow model that is widely accepted in the financial services industry and uses significant non-market observable inputs, including estimates of future coupon rates if auction failures continue, the anticipated date liquidity will return to the market and illiquidity premium.  Also included are municipal bonds that are not rated by third party credit rating agencies but are rated by the National Association of Insurance Commissioners (“NAIC”), and other high-yield municipal bonds.  The primary inputs to the valuation of these municipal bonds include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields and credit spreads.

 

Corporate, including privately placed:  Primarily valued based on non-binding broker quotes.  Also included are equity-indexed notes which are valued using a discounted cash flow model that is widely accepted in the financial services industry and uses significant non-market observable inputs, such as volatility.  Other inputs include an interest rate yield curve, as well as published credit spreads for similar assets that incorporate the credit quality and industry sector of the issuer.

 

RMBS - Subprime residential mortgage-backed securities (“Subprime”), Prime and Alt-A:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads.  Also included are Subprime, Prime and Alt-A securities that 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 securities are categorized as Level 3.

 

CMBS:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields, collateral performance and credit spreads.  Also included are CMBS that 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, 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 - other:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads.  Also included are ABS that 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, certain ABS are categorized as Level 3.

 

·                  Other investments:  Certain OTC derivatives, such as interest rate caps and floors, certain credit default swaps and OTC options (including swaptions), are valued using models that are widely accepted in the financial services industry.  These are categorized as Level 3 as a result of the significance of non-market observable inputs such as volatility.  Other primary inputs include interest rate yield curves and credit spreads.

 

17



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

·                  Contractholder funds:  Derivatives embedded in certain life and 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 primarily use stochastically determined cash flows based on the contractual elements of embedded derivatives, projected option cost and applicable market data, such as interest rate yield curves and equity index volatility assumptions.  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 written-down to fair value in connection with recognizing impairments are valued based on the fair value of the underlying collateral less costs to sell.  Limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments are valued using net asset values.

 

The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2011:

 

($ in millions)

 

Quoted prices
in active
markets for
identical
assets

 

Significant
other
observable
inputs

 

Significant
unobservable
inputs

 

Counterparty
and cash
collateral

 

Balance
as of
March 31,

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

netting

 

2011

Assets

 

 

 

 

 

 

 

 

 

 

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

   U.S. government and agencies

$

4,581

$

2,185

$

--

 

 

$

6,766

   Municipal

 

--

 

13,382

 

1,864

 

 

 

15,246

   Corporate

 

--

 

40,360

 

2,035

 

 

 

42,395

   Foreign government

 

--

 

3,117

 

--

 

 

 

3,117

   RMBS

 

--

 

5,132

 

1,398

 

 

 

6,530

   CMBS

 

--

 

1,058

 

995

 

 

 

2,053

   ABS

 

--

 

2,020

 

2,091

 

 

 

4,111

   Redeemable preferred stock

 

--

 

23

 

1

 

 

 

24

Total fixed income securities

 

4,581

 

67,277

 

8,384

 

 

 

80,242

Equity securities

 

3,980

 

414

 

43

 

 

 

4,437

Short-term investments

 

232

 

1,754

 

--

 

 

 

1,986

Other investments:

 

 

 

 

 

 

 

 

 

 

Free-standing derivatives

 

--

 

599

 

9

$

(96)

 

512

Separate account assets

 

8,603

 

--

 

--

 

 

 

8,603

Other assets

 

--

 

--

 

1

 

 

 

1

Total recurring basis assets

 

17,396

 

70,044

 

8,437

 

(96)

 

95,781

Non-recurring basis (1)

 

--

 

--

 

42

 

 

 

42

Total assets at fair value

$

17,396

$

70,044

$

8,479

$

(96)

$

95,823

% of total assets at fair value

 

18.2 %

 

 73.1 %

 

8.8 %

 

(0.1) %

 

100.0 %

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Contractholder funds:

 

 

 

 

 

 

 

 

 

 

Derivatives embedded in life and annuity contracts

$

--

$

-- 

$

(630)

 

 

$

(630)

Other liabilities:

 

 

 

 

 

 

 

 

 

 

Free-standing derivatives

 

--

 

(372)

 

(80)

$

93 

 

(359)

Total liabilities at fair value

$

--

$

(372)

$

(710)

$

93 

$

(989)

% of total liabilities at fair value

 

-- %

 

37.6 %

 

71.8 %

 

(9.4) %

 

100.0 %

 

_______________

(1) Includes $31 million of mortgage loans, $1 million of limited partnership interests and $10 million of other investments written-down to fair value in connection with recognizing other-than-temporary impairments.

 

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 December 31, 2010:

 

($ in millions)

 

Quoted prices
in active
markets for
identical
assets

 

Significant
other
observable
inputs

 

Significant
unobservable
inputs

 

Counterparty
and cash
collateral

 

Balance
as of
December 31,

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

netting

 

2010

Assets

 

 

 

 

 

 

 

 

 

 

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

   U.S. government and agencies

$

4,976

$

3,620

$

--

 

 

$

8,596

   Municipal

 

--

 

13,918

 

2,016

 

 

 

15,934

   Corporate

 

--

 

35,747

 

1,908

 

 

 

37,655

   Foreign government

 

--

 

3,158

 

--

 

 

 

3,158

   RMBS

 

--

 

6,199

 

1,794

 

 

 

7,993

   CMBS

 

--

 

1,071

 

923

 

 

 

1,994

   ABS

 

--

 

1,827

 

2,417

 

 

 

4,244

   Redeemable preferred stock

 

--

 

37

 

1

 

 

 

38

Total fixed income securities

 

4,976

 

65,577

 

9,059

 

 

 

79,612

Equity securities

 

4,316

 

432

 

63

 

 

 

4,811

Short-term investments

 

174

 

3,105

 

--

 

 

 

3,279

Other investments:

 

 

 

 

 

 

 

 

 

 

Free-standing derivatives

 

--

 

651

 

74

$

(286)

 

439

Separate account assets

 

8,676

 

--

 

--

 

 

 

8,676

Other assets

 

--

 

--

 

1

 

 

 

1

Total recurring basis assets

 

18,142

 

69,765

 

9,197

 

(286)

 

96,818

Non-recurring basis (1)

 

--

 

--

 

120

 

 

 

120

Total assets at fair value

$

18,142

$

69,765

$

9,317

$

(286)

$

96,938

% of total assets at fair value

 

18.7 %

 

72.0 %

 

9.6 %

 

(0.3) %

 

100.0 %

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Contractholder funds:

 

 

 

 

 

 

 

 

 

 

Derivatives embedded in life and annuity contracts

$

--

$

--

$

(653)

 

 

$

(653)

Other liabilities:

 

 

 

 

 

 

 

 

 

 

Free-standing derivatives

 

(2)

 

(529)

 

(95)

$

263

 

(363)

Total liabilities at fair value

$

(2)

$

(529)

$

(748)

$

263

$

(1,016)

% of total liabilities at fair value

 

0.2 %

 

52.1 %

 

73.6 %

 

(25.9) %

 

100.0 %

 

_______________

(1) Includes $111 million of mortgage loans and $9 million of limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments.

 

19



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the three months ended March 31, 2011.

 

($ in millions)

 

 

 

Total realized and
unrealized gains (losses)
included in:

 

 

 

 

 

 

 

Balance as of
December 31,
2010

 

Net
income 
(1)

 

OCI on
Statement
of Financial
Position

 

Transfers
into
Level 3

 

Transfers
out of
Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

  Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

Municipal

$

2,016

$

(11)

$

21

$

--

$

(37)

 

Corporate

 

1,908

 

12

 

10

 

95

 

(47)

 

RMBS

 

1,794

 

(61)

 

105

 

--

 

(45)

 

CMBS

 

923

 

(21)

 

114

 

56

 

(59)

 

ABS

 

2,417

 

44

 

16

 

--

 

(304)

 

Redeemable preferred stock

 

1

 

--

 

--

 

--

 

--

 

Total fixed income securities

 

9,059

 

(37)

 

266

 

151

 

(492)

 

Equity securities

 

63

 

(10)

 

--

 

--

 

(10)

 

 Other investments:

 

 

 

 

 

 

 

 

 

 

 

Free-standing derivatives, net

 

(21)

 

(31)

 

--

 

--