10-Q 1 a12-19927_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, 2012

 

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 October 17, 2012, the registrant had 418,222,228 common shares, $.01 par value, outstanding.

 



 

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2012

 

 

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, 2012 and 2011 (unaudited)

1

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three-Month and Nine-Month Periods Ended September 30, 2012 and 2011 (unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Financial Position as of September 30, 2012 (unaudited) and December 31, 2011

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2012 and 2011 (unaudited)

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

5

 

 

 

 

Report of Independent Registered Public Accounting Firm

50

 

 

 

Item 2.

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

 

 

 

 

 

Highlights

51

 

Consolidated Net Income

52

 

Property-Liability Highlights

52

 

Allstate Protection Segment

57

 

Discontinued Lines and Coverages Segment

68

 

Property-Liability Investment Results

69

 

Allstate Financial Highlights

69

 

Allstate Financial Segment

70

 

Investments Highlights

78

 

Investments

78

 

Capital Resources and Liquidity Highlights

93

 

Capital Resources and Liquidity

93

 

 

 

Item 4.

Controls and Procedures

97

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

98

 

 

 

Item 1A.

Risk Factors

98

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

98

 

 

 

Item 6.

Exhibits

98

 



 

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

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

 

(unaudited)

 

 

(unaudited)

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property-liability insurance premiums

$

6,697

 

 

$

6,432

 

 

$

19,993

 

 

$

19,337

 

Life and annuity premiums and contract charges

 

563

 

 

 

552

 

 

 

1,675

 

 

 

1,668

 

Net investment income

 

940

 

 

 

994

 

 

 

2,977

 

 

 

2,996

 

Realized capital gains and losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses

 

(39

)

 

 

(197

)

 

 

(195

)

 

 

(435

)

Portion of loss recognized in other comprehensive income

 

(7

)

 

 

(6

)

 

 

16

 

 

 

(37

)

Net other-than-temporary impairment losses recognized in earnings

 

(46

)

 

 

(203

)

 

 

(179

)

 

 

(472

)

Sales and other realized capital gains and losses

 

(26

)

 

 

467

 

 

 

302

 

 

 

889

 

Total realized capital gains and losses

 

(72

)

 

 

264

 

 

 

123

 

 

 

417

 

 

 

8,128

 

 

 

8,242

 

 

 

24,768

 

 

 

24,418

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property-liability insurance claims and claims expense

 

4,293

 

 

 

5,132

 

 

 

13,442

 

 

 

15,963

 

Life and annuity contract benefits

 

453

 

 

 

455

 

 

 

1,354

 

 

 

1,331

 

Interest credited to contractholder funds

 

215

 

 

 

405

 

 

 

959

 

 

 

1,240

 

Amortization of deferred policy acquisition costs

 

1,016

 

 

 

1,046

 

 

 

2,937

 

 

 

2,990

 

Operating costs and expenses

 

1,010

 

 

 

888

 

 

 

3,023

 

 

 

2,656

 

Restructuring and related charges

 

9

 

 

 

8

 

 

 

25

 

 

 

28

 

Interest expense

 

93

 

 

 

92

 

 

 

281

 

 

 

275

 

 

 

7,089

 

 

 

8,026

 

 

 

22,021

 

 

 

24,483

 

Gain (loss) on disposition of operations

 

9

 

 

 

3

 

 

 

15

 

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

1,048

 

 

 

219

 

 

 

2,762

 

 

 

(75

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

325

 

 

 

44

 

 

 

850

 

 

 

(150

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

723

 

 

$

175

 

 

$

1,912

 

 

$

75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share - Basic

$

1.49

 

 

$

0.34

 

 

$

3.89

 

 

$

0.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - Basic

 

485.9

 

 

 

512.0

 

 

 

491.5

 

 

 

520.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share - Diluted

$

1.48

 

 

$

0.34

 

 

$

3.86

 

 

$

0.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - Diluted

 

489.9

 

 

 

514.2

 

 

 

494.7

 

 

 

522.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

$

0.22

 

 

$

0.21

 

 

$

0.66

 

 

$

0.63

 

 

 

 

See notes to condensed consolidated financial statements.

1



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

($ in millions)

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

 

(unaudited)

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

723

 

 

$

175

 

 

$

1,912

 

 

$

75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), after-tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net capital gains and losses

 

810

 

 

 

(410

)

 

 

1,480

 

 

 

117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized foreign currency translation adjustments

 

12

 

 

 

(33

)

 

 

14

 

 

 

(19

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized pension and other postretirement benefit cost

 

20

 

 

 

21

 

 

 

64

 

 

 

53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), after-tax

 

842

 

 

 

(422

)

 

 

1,558

 

 

 

151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

$

1,565

 

 

$

(247

)

 

$

3,470

 

 

$

226

 

 

 

 

See notes to condensed consolidated financial statements.

2



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

($ in millions, except par value data)

 

September 30,

 

 

 

December 31,

 

 

2012

 

 

 

2011

Assets

 

(unaudited)

 

 

 

 

 

Investments

 

 

 

 

 

 

 

Fixed income securities, at fair value (amortized cost $72,432 and $73,379)

$

77,729

 

 

$

76,113

 

Equity securities, at fair value (cost $3,429 and $4,203)

 

3,876

 

 

 

4,363

 

Mortgage loans

 

6,904

 

 

 

7,139

 

Limited partnership interests

 

4,974

 

 

 

4,697

 

Short-term, at fair value (amortized cost $2,825 and $1,291)

 

2,825

 

 

 

1,291

 

Other

 

2,208

 

 

 

2,015

 

Total investments

 

98,516

 

 

 

95,618

 

Cash

 

642

 

 

 

776

 

Premium installment receivables, net

 

5,108

 

 

 

4,920

 

Deferred policy acquisition costs

 

3,578

 

 

 

3,871

 

Reinsurance recoverables, net

 

7,278

 

 

 

7,251

 

Accrued investment income

 

835

 

 

 

826

 

Deferred income taxes

 

--

 

 

 

722

 

Property and equipment, net

 

928

 

 

 

914

 

Goodwill

 

1,242

 

 

 

1,242

 

Other assets

 

2,041

 

 

 

2,069

 

Separate Accounts

 

6,820

 

 

 

6,984

 

Total assets

$

126,988

 

 

$

125,193

 

Liabilities

 

 

 

 

 

 

 

Reserve for property-liability insurance claims and claims expense

$

20,197

 

 

$

20,375

 

Reserve for life-contingent contract benefits

 

14,900

 

 

 

14,406

 

Contractholder funds

 

40,110

 

 

 

42,332

 

Unearned premiums

 

10,494

 

 

 

10,057

 

Claim payments outstanding

 

763

 

 

 

827

 

Deferred income taxes

 

689

 

 

 

--

 

Other liabilities and accrued expenses

 

6,121

 

 

 

5,978

 

Long-term debt

 

6,057

 

 

 

5,908

 

Separate Accounts

 

6,820

 

 

 

6,984

 

Total liabilities

 

106,151

 

 

 

106,867

 

 

 

 

 

 

 

 

 

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,
483 million and 501 million shares outstanding

 

9

 

 

 

9

 

Additional capital paid-in

 

3,154

 

 

 

3,189

 

Retained income

 

33,496

 

 

 

31,909

 

Deferred ESOP expense

 

(41

)

 

 

(43

)

Treasury stock, at cost (417 million and 399 million shares)

 

(17,368

)

 

 

(16,795

)

Accumulated other comprehensive income:

 

 

 

 

 

 

 

Unrealized net capital gains and losses:

 

 

 

 

 

 

 

Unrealized net capital losses on fixed income securities with OTTI

 

(42

)

 

 

(174

)

Other unrealized net capital gains and losses

 

3,765

 

 

 

2,041

 

Unrealized adjustment to DAC, DSI and insurance reserves

 

(843

)

 

 

(467

)

Total unrealized net capital gains and losses

 

2,880

 

 

 

1,400

 

Unrealized foreign currency translation adjustments

 

70

 

 

 

56

 

Unrecognized pension and other postretirement benefit cost

 

(1,363

)

 

 

(1,427

)

Total accumulated other comprehensive income

 

1,587

 

 

 

29

 

Total shareholders’ equity

 

20,837

 

 

 

18,298

 

Noncontrolling interest

 

--

 

 

 

28

 

Total equity

 

20,837

 

 

 

18,326

 

Total liabilities and equity

$

126,988

 

 

$

125,193

 

 

 

 

See notes to condensed consolidated financial statements.

3



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ in millions)

 

Nine Months Ended

 

 

September 30,

 

 

2012

 

 

2011

 

 

(unaudited)

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

$

1,912

 

 

$

75

 

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

 

 

 

 

 

 

 

Depreciation, amortization and other non-cash items

 

293

 

 

 

149

 

Realized capital gains and losses

 

(123

)

 

 

(417

)

(Gain) loss on disposition of operations

 

(15

)

 

 

10

 

Interest credited to contractholder funds

 

959

 

 

 

1,240

 

Changes in:

 

 

 

 

 

 

 

Policy benefits and other insurance reserves

 

(769

)

 

 

546

 

Unearned premiums

 

421

 

 

 

220

 

Deferred policy acquisition costs

 

13

 

 

 

129

 

Premium installment receivables, net

 

(178

)

 

 

(158

)

Reinsurance recoverables, net

 

(139

)

 

 

(275

)

Income taxes

 

669

 

 

 

(183

)

Other operating assets and liabilities

 

(425

)

 

 

335

 

Net cash provided by operating activities

 

2,618

 

 

 

1,671

 

Cash flows from investing activities

 

 

 

 

 

 

 

Proceeds from sales

 

 

 

 

 

 

 

Fixed income securities

 

13,952

 

 

 

23,916

 

Equity securities

 

1,345

 

 

 

1,116

 

Limited partnership interests

 

1,067

 

 

 

762

 

Mortgage loans

 

11

 

 

 

74

 

Other investments

 

104

 

 

 

149

 

Investment collections

 

 

 

 

 

 

 

Fixed income securities

 

3,892

 

 

 

3,864

 

Mortgage loans

 

682

 

 

 

491

 

Other investments

 

70

 

 

 

105

 

Investment purchases

 

 

 

 

 

 

 

Fixed income securities

 

(16,809

)

 

 

(21,900

)

Equity securities

 

(385

)

 

 

(1,066

)

Limited partnership interests

 

(1,232

)

 

 

(1,159

)

Mortgage loans

 

(472

)

 

 

(896

)

Other investments

 

(275

)

 

 

(199

)

Change in short-term investments, net

 

(1,284

)

 

 

64

 

Change in other investments, net

 

(6

)

 

 

(357

)

Purchases of property and equipment, net

 

(176

)

 

 

(160

)

Disposition of operations

 

13

 

 

 

1

 

Net cash provided by investing activities

 

497

 

 

 

4,805

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

493

 

 

 

--

 

Repayment of long-term debt

 

(351

)

 

 

(1

)

Contractholder fund deposits

 

1,571

 

 

 

1,606

 

Contractholder fund withdrawals

 

(3,938

)

 

 

(6,439

)

Dividends paid

 

(322

)

 

 

(327

)

Treasury stock purchases

 

(729

)

 

 

(858

)

Shares reissued under equity incentive plans, net

 

60

 

 

 

18

 

Excess tax benefits on share-based payment arrangements

 

7

 

 

 

(4

)

Other

 

(40

)

 

 

(7

)

Net cash used in financing activities

 

(3,249

)

 

 

(6,012

)

Net (decrease) increase in cash

 

(134

)

 

 

464

 

Cash at beginning of period

 

776

 

 

 

562

 

Cash at end of period

$

642

 

 

$

1,026

 

 

 

 

See notes to condensed consolidated financial statements.

4



 

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, 2012 and for the three-month and nine-month periods ended September 30, 2012 and 2011 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, 2011 and Current Report on Form 8-K filed May 2, 2012.  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

 

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 insurance contracts.  The guidance specifies that the costs must be directly related to the successful acquisition of insurance contracts.  The guidance also specifies that advertising costs should be included as deferred acquisition costs (“DAC”) only when the direct-response advertising accounting criteria are met.  The Company adopted the new guidance on a retrospective basis as of January 1, 2012.  The cumulative effect of the adoption to shareholders’ equity as of January 1, 2011 was a decrease of $399 million, net of taxes.  The impacts of the retrospective adjustments on previously issued financial statements are summarized in the following table.

 

($ in millions, except per share data)

 

Three months ended

 

 

Nine months ended

 

 

September 30, 2011

 

 

September 30, 2011

 

 

Previously
Reported

 

 

As
Adjusted

 

 

Previously
Reported

 

 

As
Adjusted

Amortization of DAC

$

1,122

 

 

$

1,046

 

 

$

3,191

 

 

$

2,990

 

Operating costs and expenses

 

825

 

 

 

888

 

 

 

2,465

 

 

 

2,656

 

Gain (loss) on disposition of operations

 

--

 

 

 

3

 

 

 

(17

)

 

 

(10

)

Income tax expense (benefit)

 

38

 

 

 

44

 

 

 

(156

)

 

 

(150

)

Net income

 

165

 

 

 

175

 

 

 

64

 

 

 

75

 

Net income per share - Basic

 

0.32

 

 

 

0.34

 

 

 

0.12

 

 

 

0.14

 

Net income per share - Diluted

 

0.32

 

 

 

0.34

 

 

 

0.12

 

 

 

0.14

 

 

 

 

 

 

 

 

 

As of December 31, 2011

 

 

 

 

 

Previously
Reported

 

 

As
Adjusted

 

 

 

 

 

 

DAC

 

4,443

 

 

 

3,871

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

520

 

 

 

722

 

 

 

 

 

 

 

 

 

Reserve for life-contingent contract benefits

 

14,449

 

 

 

14,406

 

 

 

 

 

 

 

 

 

Other liabilities and accrued expenses

 

5,929

 

 

 

5,978

 

 

 

 

 

 

 

 

 

Retained income

 

32,321

 

 

 

31,909

 

 

 

 

 

 

 

 

 

Unrealized adjustment to DAC, DSI and
insurance reserves

 

(504

)

 

 

(467

)

 

 

 

 

 

 

 

 

Unrealized foreign currency translation
adjustments

 

57

 

 

 

56

 

 

 

 

 

 

 

 

 

 

5



 

In future periods, operating costs and expenses will increase since a lower amount of acquisition costs will be capitalized, which will be partially offset by a decrease in amortization of DAC due to the retrospective reduction of the DAC balance.  The effect of the adoption on net income and related per share amounts for interim periods after adoption is not determinable since calculations under the historic DAC accounting policy were not continued after adoption.

 

Criteria for Determining Effective Control for Repurchase Agreements

 

In April 2011, the FASB issued guidance modifying the assessment criteria of effective control for repurchase agreements.  The new guidance removes the criteria requiring an entity to have the ability to repurchase or redeem financial assets on substantially the agreed terms and the collateral maintenance guidance related to that criteria.  The guidance is to be applied prospectively to transactions or modifications of existing transactions that occur during reporting periods beginning on or after December 15, 2011.  The adoption of this guidance as of January 1, 2012 had no impact on the Company’s results of operations or financial position.

 

Amendments to Fair Value Measurement and Disclosure Requirements

 

In May 2011, the FASB issued guidance that clarifies the application of existing fair value measurement and disclosure requirements and amends certain fair value measurement principles, requirements and disclosures.  Changes were made to improve consistency in global application.  The guidance is to be applied prospectively for reporting periods beginning after December 15, 2011.  The adoption of this guidance as of January 1, 2012 had no impact on the Company’s results of operations or financial position.

 

Presentation of Comprehensive Income

 

In June and December 2011, the FASB issued guidance amending the presentation of comprehensive income and its components.  Under the new guidance, a reporting entity has the option to present comprehensive income in a single continuous statement or in two separate but consecutive statements.  The Company adopted the new guidance in the first quarter of 2012.  The new guidance affects presentation only and therefore had no impact on the Company’s results of operations or financial position.

 

Intangibles – Goodwill and Other

 

In September 2011, the FASB issued guidance providing the option to first assess qualitative factors, such as macroeconomic conditions and industry and market considerations, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If impairment is indicated by the qualitative assessment, then it is necessary to perform the two-step goodwill impairment test.  If the option is not elected, the guidance requiring the two-step goodwill impairment test is unchanged.  The adoption of this guidance as of January 1, 2012 had no impact on the Company’s results of operations or financial position.

 

Pending accounting standard

 

Disclosures about Offsetting Assets and Liabilities for Financial Instruments and Derivative Instruments

 

In December 2011, the FASB issued guidance requiring expanded disclosures, including both gross and net information, for financial instruments and derivative instruments that are either offset in the reporting entity’s financial statements or those that are subject to an enforceable master netting arrangement or similar agreement.  The guidance is effective for reporting periods beginning on or after January 1, 2013 and is to be applied retrospectively.  The new guidance affects disclosures only and will have no impact on the Company’s results of operations or 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 and contingently issuable performance stock awards.

 

6



 

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

 

($ in millions, except per share data)

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2012

 

 

2011

 

 

2012

 

 

2011

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

723

 

 

$

175

 

 

$

1,912

 

 

$

75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

485.9

 

 

 

512.0

 

 

 

491.5

 

 

 

520.4

 

Effect of dilutive potential common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

2.7

 

 

 

1.6

 

 

 

2.2

 

 

 

2.0

 

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

 

1.3

 

 

 

0.6

 

 

 

1.0

 

 

 

0.5

 

Weighted average common and dilutive potential common shares outstanding

 

489.9

 

 

 

514.2

 

 

 

494.7

 

 

 

522.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Basic

$

1.49

 

 

$

0.34

 

 

$

3.89

 

 

$

0.14

 

Earnings per share - Diluted

$

1.48

 

 

$

0.34

 

 

$

3.86

 

 

$

0.14

 

 

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 17.8 million and 27.6 million Allstate common shares, with exercise prices ranging from $31.41 to $62.84 and $24.70 to $62.84, were outstanding for the three-month periods ended September 30, 2012 and 2011, respectively, but were not included in the computation of diluted earnings per share in those periods.  Options to purchase 22.1 million and 27.6 million Allstate common shares, with exercise prices ranging from $26.56 to $62.84 and $25.91 to $62.84, were outstanding for the nine-month periods ended September 30, 2012 and 2011, respectively, but were not included in the computation of diluted earnings per share in those periods.

 

3.  Supplemental Cash Flow Information

 

Non-cash modifications of certain mortgage loans, fixed income securities, limited partnership interests and other investments, as well as mergers completed with equity securities, totaled $170 million and $564 million for the nine months ended September 30, 2012 and 2011, respectively.  Non-cash financing activities include $39 million related to the issuance of Allstate shares for vested restricted stock units for the nine months ended September 30, 2012.

 

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 are as follows:

 

($ in millions)

 

Nine months ended
September 30,

 

 

2012

 

 

2011

Net change in proceeds managed

 

 

 

 

 

 

 

Net change in short-term investments

$

(297

)

 

$

(301

)

Operating cash flow used

 

(297

)

 

 

(301

)

Net change in cash

 

(6

)

 

 

1

 

Net change in proceeds managed

$

(303

)

 

$

(300

)

 

 

 

 

 

 

 

 

Net change in liabilities

 

 

 

 

 

 

 

Liabilities for collateral, beginning of year

$

(462

)

 

$

(484

)

Liabilities for collateral, end of period

 

(765

)

 

 

(784

)

Operating cash flow provided

$

303

 

 

$

300

 

 

7



 

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

September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

$

4,401

 

 

$

371

 

 

$

--

 

 

$

4,772

 

Municipal

 

13,048

 

 

 

1,083

 

 

 

(161

)

 

 

13,970

 

Corporate

 

44,344

 

 

 

3,956

 

 

 

(146

)

 

 

48,154

 

Foreign government

 

2,015

 

 

 

240

 

 

 

--

 

 

 

2,255

 

Residential mortgage-backed securities (“RMBS”)

 

3,344

 

 

 

150

 

 

 

(146

)

 

 

3,348

 

Commercial mortgage-backed securities (“CMBS”)

 

1,555

 

 

 

66

 

 

 

(91

)

 

 

1,530

 

Asset-backed securities (“ABS”)

 

3,703

 

 

 

112

 

 

 

(142

)

 

 

3,673

 

Redeemable preferred stock

 

22

 

 

 

5

 

 

 

--

 

 

 

27

 

Total fixed income securities

$

72,432

 

 

$

5,983

 

 

$

(686

)

 

$

77,729

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

$

5,966

 

 

$

349

 

 

$

--

 

 

$

6,315

 

Municipal

 

13,634

 

 

 

863

 

 

 

(256

)

 

 

14,241

 

Corporate

 

41,217

 

 

 

2,743

 

 

 

(379

)

 

 

43,581

 

Foreign government

 

1,866

 

 

 

216

 

 

 

(1

)

 

 

2,081

 

RMBS

 

4,532

 

 

 

110

 

 

 

(521

)

 

 

4,121

 

CMBS

 

1,962

 

 

 

48

 

 

 

(226

)

 

 

1,784

 

ABS

 

4,180

 

 

 

73

 

 

 

(287

)

 

 

3,966

 

Redeemable preferred stock

 

22

 

 

 

2

 

 

 

--

 

 

 

24

 

Total fixed income securities

$

73,379

 

 

$

4,404

 

 

$

(1,670

)

 

$

76,113

 

 

Scheduled maturities

 

The scheduled maturities for fixed income securities are as follows as of September 30, 2012:

 

($ in millions)

 

 

Amortized

 

 

 

Fair

 

 

 

 

cost

 

 

 

value

 

Due in one year or less

 

$

4,017

 

 

$

4,072

 

Due after one year through five years

 

 

20,943

 

 

 

22,124

 

Due after five years through ten years

 

 

24,287

 

 

 

26,615

 

Due after ten years

 

 

16,138

 

 

 

17,897

 

 

 

 

65,385

 

 

 

70,708

 

RMBS and ABS

 

 

7,047

 

 

 

7,021

 

Total

 

$

72,432

 

 

$

77,729

 

 

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.

 

8



 

Net investment income

 

Net investment income is as follows:

 

($ in millions)

 

 

Three months ended
September 30,

 

 

 

Nine months ended
September 30,

 

 

 

 

2012

 

 

 

2011

 

 

 

2012

 

 

 

2011

 

Fixed income securities

 

$

817

 

 

$

862

 

 

$

2,441

 

 

$

2,661

 

Equity securities

 

 

29

 

 

 

23

 

 

 

74

 

 

 

76

 

Mortgage loans

 

 

92

 

 

 

91

 

 

 

277

 

 

 

267

 

Limited partnership interests (1)

 

 

22

 

 

 

33

 

 

 

238

 

 

 

61

 

Short-term investments

 

 

2

 

 

 

2

 

 

 

4

 

 

 

5

 

Other

 

 

33

 

 

 

27

 

 

 

97

 

 

 

64

 

Investment income, before expense

 

 

995

 

 

 

1,038

 

 

 

3,131

 

 

 

3,134

 

Investment expense

 

 

(55

)

 

 

(44

)

 

 

(154

)

 

 

(138

)

Net investment income

 

$

940

 

 

$

994

 

 

$

2,977

 

 

$

2,996

 

 

 

 

 

 

 

 

 

 

(1)

Income from limited partnership interests accounted for under the equity method of accounting (“EMA”) is reported in net investment income in 2012 and realized capital gains and losses in 2011.

 

 

Realized capital gains and losses

 

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

 

($ in millions)

 

 

Three months ended
September 30,

 

 

 

Nine months ended
September 30,

 

 

 

 

2012

 

 

 

2011

 

 

 

2012

 

 

 

2011

 

Fixed income securities

 

$

(50

)

 

$

603

 

 

$

(73

)

 

$

615

 

Equity securities

 

 

(15

)

 

 

(77

)

 

 

157

 

 

 

60

 

Mortgage loans

 

 

(3

)

 

 

(28

)

 

 

5

 

 

 

(37

)

Limited partnership interests (1)

 

 

--

 

 

 

8

 

 

 

13

 

 

 

129

 

Derivatives

 

 

(2

)

 

 

(234

)

 

 

26

 

 

 

(354

)

Other

 

 

(2

)

 

 

(8

)

 

 

(5

)

 

 

4

 

Realized capital gains and losses

 

$

(72

)

 

$

264

 

 

$

123

 

 

$

417

 

 

 

 

 

 

 

 

 

 

(1)

Income from EMA limited partnerships is reported in net investment income in 2012 and realized capital gains and losses in 2011.

 

 

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

 

($ in millions)

 

 

Three months ended
September 30,

 

 

 

Nine months ended
September 30,

 

 

 

 

2012

 

 

2011

 

 

2012

 

 

2011

Impairment write-downs

 

$

(43

)

 

$

(190

)

 

$

(131

)

 

$

(374

)

Change in intent write-downs

 

 

(3

)

 

 

(13

)

 

 

(48

)

 

 

(98

)

Net other-than-temporary impairment losses recognized in earnings

 

 

(46

)

 

 

(203

)

 

 

(179

)

 

 

(472

)

Sales

 

 

(24

)

 

 

692

 

 

 

275

 

 

 

1,116

 

Valuation of derivative instruments

 

 

--

 

 

 

(254

)

 

 

1

 

 

 

(282

)

Settlements of derivative instruments

 

 

(2

)

 

 

20

 

 

 

26

 

 

 

(72

)

EMA limited partnership income

 

 

--

 

 

 

9

 

 

 

--

 

 

 

127

 

Realized capital gains and losses

 

$

(72

)

 

$

264

 

 

$

123

 

 

$

417

 

 

Gross gains of $109 million and $709 million and gross losses of $154 million and $32 million were realized on sales of fixed income securities during the three months ended September 30, 2012 and 2011, respectively.  Gross gains of $296 million and $1.10 billion and gross losses of $291 million and $218 million were realized on sales of fixed income securities during the nine months ended September 30, 2012 and 2011, respectively.

 

9



 

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

 

($ in millions)

 

 

Three months ended
September 30, 2012

 

 

 

Nine months ended
September 30, 2012

 

 

 

 

Gross

 

 

Included
in OCI

 

 

Net

 

 

Gross

 

 

Included
in OCI

 

 

Net

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

 

$

(2

)

 

$

(3

)

 

$

(5

)

 

$

(28

)

 

$

14

 

 

$

(14

)

Corporate

 

 

(1

)

 

 

(1

)

 

 

(2

)

 

 

(19

)

 

 

(2

)

 

 

(21

)

RMBS

 

 

(4

)

 

 

(6

)

 

 

(10

)

 

 

(59

)

 

 

(2

)

 

 

(61

)

CMBS

 

 

(4

)

 

 

3

 

 

 

(1

)

 

 

(19

)

 

 

6

 

 

 

(13

)

Total fixed income securities

 

 

(11

)

 

 

(7

)

 

 

(18

)

 

 

(125

)

 

 

16

 

 

 

(109

)

Equity securities

 

 

(22

)

 

 

--

 

 

 

(22

)

 

 

(58

)

 

 

--

 

 

 

(58

)

Mortgage loans

 

 

(1

)

 

 

--

 

 

 

(1

)

 

 

3

 

 

 

--

 

 

 

3

 

Limited partnership interests

 

 

(2

)

 

 

--

 

 

 

(2

)

 

 

(5

)

 

 

--

 

 

 

(5

)

Other

 

 

(3

)

 

 

--

 

 

 

(3

)

 

 

(10

)

 

 

--

 

 

 

(10

)

Other-than-temporary impairment losses

 

$

(39

)

 

$

(7

)

 

$

(46

)

 

$

(195

)

 

$

16

 

 

$

(179

)

 

 

 

 

Three months ended
September 30, 2011

 

 

 

Nine months ended
September 30, 2011

 

 

 

 

Gross

 

 

 

Included
in OCI

 

 

 

Net

 

 

 

Gross

 

 

 

Included
in OCI

 

 

 

Net

 

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

 

$

(8

)

 

$

--

 

 

$

(8

)

 

$

(50

)

 

$

(3

)

 

$

(53

)

Corporate

 

 

(14

)

 

 

--

 

 

 

(14

)

 

 

(19

)

 

 

1

 

 

 

(18

)

Foreign government

 

 

--

 

 

 

--

 

 

 

--

 

 

 

(1

)

 

 

--

 

 

 

(1

)

RMBS

 

 

(57

)

 

 

(3

)

 

 

(60

)

 

 

(164

)

 

 

(28

)

 

 

(192

)

CMBS

 

 

(1

)

 

 

(3

)

 

 

(4

)

 

 

(27

)

 

 

(10

)

 

 

(37

)

ABS

 

 

--

 

 

 

--

 

 

 

--

 

 

 

(7

)

 

 

3

 

 

 

(4

)

Total fixed income securities

 

 

(80

)

 

 

(6

)

 

 

(86

)

 

 

(268

)

 

 

(37

)

 

 

(305

)

Equity securities

 

 

(81

)

 

 

--

 

 

 

(81

)

 

 

(114

)

 

 

--

 

 

 

(114

)

Mortgage loans

 

 

(29

)

 

 

--

 

 

 

(29

)

 

 

(42

)

 

 

--

 

 

 

(42

)

Limited partnership interests

 

 

(2

)

 

 

--

 

 

 

(2

)

 

 

(4

)

 

 

--

 

 

 

(4

)

Other

 

 

(5

)

 

 

--

 

 

 

(5

)

 

 

(7

)

 

 

--

 

 

 

(7

)

Other-than-temporary impairment losses

 

$

(197

)

 

$

(6

)

 

$

(203

)

 

$

(435

)

 

$

(37

)

 

$

(472

)

 

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 $220 million and $172 million as of September 30, 2012 and December 31, 2011, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.

 

($ in millions)

 

 

September 30,
2012

 

 

 

December 31,
2011

 

Municipal

 

$

(25

)

 

$

(11

)

 

Corporate

 

 

(1

)

 

 

(35

)

 

RMBS

 

 

(223

)

 

 

(353

)

 

CMBS

 

 

(22

)

 

 

(19

)

 

ABS

 

 

(14

)

 

 

(21

)

 

Total

 

$

(285

)

 

$

(439

)

 

 

10



 

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

 

($ in millions)

 

 

Three months ended
September 30,

 

 

 

Nine months ended
September 30,

 

 

 

 

2012

 

 

 

2011

 

 

 

2012

 

 

 

2011

 

Beginning balance

 

$

(781

)

 

$

(912

)

 

$

(944

)