UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

/ X /  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2011

 

OR

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number 1-11840

 

THE ALLSTATE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

(847) 402-5000

(Registrant’s telephone number, including area code)

 

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

 

Yes   X                     No ___

 

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

 

Yes   X                     No ___

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	X	Accelerated filer	___
Non-accelerated filer	___  (Do not check if a smaller reporting company)	Smaller reporting company	___

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ___                   No   X  

 

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

 

 

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31, 2011

 

PART I	FINANCIAL INFORMATION	PAGE
Item 1.	Financial Statements
	Condensed Consolidated Statements of Operations for the Three-Month Periods Ended March 31, 2011 and 2010 (unaudited)	1
	Condensed Consolidated Statements of Financial Position as of March 31, 2011 (unaudited) and December 31, 2010	2
	Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2011 and 2010 (unaudited)	3
	Notes to Condensed Consolidated Financial Statements (unaudited)	4
	Report of Independent Registered Public Accounting Firm	43
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Highlights	44
	Consolidated Net Income	45
	Property-Liability Highlights	45
	Allstate Protection Segment	49
	Discontinued Lines and Coverages Segment	56
	Property-Liability Investment Results	57
	Allstate Financial Highlights	58
	Allstate Financial Segment	58
	Investments Highlights	64
	Investments	64
	Capital Resources and Liquidity Highlights	88
	Capital Resources and Liquidity	88
Item 4.	Controls and Procedures	92
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	93
Item 1A.	Risk Factors	93
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	93
Item 6.	Exhibits	94

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

($ in millions, except per share data)		Three months ended
		March 31,
		2011		2010
		(unaudited)
Revenues
Property-liability insurance premiums	$	6,448	$	6,503
Life and annuity premiums and contract charges		569		544
Net investment income		982		1,050
Realized capital gains and losses:
Total other-than-temporary impairment losses		(156)		(250)
Portion of loss recognized in other comprehensive income		(27)		(5)
Net other-than-temporary impairment losses recognized in earnings		(183)		(255)
Sales and other realized capital gains and losses		279		(93)
Total realized capital gains and losses		96		(348)
		8,095		7,749
Costs and expenses
Property-liability insurance claims and claims expense		4,476		4,792
Life and annuity contract benefits		454		442
Interest credited to contractholder funds		418		463
Amortization of deferred policy acquisition costs		1,051		1,014
Operating costs and expenses		838		829
Restructuring and related charges		9		11
Interest expense		92		92
		7,338		7,643
(Loss) gain on disposition of operations		(23)		1
Income from operations before income tax expense (benefit)		734		107
Income tax expense (benefit)		215		(13)
Net income	$	519	$	120
Earnings per share:
Net income per share - Basic	$	0.98	$	0.22
Weighted average shares - Basic		531.0		540.5
Net income per share - Diluted	$	0.97	$	0.22
Weighted average shares - Diluted		533.6		541.8
Cash dividends declared per share	$	0.21	$	0.20

 

See notes to condensed consolidated financial statements.

 

1

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THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

($ in millions, except par value data)		March 31,		December 31,
		2011		2010
Assets		(unaudited)
Investments
Fixed income securities, at fair value (amortized cost $79,292 and $78,786)	$	80,242	$	79,612
Equity securities, at fair value (cost $3,792 and $4,228)		4,437		4,811
Mortgage loans		6,582		6,679
Limited partnership interests		4,077		3,816
Short-term, at fair value (amortized cost $1,986 and $3,279)		1,986		3,279
Other		2,287		2,286
Total investments		99,611		100,483
Cash		641		562
Premium installment receivables, net		4,842		4,839
Deferred policy acquisition costs		4,697		4,769
Reinsurance recoverables, net		6,589		6,552
Accrued investment income		885		809
Deferred income taxes		612		784
Property and equipment, net		912		921
Goodwill		874		874
Other assets		2,159		1,605
Separate Accounts		8,603		8,676
Total assets	$	130,425	$	130,874
Liabilities
Reserve for property-liability insurance claims and claims expense	$	19,494	$	19,468
Reserve for life-contingent contract benefits		13,552		13,482
Contractholder funds		46,834		48,195
Unearned premiums		9,563		9,800
Claim payments outstanding		761		737
Other liabilities and accrued expenses		6,369		5,564
Long-term debt		5,908		5,908
Separate Accounts		8,603		8,676
Total liabilities		111,084		111,830
Commitments and Contingent Liabilities (Note 10)
Equity
Preferred stock, $1 par value, 25 million shares authorized, none issued		--		--
Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 524 million and 533 million shares outstanding		9		9
Additional capital paid-in		3,156		3,176
Retained income		32,377		31,969
Deferred ESOP expense		(42)		(44)
Treasury stock, at cost (376 million and 367 million shares)		(16,173)		(15,910)
Accumulated other comprehensive income:
Unrealized net capital gains and losses:
Unrealized net capital losses on fixed income securities with OTTI		(167)		(190)
Other unrealized net capital gains and losses		1,186		1,089
Unrealized adjustment to DAC, DSI and insurance reserves		60		36
Total unrealized net capital gains and losses		1,079		935
Unrealized foreign currency translation adjustments		79		69
Unrecognized pension and other postretirement benefit cost		(1,173)		(1,188)
Total accumulated other comprehensive loss		(15)		(184)
Total shareholders’ equity		19,312		19,016
Noncontrolling interest		29		28
Total equity		19,341		19,044
Total liabilities and equity	$	130,425	$	130,874

 

See notes to condensed consolidated financial statements.

 

2

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ in millions)		Three months ended
		March 31,
		2011		2010
Cash flows from operating activities		(unaudited)
Net income	$	519	$	120
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items		31		16
Realized capital gains and losses		(96)		348
Loss (gain) on disposition of operations		23		(1)
Interest credited to contractholder funds		418		463
Changes in:
Policy benefits and other insurance reserves		(58)		188
Unearned premiums		(248)		(261)
Deferred policy acquisition costs		72		30
Premium installment receivables, net		3		24
Reinsurance recoverables, net		(117)		(72)
Income taxes		200		73
Other operating assets and liabilities		(21)		36
Net cash provided by operating activities		726		964
Cash flows from investing activities
Proceeds from sales
Fixed income securities		8,363		4,930
Equity securities		642		1,990
Limited partnership interests		113		146
Mortgage loans		26		3
Other investments		63		37
Investment collections
Fixed income securities		1,201		1,122
Mortgage loans		88		263
Other investments		77		18
Investment purchases
Fixed income securities		(10,207)		(7,099)
Equity securities		(144)		(556)
Limited partnership interests		(334)		(185)
Mortgage loans		(26)		(1)
Other investments		(58)		(43)
Change in short-term investments, net		1,649		411
Change in other investments, net		(119)		(49)
Purchases of property and equipment, net		(48)		(24)
Disposition of operations		(1)		--
Net cash provided by investing activities		1,285		963
Cash flows from financing activities
Contractholder fund deposits		596		828
Contractholder fund withdrawals		(2,122)		(2,569)
Dividends paid		(107)		(107)
Treasury stock purchases		(305)		(5)
Shares reissued under equity incentive plans, net		9		14
Excess tax benefits on share-based payment arrangements		(3)		(2)
Other		--		6
Net cash used in financing activities		(1,932)		(1,835)
Net increase in cash		79		92
Cash at beginning of period		562		612
Cash at end of period	$	641	$	704

 

See notes to condensed consolidated financial statements.

 

3

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  General

 

Basis of presentation

 

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

 

The condensed consolidated financial statements and notes as of March 31, 2011, and for the three-month periods ended March 31, 2011 and 2010 are unaudited.  The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals), which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods.  These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

 

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

 

Adopted accounting standards

 

Consolidation Analysis Considering Investments Held through Separate Accounts

 

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

 

Disclosure of Supplementary Pro Forma Information for Business Combinations

 

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

 

Pending accounting standards

 

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

 

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

 

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

 

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

 

4

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THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

2.  Earnings per share

 

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

 

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

 

($ in millions, except per share data)		2011		2010
Numerator:
Net income	$	519	$	120
Denominator:
Weighted average common shares outstanding		531.0		540.5
Effect of dilutive potential common shares:
Stock options		2.2		1.3
Restricted stock units (non-participating)		0.4		--
Weighted average common and dilutive potential common shares outstanding		533.6		541.8
Earnings per share - Basic	$	0.98	$	0.22
Earnings per share - Diluted	$	0.97	$	0.22

 

The effect of dilutive potential common shares does not include the effect of options with an anti-dilutive effect on earnings per share because their exercise prices exceed the average market price of Allstate common shares during the period or for which the unrecognized compensation cost would have an anti-dilutive effect.  Options to purchase 30.4 million and 24.4 million Allstate common shares, with exercise prices ranging from $27.36 to $62.84 and $27.36 to $64.53, were outstanding for the three-month periods ended March 31, 2011 and 2010, respectively, but were not included in the computation of diluted earnings per share in those periods.

 

3.  Supplemental Cash Flow Information

 

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

 

5

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Liabilities for collateral received in conjunction with the Company’s securities lending program and over-the-counter (“OTC”) derivatives are reported in other liabilities and accrued expenses or other investments.  The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which for the three months ended March 31 are as follows:

 

($ in millions)		2011		2010
Net change in proceeds managed
Net change in short-term investments	$	(351)	$	171
Operating cash flow (used) provided		(351)		171
Net change in cash		(3)		6
Net change in proceeds managed	$	(354)	$	177
Net change in liabilities
Liabilities for collateral, beginning of year	$	(484)	$	(658)
Liabilities for collateral, end of period		(838)		(481)
Operating cash flow provided (used)	$	354	$	(177)

 

4.  Investments

 

Fair values

 

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

 

($ in millions)		Amortized		Gross unrealized				Fair
		cost		Gains		Losses		value
March 31, 2011
U.S. government and agencies	$	6,509	$	277	$	(20)	$	6,766
Municipal		15,500		367		(621)		15,246
Corporate		41,095		1,675		(375)		42,395
Foreign government		2,822		306		(11)		3,117
Residential mortgage-backed securities (“RMBS”)		6,907		195		(572)		6,530
Commercial mortgage-backed securities (“CMBS”)		2,156		63		(166)		2,053
Asset-backed securities (“ABS”)		4,280		82		(251)		4,111
Redeemable preferred stock		23		1		--		24
Total fixed income securities	$	79,292	$	2,966	$	(2,016)	$	80,242
December 31, 2010
U.S. government and agencies	$	8,320	$	327	$	(51)	$	8,596
Municipal		16,201		379		(646)		15,934
Corporate		36,260		1,816		(421)		37,655
Foreign government		2,821		347		(10)		3,158
RMBS		8,509		216		(732)		7,993
CMBS		2,213		58		(277)		1,994
ABS		4,425		113		(294)		4,244
Redeemable preferred stock		37		1		--		38
Total fixed income securities	$	78,786	$	3,257	$	(2,431)	$	79,612

 

6

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Scheduled maturities

 

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

 

($ in millions)		Amortized		Fair
		cost		value
Due in one year or less	$	2,699	$	2,741
Due after one year through five years		24,998		25,760
Due after five years through ten years		19,348		20,199
Due after ten years		21,060		20,901
		68,105		69,601
RMBS and ABS		11,187		10,641
Total	$	79,292	$	80,242

 

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

 

Net investment income

 

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

 

($ in millions)		2011		2010
Fixed income securities	$	900	$	959
Equity securities		19		21
Mortgage loans		89		104
Limited partnership interests		10		6
Short-term investments		2		2
Other		11		1
Investment income, before expense		1,031		1,093
Investment expense		(49)		(43)
Net investment income	$	982	$	1,050

 

Realized capital gains and losses

 

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

 

($ in millions)		2011		2010
Fixed income securities	$	(27)	$	(136)
Equity securities		122		14
Mortgage loans		(6)		(25)
Limited partnership interests		68		(21)
Derivatives		(67)		(185)
Other		6		5
Realized capital gains and losses	$	96	$	(348)

 

7

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

($ in millions)		2011		2010
Impairment write-downs	$	(114)	$	(223)
Change in intent write-downs		(69)		(32)
Net other-than-temporary impairment losses recognized in earnings		(183)		(255)
Sales		283		88
Valuation of derivative instruments		22		(155)
Settlements of derivative instruments		(89)		(30)
Equity method of accounting (“EMA”) limited partnership income		63		4
Realized capital gains and losses	$	96	$	(348)

 

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

 

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

 

($ in millions)		2011						2010
		Gross		Included in OCI		Net		Gross		Included in OCI		Net
Fixed income securities:
Municipal	$	(27)	$	(2)	$	(29)	$	(37)	$	--	$	(37)
Corporate		(5)		1		(4)		(47)		3		(44)
Foreign government		(1)		--		(1)		--		--		--
RMBS		(72)		(25)		(97)		(88)		(7)		(95)
CMBS		(16)		(4)		(20)		(26)		--		(26)
ABS		(7)		3		(4)		(3)		(1)		(4)
Total fixed income securities		(128)		(27)		(155)		(201)		(5)		(206)
Equity securities		(20)		--		(20)		(6)		--		(6)
Mortgage loans		(6)		--		(6)		(19)		--		(19)
Limited partnership interests		(1)		--		(1)		(24)		--		(24)
Other		(1)		--		(1)		--		--		--
Other-than-temporary impairment losses	$	(156)	$	(27)	$	(183)	$	(250)	$	(5)	$	(255)

 

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

 

($ in millions)		March 31,		December 31,
		2011		2010
Municipal	$	(14)	$	(27)
Corporate		(32)		(31)
RMBS		(417)		(467)
CMBS		(42)		(49)
ABS		(26)		(41)
Total	$	(531)	$	(615)

 

8

 

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

		Three months ended March 31
($ in millions)		2011			2010
Beginning balance	$	(1,046	)	$	(1,187	)
Additional credit loss for securities previously other-than-temporarily impaired		(59	)		(101	)
Additional credit loss for securities not previously other-than-temporarily impaired		(27	)		(79	)
Reduction in credit loss for securities disposed or collected		153			131
Reduction in credit loss for securities the Company has made the decision to sell or more likely than not will be required to sell		15			--
Change in credit loss due to accretion of increase in cash flows		1			--
Ending balance	$	(963	)	$	(1,236	)

 

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

 

9

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Unrealized net capital gains and losses

 

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

 

($ in millions)		Fair			Gross unrealized						Unrealized net
March 31, 2011		value			Gains			Losses			gains (losses)
Fixed income securities	$	80,242		$	2,966		$	(2,016	)		$	950
Equity securities		4,437			707			(62	)			645
Short-term investments		1,986			--			--				--
Derivative instruments (1)		(26	)		--			(30	)			(30	)
EMA limited partnership interests (2)												7
Unrealized net capital gains and losses, pre-tax												1,572
Amounts recognized for:
Insurance reserves (3)												(2	)
DAC and DSI (4)												95
Amounts recognized												93
Deferred income taxes												(586	)
Unrealized net capital gains and losses, after-tax											$	1,079

 

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

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

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

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

 

		Fair			Gross unrealized						Unrealized net
December 31, 2010		value			Gains			Losses			gains (losses)
Fixed income securities	$	79,612		$	3,257		$	(2,431	)		$	826
Equity securities		4,811			646			(63	)			583
Short-term investments		3,279			--			--				--
Derivative instruments (1)		(17	)		2			(24	)			(22	)
Unrealized net capital gains and losses, pre-tax												1,387
Amounts recognized for:
Insurance reserves												(41	)
DAC and DSI												97
Amounts recognized												56
Deferred income taxes												(508	)
Unrealized net capital gains and losses, after-tax											$	935

 

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

 

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THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Change in unrealized net capital gains and losses

 

The change in unrealized net capital gains and losses for the three months ended March 31, 2011 is as follows:

 

($ in millions)
Fixed income securities	$	124
Equity securities		62
Derivative instruments		(8	)
EMA limited partnership interests		7
Total		185
Amounts recognized for:
Insurance reserves		39
DAC and DSI		(2	)
Increase in amounts recognized		37
Deferred income taxes		(78	)
Increase in unrealized net capital gains and losses	$	144

 

Portfolio monitoring

 

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

 

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

 

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

 

For equity securities, the Company considers various factors, including whether it has the intent and ability to hold the equity security for a period of time sufficient to recover its cost basis.  Where the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the equity security’s decline in fair value is considered other than temporary and is recorded in earnings.  For equity securities managed by a third party, the Company has contractually retained its decision making authority as it pertains to selling equity securities that are in an unrealized loss position.

 

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

 

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THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

($ in millions)		Less than 12 months							12 months or more							Total
		Number		Fair		Unrealized			Number		Fair		Unrealized			unrealized
		of issues		value		losses			of issues		value		losses			losses
March 31, 2011
Fixed income securities
U.S. government and agencies		33	$	1,565	$	(20	)		--	$	--	$	--		$	(20	)
Municipal		815		3,767		(174	)		395		2,573		(447	)		(621	)
Corporate		597		9,339		(188	)		144		1,959		(187	)		(375	)
Foreign government		55		357		(11	)		1		10		--			(11	)
RMBS		281		493		(13	)		357		1,458		(559	)		(572	)
CMBS		13		128		(3	)		95		721		(163	)		(166	)
ABS		58		815		(6	)		122		1,268		(245	)		(251	)
Total fixed income securities		1,852		16,464		(415	)		1,114		7,989		(1,601	)		(2,016	)
Equity securities		788		600		(53	)		38		74		(9	)		(62	)
Total fixed income and equity Securities		2,640	$	17,064	$	(468	)		1,152	$	8,063	$	(1,610	)	$	(2,078	)
Investment grade fixed income securities		1,702	$	15,130	$	(372	)		750	$	5,468	$	(721	)	$	(1,093	)
Below investment grade fixed income securities		150		1,334		(43	)		364		2,521		(880	)		(923	)
Total fixed income securities		1,852	$	16,464	$	(415	)		1,114	$	7,989	$	(1,601	)	$	(2,016	)
December 31, 2010
Fixed income securities
U.S. government and agencies		32	$	2,081	$	(51	)		--	$	--	$	--		$	(51	)
Municipal		847		4,130		(175	)		411		2,715		(471	)		(646	)
Corporate		438		5,994		(186	)		150		1,992		(235	)		(421	)
Foreign government		33		277		(9	)		1		10		(1	)		(10	)
RMBS		280		583		(12	)		422		1,939		(720	)		(732	)
CMBS		14		158		(3	)		114		835		(274	)		(277	)
ABS		68		762		(8	)		133		1,313		(286	)		(294	)
Total fixed income securities		1,712		13,985		(444	)		1,231		8,804		(1,987	)		(2,431	)
Equity securities		773		610		(48	)		44		91		(15	)		(63	)
Total fixed income and equity securities		2,485	$	14,595	$	(492	)		1,275	$	8,895	$	(2,002	)	$	(2,494	)
Investment grade fixed income securities		1,607	$	13,280	$	(408	)		857	$	6,217	$	(943	)	$	(1,351	)
Below investment grade fixed income securities		105		705		(36	)		374		2,587		(1,044	)		(1,080	)
Total fixed income securities		1,712	$	13,985	$	(444	)		1,231	$	8,804	$	(1,987	)	$	(2,431	)

 

As of March 31, 2011, $1.04 billion of unrealized losses are related to securities with an unrealized loss position less than 20% of amortized cost or cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired.  Of the $1.04 billion, $805 million are related to unrealized losses on investment grade fixed income securities.  Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from Standard & Poor’s (“S&P”), Fitch, Dominion or Realpoint, a rating of aaa, aa, a or bbb from A.M. Best, or a comparable internal rating if an externally provided rating is not available.  Unrealized losses on investment grade securities are principally related to widening credit spreads or rising interest rates since the time of initial purchase.

 

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

 

12