10-Q 1 a13-13460_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 June 30, 2013

 

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 July 17, 2013, the registrant had 463,447,495 common shares, $.01 par value, outstanding.

 


 


 

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2013

 

 

PART I

 

FINANCIAL INFORMATION

 

PAGE

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2013 and 2012 (unaudited)

 

1

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three-Month and Six-Month Periods Ended June 30, 2013 and 2012 (unaudited)

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Financial Position as of June 30, 2013 (unaudited) and December 31, 2012

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Six-Month Periods Ended June 30, 2013 and 2012 (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2013 and 2012 (unaudited)

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

6

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

49

 

 

 

 

 

Item 2.

 

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

 

 

 

 

 

 

 

 

 

Highlights

 

50

 

 

Consolidated Net Income

 

51

 

 

Impact of Low Interest Rate Environment

 

52

 

 

Property-Liability Highlights

 

53

 

 

Allstate Protection Segment

 

56

 

 

Discontinued Lines and Coverages Segment

 

69

 

 

Property-Liability Investment Results

 

69

 

 

Allstate Financial Highlights

 

71

 

 

Allstate Financial Segment

 

71

 

 

Investments Highlights

 

78

 

 

Investments

 

78

 

 

Capital Resources and Liquidity Highlights

 

85

 

 

Capital Resources and Liquidity

 

85

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

90

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

91

 

 

 

 

 

Item 1A.

 

Risk Factors

 

91

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

92

 

 

 

 

 

Item 6.

 

Exhibits

 

92

 


 


 

PART I.  FINANCIAL INFORMATION

ITEM I.  FINANCIAL INFORMATION

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

($ in millions, except per share data)

 

Three months ended
June 30

 

Six months ended
June 30

 

 

2013

 

2012

 

2013

 

2012

 

 

(unaudited)

 

(unaudited)

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Property-liability insurance premiums

6,862

 

6,666

 

13,632

 

13,296

 

Life and annuity premiums and contract charges

 

579

 

 

559

 

 

1,158

 

 

1,112

 

Net investment income

 

984

 

 

1,026

 

 

1,967

 

 

2,037

 

Realized capital gains and losses:

 

 

 

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses

 

(55

)

 

(69

)

 

(82

)

 

(156

)

Portion of loss recognized in other comprehensive income

 

(5

)

 

19

 

 

(15

)

 

23

 

Net other-than-temporary impairment losses recognized in earnings

 

(60

)

 

(50

)

 

(97

)

 

(133

)

Sales and other realized capital gains and losses

 

422

 

 

77

 

 

590

 

 

328

 

Total realized capital gains and losses

 

362

 

 

27

 

 

493

 

 

195

 

 

 

8,787

 

 

8,278

 

 

17,250

 

 

16,640

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Property-liability insurance claims and claims expense

 

4,741

 

 

4,810

 

 

9,201

 

 

9,149

 

Life and annuity contract benefits

 

471

 

 

462

 

 

929

 

 

901

 

Interest credited to contractholder funds

 

311

 

 

366

 

 

656

 

 

744

 

Amortization of deferred policy acquisition costs

 

961

 

 

942

 

 

1,907

 

 

1,921

 

Operating costs and expenses

 

1,090

 

 

996

 

 

2,192

 

 

2,013

 

Restructuring and related charges

 

20

 

 

10

 

 

46

 

 

16

 

Loss on extinguishment of debt

 

480

 

 

--

 

 

480

 

 

--

 

Interest expense

 

99

 

 

93

 

 

197

 

 

188

 

 

 

8,173

 

 

7,679

 

 

15,608

 

 

14,932

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on disposition of operations

 

--

 

 

3

 

 

2

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations before income tax expense

 

614

 

 

602

 

 

1,644

 

 

1,714

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

180

 

 

179

 

 

501

 

 

525

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

434

 

 

423

 

 

1,143

 

 

1,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

--

 

 

--

 

 

--

 

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

434

 

423

 

1,143

 

1,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders per common share - Basic

0.93

 

0.86

 

2.42

 

2.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares - Basic

 

468.3

 

 

490.6

 

 

471.9

 

 

494.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders per common share - Diluted

0.92

 

0.86

 

2.39

 

2.39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares - Diluted

 

473.8

 

 

493.8

 

 

477.3

 

 

497.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

0.25

 

0.22

 

0.50

 

0.44

 

 

See notes to condensed consolidated financial statements.

 

1



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

($ in millions)

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

434

 

423

 

1,143

 

1,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, after-tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net capital gains and losses

 

(1,254

)

 

196

 

 

(1,183

)

 

670

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized foreign currency translation adjustments

 

(21

)

 

(7

)

 

(33

)

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized pension and other postretirement benefit cost

 

46

 

 

24

 

 

91

 

 

44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, after-tax

 

(1,229

)

 

213

 

 

(1,125

)

 

716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income

(795

)

636

 

18

 

1,905

 

 

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) 

 

June 30,

2013

 

December 31,

2012

Assets

 

(unaudited)

 

 

Investments

 

 

 

 

     Fixed income securities, at fair value (amortized cost $68,475 and $71,915)

71,039 

77,017 

     Equity securities, at fair value (cost $4,237 and $3,577)

 

4,505 

 

4,037 

     Mortgage loans

 

6,413 

 

6,570 

     Limited partnership interests

 

4,941 

 

4,922 

Short-term, at fair value (amortized cost $2,646 and $2,336)

 

2,646 

 

2,336 

     Other

 

2,771 

 

2,396 

          Total investments

 

92,315 

 

97,278 

Cash

 

634 

 

806 

Premium installment receivables, net

 

5,116 

 

5,051 

Deferred policy acquisition costs

 

3,914 

 

3,621 

Reinsurance recoverables, net

 

8,346 

 

8,767 

Accrued investment income

 

773 

 

781 

Property and equipment, net

 

971 

 

989 

Goodwill

 

1,239 

 

1,240 

Other assets

 

1,684 

 

1,804 

Separate Accounts

 

6,488 

 

6,610 

              Total assets

121,480 

126,947 

Liabilities

 

 

 

 

Reserve for property-liability insurance claims and claims expense

20,989 

21,288 

Reserve for life-contingent contract benefits

 

14,242 

 

14,895 

Contractholder funds

 

36,357 

 

39,319 

Unearned premiums

 

10,510 

 

10,375 

Claim payments outstanding

 

745 

 

797 

Deferred income taxes

 

250 

 

597 

Other liabilities and accrued expenses

 

6,055 

 

6,429 

Short-term debt

 

500 

 

-- 

Long-term debt

 

5,475 

 

6,057 

Separate Accounts

 

6,488 

 

6,610 

              Total liabilities

 

101,611 

 

106,367 

Commitments and Contingent Liabilities (Note 11)

 

 

 

 

Equity

 

 

 

 

Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 11,500 shares issued and outstanding as of June 30, 2013 and none issued and outstanding as of December 31, 2012, $287.5 aggregate liquidation preference

 

278 

 

-- 

Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 465 million and 479 million shares outstanding

 

 

Additional capital paid-in

 

3,105 

 

3,162 

Retained income

 

34,691 

 

33,783 

Deferred ESOP expense

 

(39)

 

(41)

Treasury stock, at cost (435 million and 421 million shares)

 

(18,225)

 

(17,508)

Accumulated other comprehensive income:

 

 

 

 

     Unrealized net capital gains and losses:

 

 

 

 

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

 

36 

 

(11)

Other unrealized net capital gains and losses

 

1,794 

 

3,614 

Unrealized adjustment to DAC, DSI and insurance reserves

 

(179)

 

(769)

  Total unrealized net capital gains and losses

 

1,651 

 

2,834 

     Unrealized foreign currency translation adjustments

 

37 

 

70 

     Unrecognized pension and other postretirement benefit cost

 

(1,638)

 

(1,729)

              Total accumulated other comprehensive income

 

50 

 

1,175 

              Total shareholders’ equity

 

19,869 

 

20,580 

              Total liabilities and shareholders’ equity

121,480 

126,947 

 

See notes to condensed consolidated financial statements.

 

3



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

($ in millions)

 

Six months ended
June 30,

 

 

2013

 

2012

Preferred stock par value

 

(unaudited)

Balance, beginning of period

--

 

--

 

Preferred stock issuance

 

--

 

 

--

 

Balance, end of period

 

--

 

 

--

 

 

 

 

 

 

 

 

Preferred stock additional capital paid-in

 

 

 

 

 

 

Balance, beginning of period

 

--

 

 

--

 

Preferred stock issuance

 

278

 

 

--

 

Balance, end of period

 

278

 

 

--

 

 

 

 

 

 

 

 

Common stock

 

9

 

 

9

 

 

 

 

 

 

 

 

Additional capital paid-in

 

 

 

 

 

 

Balance, beginning of period

 

3,162

 

 

3,189

 

Equity incentive plans activity

 

(57

)

 

(35

)

Balance, end of period

 

3,105

 

 

3,154

 

 

 

 

 

 

 

 

Retained income

 

 

 

 

 

 

Balance, beginning of period

 

33,783

 

 

31,909

 

Net income

 

1,143

 

 

1,189

 

Dividends on common stock

 

(235

)

 

(218

)

Dividends on preferred stock

 

--

 

 

--

 

Balance, end of period

 

34,691

 

 

32,880

 

 

 

 

 

 

 

 

Deferred ESOP expense

 

 

 

 

 

 

Balance, beginning of period

 

(41

)

 

(43

)

Payments

 

2

 

 

2

 

Balance, end of period

 

(39

)

 

(41

)

 

 

 

 

 

 

 

Treasury stock

 

 

 

 

 

 

Balance, beginning of period

 

(17,508

)

 

(16,795

)

Shares acquired

 

(905

)

 

(575

)

Shares reissued under equity incentive plans, net

 

188

 

 

98

 

Balance, end of period

 

(18,225

)

 

(17,272

)

 

 

 

 

 

 

 

Accumulated other comprehensive income

 

 

 

 

 

 

Balance, beginning of period

 

1,175

 

 

29

 

Change in unrealized net capital gains and losses

 

(1,183

)

 

670

 

Change in unrealized foreign currency translation adjustments

 

(33

)

 

2

 

Change in unrecognized pension and other postretirement benefit cost

 

91

 

 

44

 

Balance, end of period

 

50

 

 

745

 

 

 

 

 

 

 

 

Noncontrolling interest

 

 

 

 

 

 

Balance, beginning of period

 

--

 

 

28

 

Change in noncontrolling interest ownership

 

--

 

 

(28

)

Balance, end of period

 

--

 

 

--

 

 

 

 

 

 

 

 

Total shareholders’ equity

19,869

 

19,475

 

 

See notes to condensed consolidated financial statements.

 

4



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ in millions)

 

Six months ended
June 30,

 

 

2013

 

2012

Cash flows from operating activities

 

(unaudited)

Net income

1,143

 

1,189

 

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

 

 

 

 

 

 

Depreciation, amortization and other non-cash items

 

180

 

 

201

 

Realized capital gains and losses

 

(493

)

 

(195

)

Loss on extinguishment of debt

 

480

 

 

--

 

Gain on disposition of operations

 

(2

)

 

(6

)

Interest credited to contractholder funds

 

656

 

 

744

 

Changes in:

 

 

 

 

 

 

Policy benefits and other insurance reserves

 

(607

)

 

(377

)

Unearned premiums

 

165

 

 

27

 

Deferred policy acquisition costs

 

(107

)

 

6

 

Premium installment receivables, net

 

(81

)

 

(9

)

Reinsurance recoverables, net

 

327

 

 

27

 

Income taxes

 

283

 

 

341

 

Other operating assets and liabilities

 

(391

)

 

(174

)

Net cash provided by operating activities

 

1,553

 

 

1,774

 

Cash flows from investing activities

 

 

 

 

 

 

Proceeds from sales

 

 

 

 

 

 

Fixed income securities

 

10,461

 

 

9,918

 

Equity securities

 

1,742

 

 

1,275

 

Limited partnership interests

 

438

 

 

796

 

Mortgage loans

 

20

 

 

11

 

Other investments

 

38

 

 

88

 

Investment collections

 

 

 

 

 

 

Fixed income securities

 

3,658

 

 

2,141

 

Mortgage loans

 

475

 

 

458

 

Other investments

 

171

 

 

39

 

Investment purchases

 

 

 

 

 

 

Fixed income securities

 

(10,637

)

 

(12,345

)

Equity securities

 

(2,010

)

 

(290

)

Limited partnership interests

 

(477

)

 

(664

)

Mortgage loans

 

(314

)

 

(267

)

Other investments

 

(538

)

 

(243

)

Change in short-term investments, net

 

(423

)

 

(392

)

Change in other investments, net

 

91

 

 

(57

)

Purchases of property and equipment, net

 

(43

)

 

(116

)

Net cash provided by investing activities

 

2,652

 

 

352

 

Cash flows from financing activities

 

 

 

 

 

 

Change in short-term debt

 

500

 

 

--

 

Proceeds from issuance of long-term debt

 

1,481

 

 

493

 

Repayment of long-term debt

 

(2,540

)

 

(351

)

Proceeds from issuance of preferred stock

 

278

 

 

--

 

Contractholder fund deposits

 

1,119

 

 

1,005

 

Contractholder fund withdrawals

 

(4,273

)

 

(2,665

)

Dividends paid on common stock

 

(119

)

 

(215

)

Treasury stock purchases

 

(897

)

 

(583

)

Shares reissued under equity incentive plans, net

 

60

 

 

26

 

Excess tax benefits on share-based payment arrangements

 

29

 

 

4

 

Other

 

(15

)

 

(45

)

Net cash used in financing activities

 

(4,377

)

 

(2,331

)

Net decrease in cash

 

(172

)

 

(205

)

Cash at beginning of period

 

806

 

 

776

 

Cash at end of period

634

 

571

 

 

See notes to condensed consolidated financial statements.

 

5



 

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 (the “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 June 30, 2013 and for the three-month and six-month periods ended June 30, 2013 and 2012 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, 2012.  The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.  All significant intercompany accounts and transactions have been eliminated.

 

Adopted accounting standards

 

Disclosures about Offsetting Assets and Liabilities

 

In December 2011 and January 2013, the Financial Accounting Standards Board (“FASB”) issued guidance requiring expanded disclosures, including both gross and net information, for derivatives, repurchase and reverse repurchase agreements, and securities borrowing and securities lending transactions 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 Company adopted the new guidance in the first quarter of 2013. The new guidance affects disclosures only and therefore had no impact on the Company’s results of operations or financial position.

 

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

 

In February 2013, the FASB issued guidance requiring expanded disclosures about the amounts reclassified out of accumulated other comprehensive income by component.  The guidance requires the presentation of significant amounts reclassified out of accumulated other comprehensive income by income statement line item but only if the amount reclassified is required under accounting principles generally accepted in the United States of America (“GAAP”) to be reclassified to net income in its entirety in the same reporting period.  For other amounts that are not required under GAAP to be reclassified in their entirety to net income, cross-reference to other disclosures that provide additional detail about those amounts is required.  The Company adopted the new guidance in the first quarter of 2013.  The new guidance affects disclosures only and therefore had no impact on the Company’s results of operations or financial position.

 

6



 

2.  Earnings per common share

 

Basic earnings per common share is computed using the weighted average number of common shares outstanding, including unvested participating restricted stock units.  Diluted earnings per common share is computed using the weighted average number of common and dilutive potential common shares outstanding.  For the Company, dilutive potential common shares consist of outstanding stock options and unvested non-participating restricted stock units and contingently issuable performance stock awards.

 

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

 

($ in millions, except per share data)

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 434

 423

 1,143

 1,189

 

Less: Preferred stock dividends

 

--

 

--

 

--

 

--

 

Net income available to common shareholders

434

 423

 1,143

 1,189

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

468.3

 

490.6

 

471.9

 

494.9

 

Effect of dilutive potential common shares:

 

 

 

 

 

 

 

 

 

Stock options

 

3.9

 

2.3

 

3.8

 

2.2

 

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

 

1.6

 

0.9

 

1.6

 

0.8

 

Weighted average common and dilutive potential common shares outstanding

 

473.8

 

493.8

 

477.3

 

497.9

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - Basic

 0.93

 0.86

 2.42

 2.40

 

Earnings per common share - Diluted

 0.92

 0.86

 2.39

 2.39

 

 

The effect of dilutive potential common shares does not include the effect of options with an anti-dilutive effect on earnings per common share because their exercise prices exceed the average market price of Allstate common shares during the period or for which the unrecognized compensation cost would have an anti-dilutive effect.  Options to purchase 13.5 million and 22.5 million Allstate common shares, with exercise prices ranging from $39.95 to $62.42 and $27.75 to $62.84, were outstanding for the three-month periods ended June 30, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per common share in those periods.  Options to purchase 13.7 million and 25.3 million Allstate common shares, with exercise prices ranging from $39.05 to $62.42 and $26.09 to $62.84, were outstanding for the six-month periods ended June 30, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per common 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 $203 million and $109 million for the six months ended June 30, 2013 and 2012, respectively.  Non-cash financing activities include $92 million and $39 million related to the issuance of Allstate common shares for vested restricted stock units for the six months ended June 30, 2013 and 2012, respectively.

 

7



 

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)

 

Six months ended
June 30,

 

 

2013

 

2012

Net change in proceeds managed

 

 

 

 

 

 

Net change in short-term investments

113

 

(202

)

Operating cash flow provided (used)

 

113

 

 

(202

)

Net change in cash

 

3

 

 

(1

)

Net change in proceeds managed

116

 

(203

)

 

 

 

 

 

 

 

Net change in liabilities

 

 

 

 

 

 

Liabilities for collateral, beginning of year

(808

)

(462

)

Liabilities for collateral, end of period

 

(692

)

 

(665

)

Operating cash flow (used) provided

(116

)

203

 

 

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

June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

3,001

 

205

 

(2

)

3,204

 

Municipal

 

10,220

 

 

601

 

 

(105

)

 

10,716

 

Corporate

 

45,969

 

 

2,159

 

 

(512

)

 

47,616

 

Foreign government

 

2,099

 

 

141

 

 

(16

)

 

2,224

 

Asset-backed securities (“ABS”)

 

3,467

 

 

86

 

 

(77

)

 

3,476

 

Residential mortgage-backed securities (“RMBS”)

 

2,423

 

 

119

 

 

(57

)

 

2,485

 

Commercial mortgage-backed securities (“CMBS”)

 

1,273

 

 

50

 

 

(32

)

 

1,291

 

Redeemable preferred stock

 

23

 

 

4

 

 

--

 

 

27

 

Total fixed income securities

68,475

 

3,365

 

(801

)

71,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

4,387

 

326

 

--

 

4,713

 

Municipal

 

12,139

 

 

1,038

 

 

(108

)

 

13,069

 

Corporate

 

44,943

 

 

3,721

 

 

(127

)

 

48,537

 

Foreign government

 

2,290

 

 

228

 

 

(1

)

 

2,517

 

ABS

 

3,623

 

 

108

 

 

(107

)

 

3,624

 

RMBS

 

3,000

 

 

142

 

 

(110

)

 

3,032

 

CMBS

 

1,510

 

 

65

 

 

(77

)

 

1,498

 

Redeemable preferred stock

 

23

 

 

4

 

 

--

 

 

27

 

Total fixed income securities

71,915

 

5,632

 

(530

)

77,017

 

 

8



 

Scheduled maturities

 

The scheduled maturities for fixed income securities are as follows as of June 30, 2013:

 

($ in millions)

 

Amortized
cost

 

Fair
value

 

Due in one year or less

2,816

2,859

 

Due after one year through five years

 

25,101

 

25,901

 

Due after five years through ten years

 

22,450

 

23,243

 

Due after ten years

 

10,945

 

11,784

 

 

 

61,312

 

63,787

 

ABS, RMBS and CMBS

 

7,163

 

7,252

 

Total

68,475

71,039

 

 

Actual maturities may differ from those scheduled as a result of prepayments by the issuers.  ABS, RMBS and CMBS are shown separately because of the potential for prepayment of principal prior to contractual maturity dates.

 

Net investment income

 

Net investment income is as follows:

 

($ in millions)

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

2013

 

2012

 

2013

 

2012

Fixed income securities

740

 

818

 

1,502

 

1,624

 

Equity securities

 

39

 

 

24

 

 

64

 

 

45

 

Mortgage loans

 

93

 

 

92

 

 

191

 

 

185

 

Limited partnership interests

 

126

 

 

107

 

 

233

 

 

216

 

Short-term investments

 

1

 

 

1

 

 

3

 

 

2

 

Other

 

39

 

 

34

 

 

76

 

 

64

 

Investment income, before expense

 

1,038

 

 

1,076

 

 

2,069

 

 

2,136

 

Investment expense

 

(54

)

 

(50

)

 

(102

)

 

(99

)

Net investment income

984

 

1,026

 

1,967

 

2,037

 

 

Realized capital gains and losses

 

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

 

($ in millions)

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

2013

 

2012

 

2013

 

2012

Fixed income securities

79

 

6

 

151

 

(23

)

Equity securities

 

283

 

 

13

 

 

312

 

 

172

 

Mortgage loans

 

(6

)

 

9

 

 

25

 

 

8

 

Limited partnership interests

 

(8

)

 

3

 

 

(3

)

 

13

 

Derivatives

 

14

 

 

7

 

 

10

 

 

28

 

Other

 

--

 

 

(11

)

 

(2

)

 

(3

)

Realized capital gains and losses

362

 

27

 

493

 

195

 

 

9



 

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

 

($ in millions)

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Impairment write-downs

$

(33)

$

(49)

$

(43)

$

(88)

 

Change in intent write-downs

 

(27)

 

(1)

 

(54)

 

(45)

 

Net other-than-temporary impairment losses recognized in earnings

 

(60)

 

(50)

 

(97)

 

(133)

 

Sales

 

408

 

70

 

580

 

299

 

Valuation of derivative instruments

 

3

 

(10)

 

(1)

 

1

 

Settlements of derivative instruments

 

11

 

17

 

11

 

28

 

Realized capital gains and losses

$

362

$

27

$

493

$

195

 

 

Gross gains of $114 million and $72 million and gross losses of $24 million and $47 million were realized on sales of fixed income securities during the three months ended June 30, 2013 and 2012, respectively.  Gross gains of $248 million and $187 million and gross losses of $44 million and $137 million were realized on sales of fixed income securities during the six months ended June 30, 2013 and 2012, respectively.

 

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

 

($ in millions)

 

Three months ended
June 30, 2013

 

Six months ended
June 30, 2013

 

 

 

Gross

 

Included
in OCI

 

Net

 

Gross

 

Included
in OCI

 

Net

 

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

$

(4)

$

(3)

$

(7)

$

(17)

$

(5)

$

(22)

 

ABS

 

--

 

(1)

 

(1)

 

--

 

(1)

 

(1)

 

RMBS

 

(1)

 

(1)

 

(2)

 

(1)

 

(2)

 

(3)

 

CMBS

 

(1)

 

--

 

(1)

 

(20)

 

(7)

 

(27)

 

Total fixed income securities

 

(6)

 

(5)

 

(11)

 

(38)

 

(15)

 

(53)

 

Equity securities

 

(32)

 

--

 

(32)

 

(51)

 

--

 

(51)

 

Mortgage loans

 

(9)

 

--

 

(9)

 

17

 

--

 

17

 

Limited partnership interests

 

(8)

 

--

 

(8)

 

(8)

 

--

 

(8)

 

Other

 

--

 

--

 

--

 

(2)

 

--

 

(2)

 

Other-than-temporary impairment losses

$

(55)

$

(5)

$

(60)

$

(82)

$

(15)

$

(97)

 

 

($ in millions)

 

Three months ended
June 30, 2012

 

Six months ended
June 30, 2012

 

 

 

Gross

 

Included
in OCI

 

Net

 

Gross

 

Included
in OCI

 

Net

 

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

$

(25)

$

17

$

(8)

$

(26)

$

17

$

(9)

 

Corporate

 

--

 

(1)

 

(1)

 

(18)

 

(1)

 

(19)

 

RMBS

 

(12)

 

--

 

(12)

 

(55)

 

4

 

(51)

 

CMBS

 

(9)

 

3

 

(6)

 

(15)

 

3

 

(12)

 

Total fixed income securities

 

(46)

 

19

 

(27)

 

(114)

 

23

 

(91)

 

Equity securities

 

(20)

 

--

 

(20)

 

(36)

 

--

 

(36)

 

Mortgage loans

 

7

 

--

 

7

 

4

 

--

 

4

 

Limited partnership interests

 

(1)

 

--

 

(1)

 

(3)

 

--

 

(3)

 

Other

 

(9)

 

--

 

(9)

 

(7)

 

--

 

(7)

 

Other-than-temporary impairment losses

$

(69)

$

19

$

(50)

$

(156)

$

23

$

(133)

 

 

10



 

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 $247 million and $219 million as of June 30, 2013 and December 31, 2012, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.

 

($ in millions)

 

June 30,
2013

 

December 31,
2012

 

Municipal

$

(10)

$

(20)

 

Corporate

 

(1)

 

(1)

 

ABS

 

(10)

 

(14)

 

RMBS

 

(158)

 

(182)

 

CMBS

 

(12)

 

(19)

 

Total

$

(191)

$

(236)

 

 

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
June 30,

 

Six months ended
June 30,

 

 

2013

 

2012

 

2013

 

2012

Beginning balance

$

(600)

$

(820)

$

(617)

$

(944)

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

 

(10)

 

(16)

 

(24)

 

(36)

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

 

(1)

 

(10)

 

(17)

 

(19)

Reduction in credit loss for securities disposed or collected

 

46

 

65

 

93

 

211

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

 

--

 

--

 

--

 

7

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

 

1

 

--

 

1

 

--

Ending balance

$

(564)

$

(781)

$

(564)

$

(781)

 

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.

 

11



 

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

 

June 30, 2013

 

value

 

Gains

 

Losses

 

gains (losses)

 

Fixed income securities

$

71,039

$

3,365

$

(801)

 

2,564

 

Equity securities

 

4,505

 

362

 

(94)

 

 

268

 

Short-term investments

 

2,646

 

--

 

--

 

 

--

 

Derivative instruments (1)

 

(7)

 

3

 

(15)

 

 

(12)

 

EMA limited partnerships (2)

 

 

 

 

 

 

 

 

--

 

Unrealized net capital gains and losses, pre-tax

 

 

 

 

 

 

 

 

2,820

 

Amounts recognized for:

 

 

 

 

 

 

 

 

 

 

Insurance reserves (3)

 

 

 

 

 

 

 

 

(76)

 

DAC and DSI (4)

 

 

 

 

 

 

 

 

(199)

 

Amounts recognized

 

 

 

 

 

 

 

 

(275)

 

Deferred income taxes

 

 

 

 

 

 

 

 

(894)

 

Unrealized net capital gains and losses, after-tax

 

 

 

 

 

 

 

1,651

 

 


(1)     Included in the fair value of derivative instruments are $(1) million classified as assets and $6 million classified as liabilities.

(2)     Unrealized net capital gains and losses for limited partnership interests 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, 2012

 

value

 

Gains

 

Losses

 

gains (losses)

 

Fixed income securities

$

77,017

$

5,632

$

(530)

 

5,102

 

Equity securities

 

4,037

 

494

 

(34)

 

 

460

 

Short-term investments

 

2,336

 

--

 

--

 

 

--

 

Derivative instruments (1)

 

(17)

 

2

 

(24)

 

 

(22)

 

EMA limited partnerships

 

 

 

 

 

 

 

 

7

 

Unrealized net capital gains and losses, pre-tax

 

 

 

 

 

 

 

 

5,547

 

Amounts recognized for:

 

 

 

 

 

 

 

 

 

 

Insurance reserves

 

 

 

 

 

 

 

 

(771)

 

DAC and DSI

 

 

 

 

 

 

 

 

(412)

 

Amounts recognized

 

 

 

 

 

 

 

 

(1,183)

 

Deferred income taxes

 

 

 

 

 

 

 

 

(1,530)

 

Unrealized net capital gains and losses, after-tax

 

 

 

 

 

 

 

2,834

 

 


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

 

12



 

Change in unrealized net capital gains and losses

 

The change in unrealized net capital gains and losses for the six months ended June 30, 2013 is as follows:

 

($ in millions)

 

 

 

Fixed income securities

$

(2,538)

 

Equity securities

 

(192)

 

Derivative instruments

 

10

 

EMA limited partnerships

 

(7)

 

Total

 

(2,727)

 

Amounts recognized for:

 

 

 

Insurance reserves

 

695

 

DAC and DSI

 

213

 

Amounts recognized

 

908

 

Deferred income taxes

 

636

 

Decrease in unrealized net capital gains and losses

$

(1,183)

 

 

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 fixed income and equity securities managed by third parties, either the Company has contractually retained its decision making authority as it pertains to selling securities that are in an unrealized loss position or it recognizes any unrealized loss at the end of the period through a charge to earnings.

 

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 that may be 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.

 

13



 

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

 

June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

22

$

562

$

(2

)

 

--

$

--

$

--

 

$

(2

)

Municipal

 

334

 

2,360

 

(60

)

 

40

 

200

 

(45

)

 

(105

)

Corporate

 

827

 

12,084

 

(418

)

 

57

 

717

 

(94

)

 

(512

)

Foreign government

 

93

 

434

 

(16

)

 

--

 

--

 

--

 

 

(16

)

ABS

 

43

 

684

 

(8

)

 

71

 

741

 

(69

)

 

(77

)

RMBS

 

238

 

398

 

(10

)

 

318

 

380

 

(47

)

 

(57

)

CMBS

 

22

 

226

 

(5

)

 

21

 

133

 

(27

)

 

(32

)

Total fixed income securities

 

1,579

 

16,748

 

(519

)

 

507

 

2,171

 

(282

)

 

(801

)

Equity securities

 

265

 

1,596

 

(94

)

 

9

 

5

 

--

 

 

(94

)

Total fixed income and equity securities

 

1,844

$

18,344

$

(613

)

 

516

$

2,176

$

(282

)

$

(895

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade fixed income securities

 

1,344

$

15,012

$

(460

)

 

373

$

1,371

$

(148

)

$

(608

)

Below investment grade fixed income securities

 

235

 

1,736

 

(59

)

 

134

 

800

 

(134

)

 

(193

)

Total fixed income securities

 

1,579

$

16,748

$

(519

)

 

507

$

2,171

$

(282

)

$

(801

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities