10-Q 1 a13-19505_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, 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 October 16, 2013, the registrant had 454,848,452 common shares, $.01 par value, outstanding.

 



 

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2013

 

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, 2013 and 2012 (unaudited)

1

 

 

 

 

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

2

 

 

 

 

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

3

 

 

 

 

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

4

 

 

 

 

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

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

6

 

 

 

 

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

 

 Impact of Low Interest Rate Environment

53

 

 Property-Liability Highlights

54

 

 Allstate Protection Segment

57

 

 Discontinued Lines and Coverages Segment

69

 

 Property-Liability Investment Results

70

 

 Allstate Financial Highlights

71

 

 Allstate Financial Segment

71

 

 Investments Highlights

79

 

 Investments

79

 

 Capital Resources and Liquidity Highlights

86

 

 Capital Resources and Liquidity

87

 

 

 

Item 4.

Controls and Procedures

91

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

92

 

 

 

Item 1A.

Risk Factors

92

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

93

 

 

 

Item 6.

Exhibits

93

 



 

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
September 30

 

Nine months ended
September 30

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

(unaudited)

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Property-liability insurance premiums

$

6,972

 

$

6,697

 

$

20,604

 

$

19,993

 

Life and annuity premiums and contract charges

 

584

 

 

563

 

 

1,742

 

 

1,675

 

Net investment income

 

950

 

 

940

 

 

2,917

 

 

2,977

 

Realized capital gains and losses:

 

 

 

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses

 

(96

)

 

(39

)

 

(178

)

 

(195

)

Portion of loss recognized in other comprehensive income

 

8

 

 

(7

)

 

(7

)

 

16

 

Net other-than-temporary impairment losses recognized in earnings

 

(88

)

 

(46

)

 

(185

)

 

(179

)

Sales and other realized capital gains and losses

 

47

 

 

(26

)

 

637

 

 

302

 

Total realized capital gains and losses

 

(41

)

 

(72

)

 

452

 

 

123

 

 

 

8,465

 

 

8,128

 

 

25,715

 

 

24,768

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Property-liability insurance claims and claims expense

 

4,427

 

 

4,293

 

 

13,628

 

 

13,442

 

Life and annuity contract benefits

 

498

 

 

453

 

 

1,427

 

 

1,354

 

Interest credited to contractholder funds

 

317

 

 

215

 

 

973

 

 

959

 

Amortization of deferred policy acquisition costs

 

1,026

 

 

1,016

 

 

2,933

 

 

2,937

 

Operating costs and expenses

 

937

 

 

1,010

 

 

3,129

 

 

3,023

 

Restructuring and related charges

 

13

 

 

9

 

 

59

 

 

25

 

Loss on extinguishment of debt

 

9

 

 

--

 

 

489

 

 

--

 

Interest expense

 

83

 

 

93

 

 

280

 

 

281

 

 

 

7,310

 

 

7,089

 

 

22,918

 

 

22,021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) gain on disposition of operations

 

(646

)

 

9

 

 

(644

)

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations before income tax expense

 

509

 

 

1,048

 

 

2,153

 

 

2,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

193

 

 

325

 

 

694

 

 

850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

316

 

 

723

 

 

1,459

 

 

1,912

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

6

 

 

--

 

 

6

 

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

$

310

 

$

723

 

$

1,453

 

$

1,912

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders per common share - Basic

$

0.67

 

$

1.49

 

$

3.10

 

$

3.89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares - Basic

 

461.1

 

 

485.9

 

 

468.2

 

 

491.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders per common share - Diluted

$

0.66

 

$

1.48

 

$

3.07

 

$

3.86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares - Diluted

 

467.1

 

 

489.9

 

 

473.8

 

 

494.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

$

0.25

 

$

0.22

 

$

0.75

 

$

0.66

 

 

See notes to condensed consolidated financial statements.

 

1



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

($ in millions)

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

2013

 

2012

 

2013

 

2012

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

316

 

$

723

 

$

1,459

 

$

1,912

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), after-tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net capital gains and losses

 

63

 

 

810

 

 

(1,120

)

 

1,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized foreign currency translation adjustments

 

13

 

 

12

 

 

(20

)

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized pension and other postretirement benefit cost

 

684

 

 

20

 

 

775

 

 

64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), after-tax

 

760

 

 

842

 

 

(365

)

 

1,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

$

1,076

 

$

1,565

 

$

1,094

 

$

3,470

 

 

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,
2013

 

December 31,
2012

Assets

 

(unaudited)

 

 

 

Investments

 

 

 

 

 

 

Fixed income securities, at fair value (amortized cost $58,129 and $71,915)

$

60,295

 

$

77,017

 

Equity securities, at fair value (cost $4,370 and $3,577)

 

4,812

 

 

4,037

 

Mortgage loans

 

4,817

 

 

6,570

 

Limited partnership interests

 

5,091

 

 

4,922

 

Short-term, at fair value (amortized cost $2,694 and $2,336)

 

2,694

 

 

2,336

 

Other

 

2,774

 

 

2,396

 

Total investments

 

80,483

 

 

97,278

 

Cash

 

1,069

 

 

806

 

Premium installment receivables, net

 

5,341

 

 

5,051

 

Deferred policy acquisition costs

 

3,286

 

 

3,621

 

Reinsurance recoverables, net

 

6,938

 

 

8,767

 

Accrued investment income

 

617

 

 

781

 

Property and equipment, net

 

993

 

 

989

 

Goodwill

 

1,243

 

 

1,240

 

Other assets

 

1,810

 

 

1,804

 

Separate Accounts

 

4,928

 

 

6,610

 

Assets held for sale

 

15,577

 

 

--

 

Total assets

$

122,285

 

$

126,947

 

Liabilities

 

 

 

 

 

 

Reserve for property-liability insurance claims and claims expense

$

20,983

 

$

21,288

 

Reserve for life-contingent contract benefits

 

12,590

 

 

14,895

 

Contractholder funds

 

24,476

 

 

39,319

 

Unearned premiums

 

11,016

 

 

10,375

 

Claim payments outstanding

 

702

 

 

797

 

Deferred income taxes

 

440

 

 

597

 

Other liabilities and accrued expenses

 

5,245

 

 

6,429

 

Long-term debt

 

6,217

 

 

6,057

 

Separate Accounts

 

4,928

 

 

6,610

 

Liabilities held for sale

 

14,908

 

 

--

 

Total liabilities

 

101,505

 

 

106,367

 

Commitments and Contingent Liabilities (Note 12)

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 26,900 shares issued and outstanding as of September 30, 2013 and none issued and outstanding as of December 31, 2012, $672.5 aggregate liquidation preference

 

650

 

 

--

 

Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 456 million and 479 million shares outstanding

 

9

 

 

9

 

Additional capital paid-in

 

3,127

 

 

3,162

 

Retained income

 

34,885

 

 

33,783

 

Deferred ESOP expense

 

(39

)

 

(41

)

Treasury stock, at cost (444 million and 421 million shares)

 

(18,662

)

 

(17,508

)

Accumulated other comprehensive income:

 

 

 

 

 

 

Unrealized net capital gains and losses:

 

 

 

 

 

 

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

 

33

 

 

(11

)

Other unrealized net capital gains and losses

 

1,804

 

 

3,614

 

Unrealized adjustment to DAC, DSI and insurance reserves

 

(123

)

 

(769

)

Total unrealized net capital gains and losses

 

1,714

 

 

2,834

 

Unrealized foreign currency translation adjustments

 

50

 

 

70

 

Unrecognized pension and other postretirement benefit cost

 

(954

)

 

(1,729

)

Total accumulated other comprehensive income

 

810

 

 

1,175

 

Total shareholders’ equity

 

20,780

 

 

20,580

 

Total liabilities and shareholders’ equity

$

122,285

 

$

126,947

 

 

See notes to condensed consolidated financial statements.

 

3



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

($ in millions)

 

Nine months ended
September 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

 

650

 

 

--

 

Balance, end of period

 

650

 

 

--

 

 

 

 

 

 

 

 

Common stock

 

9

 

 

9

 

 

 

 

 

 

 

 

Additional capital paid-in

 

 

 

 

 

 

Balance, beginning of period

 

3,162

 

 

3,189

 

Equity incentive plans activity

 

(35

)

 

(35

)

Balance, end of period

 

3,127

 

 

3,154

 

 

 

 

 

 

 

 

Retained income

 

 

 

 

 

 

Balance, beginning of period

 

33,783

 

 

31,909

 

Net income

 

1,459

 

 

1,912

 

Dividends on common stock

 

(351

)

 

(325

)

Dividends on preferred stock

 

(6

)

 

--

 

Balance, end of period

 

34,885

 

 

33,496

 

 

 

 

 

 

 

 

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

 

(1,395

)

 

(728

)

Shares reissued under equity incentive plans, net

 

241

 

 

155

 

Balance, end of period

 

(18,662

)

 

(17,368

)

 

 

 

 

 

 

 

Accumulated other comprehensive income

 

 

 

 

 

 

Balance, beginning of period

 

1,175

 

 

29

 

Change in unrealized net capital gains and losses

 

(1,120

)

 

1,480

 

Change in unrealized foreign currency translation adjustments

 

(20

)

 

14

 

Change in unrecognized pension and other postretirement benefit cost

 

775

 

 

64

 

Balance, end of period

 

810

 

 

1,587

 

 

 

 

 

 

 

 

Noncontrolling interest

 

 

 

 

 

 

Balance, beginning of period

 

--

 

 

28

 

Change in noncontrolling interest ownership

 

--

 

 

(28

)

Balance, end of period

 

--

 

 

--

 

 

 

 

 

 

 

 

Total shareholders’ equity

$

20,780

 

$

20,837

 

 

See notes to condensed consolidated financial statements.

 

4



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ in millions)

 

Nine months ended September 30,

 

 

2013

 

2012

Cash flows from operating activities

 

(unaudited)

Net income

$

1,459

 

$

1,912

 

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

 

 

 

 

 

 

Depreciation, amortization and other non-cash items

 

246

 

 

293

 

Realized capital gains and losses

 

(452

)

 

(123

)

Loss on extinguishment of debt

 

489

 

 

--

 

Loss (gain) on disposition of operations

 

644

 

 

(15

)

Interest credited to contractholder funds

 

973

 

 

959

 

Changes in:

 

 

 

 

 

 

Policy benefits and other insurance reserves

 

(787

)

 

(769

)

Unearned premiums

 

670

 

 

421

 

Deferred policy acquisition costs

 

(208

)

 

13

 

Premium installment receivables, net

 

(300

)

 

(178

)

Reinsurance recoverables, net

 

294

 

 

(139

)

Income taxes

 

455

 

 

669

 

Other operating assets and liabilities

 

(412

)

 

(425

)

Net cash provided by operating activities

 

3,071

 

 

2,618

 

Cash flows from investing activities

 

 

 

 

 

 

Proceeds from sales

 

 

 

 

 

 

Fixed income securities

 

15,354

 

 

13,952

 

Equity securities

 

2,231

 

 

1,345

 

Limited partnership interests

 

676

 

 

1,067

 

Mortgage loans

 

20

 

 

11

 

Other investments

 

93

 

 

104

 

Investment collections

 

 

 

 

 

 

Fixed income securities

 

4,879

 

 

3,892

 

Mortgage loans

 

783

 

 

682

 

Other investments

 

213

 

 

70

 

Investment purchases

 

 

 

 

 

 

Fixed income securities

 

(16,645

)

 

(16,809

)

Equity securities

 

(2,565

)

 

(385

)

Limited partnership interests

 

(911

)

 

(1,232

)

Mortgage loans

 

(423

)

 

(472

)

Other investments

 

(880

)

 

(275

)

Change in short-term investments, net

 

(544

)

 

(1,284

)

Change in other investments, net

 

92

 

 

(6

)

Purchases of property and equipment, net

 

(116

)

 

(176

)

(Acquisition) disposition of operations

 

(24

)

 

13

 

Net cash provided by investing activities

 

2,233

 

 

497

 

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

2,267

 

 

493

 

Repayment of long-term debt

 

(2,605

)

 

(351

)

Proceeds from issuance of preferred stock

 

651

 

 

--

 

Contractholder fund deposits

 

1,608

 

 

1,571

 

Contractholder fund withdrawals

 

(5,458

)

 

(3,938

)

Dividends paid on common stock

 

(237

)

 

(322

)

Treasury stock purchases

 

(1,385

)

 

(729

)

Shares reissued under equity incentive plans, net

 

108

 

 

60

 

Excess tax benefits on share-based payment arrangements

 

33

 

 

7

 

Other

 

(10

)

 

(40

)

Net cash used in financing activities

 

(5,028

)

 

(3,249

)

Transfer of cash to held for sale

 

(13

)

 

--

 

Net increase (decrease) in cash

 

263

 

 

(134

)

Cash at beginning of period

 

806

 

 

776

 

Cash at end of period

$

1,069

 

$

642

 

 

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 September 30, 2013 and for the three-month and nine-month periods ended September 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
September 30,

 

 

Nine months ended
September 30,

 

 

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

316

 

723

 

1,459

 

1,912

 

Less: Preferred stock dividends

 

 

6

 

 

--

 

 

6

 

 

--

 

Net income available to common shareholders

 

310

 

723

 

1,453

 

1,912

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

461.1

 

 

485.9

 

 

468.2

 

 

491.5

 

Effect of dilutive potential common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

4.2

 

 

2.7

 

 

3.9

 

 

2.2

 

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

 

 

1.8

 

 

1.3

 

 

1.7

 

 

1.0

 

Weighted average common and dilutive potential common shares outstanding

 

 

467.1

 

 

489.9

 

 

473.8

 

 

494.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - Basic

 

0.67

 

1.49

 

3.10

 

3.89

 

Earnings per common share - Diluted

 

0.66

 

1.48

 

3.07

 

3.86

 

 

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 8.4 million and 17.8 million Allstate common shares, with exercise prices ranging from $41.16 to $62.42 and $31.41 to $62.84, were outstanding for the three-month periods ended September 30, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per common share in those periods.  Options to purchase 13.0 million and 22.1 million Allstate common shares, with exercise prices ranging from $39.05 to $62.42 and $26.56 to $62.84, were outstanding for the nine-month periods ended September 30, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per common share in those periods.

 

7



 

3.  Held for Sale Transaction

 

On July 17, 2013, the Company entered into a definitive agreement with Resolution Life Holdings, Inc. to sell Lincoln Benefit Life Company (“LBL”), LBL’s life insurance business generated through independent master brokerage agencies, and all of LBL’s deferred fixed annuity and long-term care insurance business for $600 million subject to certain adjustments as of the closing date.  LBL is reported in the Allstate Financial segment.  The transaction is subject to regulatory approvals and other customary closing conditions.  The Company expects the closing to occur during the first quarter of 2014.  The estimated loss on disposition of $475 million, after-tax, was recorded in third quarter 2013, excluding any impact of unrealized net capital gains and losses.  This transaction met the criteria for held for sale accounting.  As a result, the related assets and liabilities are included as single line items in the asset and liability sections of the Condensed Consolidated Statement of Financial Position as of September 30, 2013.  The following table summarizes the assets and liabilities held for sale as of September 30, 2013.

 

($ in millions) 

 

 

 

Assets

 

 

 

Investments

 

 

 

Fixed income securities

10,514

 

Mortgage loans

 

1,400

 

Short-term investments

 

31

 

Other investments

 

294

 

Total investments

 

12,239

 

Cash

 

13

 

Deferred policy acquisition costs

 

741

 

Reinsurance recoverables, net

 

1,403

 

Accrued investment income

 

117

 

Other assets

 

52

 

Separate Accounts

 

1,655

 

Assets held for sale

 

16,220

 

Less: Loss accrual

 

(643)

 

Total assets held for sale

15,577

 

Liabilities

 

 

 

Reserve for life-contingent contract benefits

1,629

 

Contractholder funds

 

11,283

 

Unearned premiums

 

12

 

Deferred income taxes

 

114

 

Other liabilities and accrued expenses

 

215

 

Separate Accounts

 

1,655

 

Total liabilities held for sale

14,908

 

 

Included in shareholders’ equity is $111 million of accumulated other comprehensive income related to assets held for sale.

 

4.  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 $271 million and $170 million for the nine months ended September 30, 2013 and 2012, respectively.  Non-cash financing activities include $93 million and $39 million related to the issuance of Allstate common shares for vested restricted stock units for the nine months ended September 30, 2013 and 2012, respectively.

 

8



 

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,

 

 

 

2013

 

2012

 

Net change in proceeds managed

 

 

 

 

 

Net change in short-term investments

156

(297

)

Operating cash flow provided (used)

 

156

 

(297

)

Net change in cash

 

(3)

 

(6

)

Net change in proceeds managed

153

(303

)

 

 

 

 

 

 

Net change in liabilities

 

 

 

 

 

Liabilities for collateral, beginning of year

(808)

(462

)

Liabilities for collateral, end of period

 

(655)

 

(765

)

Operating cash flow (used) provided

(153)

303

 

 

5.  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, 2013

 

 

 

 

 

 

 

 

 

U.S. government and agencies

2,725

158

(2)

2,881

 

Municipal

 

9,246

 

451

 

(86)

 

9,611

 

Corporate

 

38,285

 

1,777

 

(365)

 

39,697

 

Foreign government

 

1,831

 

119

 

(11)

 

1,939

 

Asset-backed securities (“ABS”)

 

3,389

 

75

 

(43)

 

3,421

 

Residential mortgage-backed securities (“RMBS”)

 

1,787

 

100

 

(43)

 

1,844

 

Commercial mortgage-backed securities (“CMBS”)

 

844

 

48

 

(17)

 

875

 

Redeemable preferred stock

 

22

 

5

 

--

 

27

 

Total fixed income securities

58,129

2,733

(567)

60,295

 

 

 

 

 

 

 

 

 

 

 

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

 

 

9



 

Scheduled maturities

 

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

 

($ in millions)

 

Amortized
cost

 

Fair
value

 

Due in one year or less

2,564

2,604

 

Due after one year through five years

 

22,645

 

23,399

 

Due after five years through ten years

 

17,441

 

18,079

 

Due after ten years

 

9,459

 

10,073

 

 

 

52,109

 

54,155

 

ABS, RMBS and CMBS

 

6,020

 

6,140

 

Total

58,129

60,295

 

 

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
September 30,

 

Nine months ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Fixed income securities

721

817

2,223

2,441

 

Equity securities

 

30

 

29

 

94

 

74

 

Mortgage loans

 

99

 

92

 

290

 

277

 

Limited partnership interests

 

106

 

22

 

339

 

238

 

Short-term investments

 

1

 

2

 

4

 

4

 

Other

 

44

 

33

 

120

 

97

 

Investment income, before expense

 

1,001

 

995

 

3,070

 

3,131

 

Investment expense

 

(51)

 

(55)

 

(153)

 

(154)

 

Net investment income

950

940

2,917

2,977

 

 

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,

 

 

 

2013

 

2012

 

2013

 

2012

 

Fixed income securities

24

(50)

175

(73)

 

Equity securities

 

(51)

 

(15)

 

261

 

157

 

Mortgage loans

 

(6)

 

(3)

 

19

 

5

 

Limited partnership interests

 

2

 

--

 

(1)

 

13

 

Derivatives

 

(12)

 

(2)

 

(2)

 

26

 

Other

 

2

 

(2)

 

--

 

(5)

 

Realized capital gains and losses

(41)

(72)

452

123

 

 

10



 

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

 

($ in millions)

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Impairment write-downs

(18)

(43)

(61)

(131)

 

Change in intent write-downs

 

(70)

 

(3)

 

(124)

 

(48)

 

Net other-than-temporary impairment losses recognized in earnings

 

(88)

 

(46)

 

(185)

 

(179)

 

Sales

 

59

 

(24)

 

639

 

275

 

Valuation of derivative instruments

 

--

 

--

 

(1)

 

1

 

Settlements of derivative instruments

 

(12)

 

(2)

 

(1)

 

26

 

Realized capital gains and losses

(41)

(72)

452

123

 

 

Gross gains of $74 million and $109 million and gross losses of $39 million and $154 million were realized on sales of fixed income securities during the three months ended September 30, 2013 and 2012, respectively.  Gross gains of $322 million and $296 million and gross losses of $83 million and $291 million were realized on sales of fixed income securities during the nine months ended September 30, 2013 and 2012, respectively.

 

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

 

($ in millions)

 

Three months ended
September 30, 2013

 

Nine months ended
September 30, 2013

 

 

 

Gross

 

Included
in OCI

 

Net

 

Gross

 

Included
in OCI

 

Net

 

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

(6)

--

(6)

(23)

(5)

(28)

 

ABS

 

--

 

--

 

--

 

--

 

(1)

 

(1)

 

RMBS

 

(4)

 

4

 

--

 

(5)

 

2

 

(3)

 

CMBS

 

(9)

 

4

 

(5)

 

(29)

 

(3)

 

(32)

 

Total fixed income securities

 

(19)

 

8

 

(11)

 

(57)

 

(7)

 

(64)

 

Equity securities

 

(67)

 

--

 

(67)

 

(118)

 

--

 

(118)

 

Mortgage loans

 

(6)

 

--

 

(6)

 

11

 

--

 

11

 

Limited partnership interests

 

(2)

 

--

 

(2)

 

(10)

 

--

 

(10)

 

Other

 

(2)

 

--

 

(2)

 

(4)

 

--

 

(4)

 

Other-than-temporary impairment losses

(96)

8

(88)

(178)

(7)

(185)

 

 

($ 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)

 

 

11



 

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 $243 million and $219 million as of September 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)

 

September 30,
2013

 

December 31,
2012

 

Municipal

(9)

(20)

 

Corporate

 

(7)

 

(1)

 

ABS

 

(10)

 

(14)

 

RMBS

 

(150)

 

(182)

 

CMBS

 

(16)

 

(19)

 

Total

(192)

(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
September 30,

 

Nine months ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Beginning balance

(564)

(781)

(617)

(944)

 

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

 

(6)

 

(15)

 

(30)

 

(49)

 

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

 

(2)

 

(3)

 

(19)

 

(24)

 

Reduction in credit loss for securities disposed or collected

 

43

 

128

 

136

 

339

 

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

 

1

 

Ending balance (1)

(529)

(670)

(529)

(670)

 

 


(1)

The September 30, 2013 ending balance includes $59 million of cumulative credit losses recognized in earnings for fixed income securities that are classified as held for sale.

 

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.

 

12



 

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

 

September 30, 2013

 

value

 

Gains

 

Losses

 

gains (losses)

 

Fixed income securities

60,295

2,733

(567)

 

$

2,166

 

Equity securities

 

4,812

 

465

 

(23)

 

 

442

 

Short-term investments

 

2,694

 

--

 

--

 

 

--

 

Derivative instruments (1)

 

(14)

 

2

 

(21)

 

 

(19)

 

EMA limited partnerships (2)

 

 

 

 

 

 

 

 

(3)

 

Investments classified as held for sale

 

 

 

 

 

 

 

 

244

 

Unrealized net capital gains and losses, pre-tax

 

 

 

 

 

 

 

 

2,830

 

Amounts recognized for:

 

 

 

 

 

 

 

 

 

 

Insurance reserves (3)

 

 

 

 

 

 

 

 

--

 

DAC and DSI (4)

 

 

 

 

 

 

 

 

(189)

 

Amounts recognized

 

 

 

 

 

 

 

 

(189)

 

Deferred income taxes

 

 

 

 

 

 

 

 

(927)

 

Unrealized net capital gains and losses, after-tax

 

 

 

 

 

 

 

$

1,714

 

 


(1)

Included in the fair value of derivative instruments are $2 million classified as assets and $16 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.

 

13



 

Change in unrealized net capital gains and losses

 

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

 

($ in millions)

 

 

 

Fixed income securities

(2,936

)

Equity securities

 

(18

)

Derivative instruments

 

3

 

EMA limited partnerships

 

(10

)

Investments classified as held for sale

 

244

 

Total

 

(2,717

)

Amounts recognized for:

 

 

 

Insurance reserves

 

771

 

DAC and DSI

 

223

 

Amounts recognized

 

994

 

Deferred income taxes

 

603

 

Decrease in unrealized net capital gains and losses

(1,120

)

 

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.

 

14



 

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

 

September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

8

93

(2)

 

--

--

--

(2)

 

Municipal

 

325

 

2,308

 

(46)

 

33

 

191

 

(40)

 

(86)

 

Corporate

 

767

 

9,035

 

(293)

 

44

 

467

 

(72)

 

(365)

 

Foreign government

 

90

 

335

 

(11)

 

1

 

1

 

--

 

(11)

 

ABS

 

46

 

699

 

(6)

 

42

 

407

 

(37)

 

(43)

 

RMBS

 

285

 

297

 

(6)

 

280

 

261

 

(37)

 

(43)

 

CMBS

 

11

 

67

 

--

 

10

 

73

 

(17)

 

(17)

 

Total fixed income securities

 

1,532

 

12,834

 

(364)

 

410

 

1,400

 

(203)

 

(567)

 

Equity securities

 

210

 

1,047

 

(23)

 

10

 

7

 

--

 

(23)

 

Total fixed income and equity securities

 

1,742

13,881

(387)

 

420

1,407

(203)

(590)