UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2011

 

OR

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number 1-11840

 

THE ALLSTATE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

36-3871531

(State or other jurisdiction of incorporation or organization)

 

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

 

2775 Sanders Road, Northbrook, Illinois

60062

(Address of principal executive offices)

(Zip Code)

 

(847) 402-5000

(Registrant’s telephone number, including area code)

 

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

 

Yes   X                     No ___

 

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

 

Yes   X                     No ___

 

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

 

Large accelerated filer

  X  

Accelerated filer

___

 

 

 

 

Non-accelerated filer

___  (Do not check if a smaller reporting company)

Smaller reporting company

___

 

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

 

Yes ___                   No   X  

 

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

 



 

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31, 2011

 

PART I

FINANCIAL INFORMATION

PAGE

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

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

1

 

 

 

 

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

2

 

 

 

 

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

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

4

 

 

 

 

Report of Independent Registered Public Accounting Firm

43

 

 

 

Item 2.

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

 

 

 

 

 

Highlights

44

 

Consolidated Net Income

45

 

Property-Liability Highlights

45

 

Allstate Protection Segment

49

 

Discontinued Lines and Coverages Segment

56

 

Property-Liability Investment Results

57

 

Allstate Financial Highlights

58

 

Allstate Financial Segment

58

 

Investments Highlights

64

 

Investments

64

 

Capital Resources and Liquidity Highlights

88

 

Capital Resources and Liquidity

88

 

 

 

Item 4.

Controls and Procedures

92

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

93

 

 

 

Item 1A.

Risk Factors

93

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

93

 

 

 

Item 6.

Exhibits

94

 



 

PART I. FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

($ in millions, except per share data)

 

Three months ended

 

 

March 31,

 

 

2011

 

2010

 

 

(unaudited)

Revenues

 

 

 

 

Property-liability insurance premiums

6,448

6,503

Life and annuity premiums and contract charges

 

569

 

544

Net investment income

 

982

 

1,050

Realized capital gains and losses:

 

 

 

 

Total other-than-temporary impairment losses

 

(156)

 

(250)

Portion of loss recognized in other comprehensive income

 

(27)

 

(5)

Net other-than-temporary impairment losses recognized in earnings

 

(183)

 

(255)

Sales and other realized capital gains and losses

 

279

 

(93)

Total realized capital gains and losses

 

96

 

(348)

 

 

8,095

 

7,749

 

 

 

 

 

Costs and expenses

 

 

 

 

Property-liability insurance claims and claims expense

 

4,476

 

4,792

Life and annuity contract benefits

 

454

 

442

Interest credited to contractholder funds

 

418

 

463

Amortization of deferred policy acquisition costs

 

1,051

 

1,014

Operating costs and expenses

 

838

 

829

Restructuring and related charges

 

9

 

11

Interest expense

 

92

 

92

 

 

7,338

 

7,643

 

 

 

 

 

(Loss) gain on disposition of operations

 

(23)

 

1

 

 

 

 

 

Income from operations before income tax expense (benefit)

 

734

 

107

 

 

 

 

 

Income tax expense (benefit)

 

215

 

(13)

 

 

 

 

 

Net income

519

120

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Net income per share - Basic

0.98

0.22

 

 

 

 

 

Weighted average shares - Basic

 

531.0

 

540.5

 

 

 

 

 

Net income per share - Diluted

0.97

0.22

 

 

 

 

 

Weighted average shares - Diluted

 

533.6

 

541.8

 

 

 

 

 

Cash dividends declared per share

0.21

0.20

 

See notes to condensed consolidated financial statements.

 

1



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

($ in millions, except par value data)

 

March 31,

 

December 31,

 

 

2011

 

2010

Assets

 

(unaudited)

 

 

Investments

 

 

 

 

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

80,242

79,612

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

 

4,437

 

4,811

Mortgage loans

 

6,582

 

6,679

Limited partnership interests

 

4,077

 

3,816

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

 

1,986

 

3,279

Other

 

2,287

 

2,286

Total investments

 

99,611

 

100,483

Cash

 

641

 

562

Premium installment receivables, net

 

4,842

 

4,839

Deferred policy acquisition costs

 

4,697

 

4,769

Reinsurance recoverables, net

 

6,589

 

6,552

Accrued investment income

 

885

 

809

Deferred income taxes

 

612

 

784

Property and equipment, net

 

912

 

921

Goodwill

 

874

 

874

Other assets

 

2,159

 

1,605

Separate Accounts

 

8,603

 

8,676

Total assets

130,425

130,874

 

 

 

 

 

Liabilities

 

 

 

 

Reserve for property-liability insurance claims and claims expense

19,494

19,468

Reserve for life-contingent contract benefits

 

13,552

 

13,482

Contractholder funds

 

46,834

 

48,195

Unearned premiums

 

9,563

 

9,800

Claim payments outstanding

 

761

 

737

Other liabilities and accrued expenses

 

6,369

 

5,564

Long-term debt

 

5,908

 

5,908

Separate Accounts

 

8,603

 

8,676

Total liabilities

 

111,084

 

111,830

 

 

 

 

 

Commitments and Contingent Liabilities (Note 10)

 

 

 

 

Equity

 

 

 

 

Preferred stock, $1 par value, 25 million shares authorized, none issued

 

--

 

--

Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 524 million and 533 million shares outstanding

 

9

 

9

Additional capital paid-in

 

3,156

 

3,176

Retained income

 

32,377

 

31,969

Deferred ESOP expense

 

(42)

 

(44)

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

 

(16,173)

 

(15,910)

Accumulated other comprehensive income:

 

 

 

 

Unrealized net capital gains and losses:

 

 

 

 

Unrealized net capital losses on fixed income securities with OTTI

 

(167)

 

(190)

Other unrealized net capital gains and losses

 

1,186

 

1,089

Unrealized adjustment to DAC, DSI and insurance reserves

 

60

 

36

Total unrealized net capital gains and losses

 

1,079

 

935

Unrealized foreign currency translation adjustments

 

79

 

69

Unrecognized pension and other postretirement benefit cost

 

(1,173)

 

(1,188)

Total accumulated other comprehensive loss

 

(15)

 

(184)

Total shareholders’ equity

 

19,312

 

19,016

Noncontrolling interest

 

29

 

28

Total equity

 

19,341

 

19,044

Total liabilities and equity

130,425

130,874

 

See notes to condensed consolidated financial statements.

 

2



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ in millions)

 

Three months ended

 

 

March 31,

 

 

 

 

 

2011

 

2010

Cash flows from operating activities

 

(unaudited)

Net income

519

120

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

 

 

 

 

Depreciation, amortization and other non-cash items

 

31

 

16

Realized capital gains and losses

 

(96)

 

348

Loss (gain) on disposition of operations

 

23

 

(1)

Interest credited to contractholder funds

 

418

 

463

Changes in:

 

 

 

 

Policy benefits and other insurance reserves

 

(58)

 

188

Unearned premiums

 

(248)

 

(261)

Deferred policy acquisition costs

 

72

 

30

Premium installment receivables, net

 

3

 

24

Reinsurance recoverables, net

 

(117)

 

(72)

Income taxes

 

200

 

73

Other operating assets and liabilities

 

(21)

 

36

Net cash provided by operating activities

 

726

 

964

Cash flows from investing activities

 

 

 

 

Proceeds from sales

 

 

 

 

Fixed income securities

 

8,363

 

4,930

Equity securities

 

642

 

1,990

Limited partnership interests

 

113

 

146

Mortgage loans

 

26

 

3

Other investments

 

63

 

37

Investment collections

 

 

 

 

Fixed income securities

 

1,201

 

1,122

Mortgage loans

 

88

 

263

Other investments

 

77

 

18

Investment purchases

 

 

 

 

Fixed income securities

 

(10,207)

 

(7,099)

Equity securities

 

(144)

 

(556)

Limited partnership interests

 

(334)

 

(185)

Mortgage loans

 

(26)

 

(1)

Other investments

 

(58)

 

(43)

Change in short-term investments, net

 

1,649

 

411

Change in other investments, net

 

(119)

 

(49)

Purchases of property and equipment, net

 

(48)

 

(24)

Disposition of operations

 

(1)

 

--

Net cash provided by investing activities

 

1,285

 

963

Cash flows from financing activities

 

 

 

 

Contractholder fund deposits

 

596

 

828

Contractholder fund withdrawals

 

(2,122)

 

(2,569)

Dividends paid

 

(107)

 

(107)

Treasury stock purchases

 

(305)

 

(5)

Shares reissued under equity incentive plans, net

 

9

 

14

Excess tax benefits on share-based payment arrangements

 

(3)

 

(2)

Other

 

--

 

6

Net cash used in financing activities

 

(1,932)

 

(1,835)

Net increase in cash

 

79

 

92

Cash at beginning of period

 

562

 

612

Cash at end of period

641

704

 

See notes to condensed consolidated financial statements.

 

3



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  General

 

Basis of presentation

 

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

 

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

 

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

 

Adopted accounting standards

 

Consolidation Analysis Considering Investments Held through Separate Accounts

 

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

 

Disclosure of Supplementary Pro Forma Information for Business Combinations

 

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

 

Pending accounting standards

 

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

 

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

 

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

 

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

 

4



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

2.  Earnings per share

 

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

 

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

 

($ in millions, except per share data)

 

2011

 

2010

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

519

120

 

 

 

 

 

Denominator:

 

 

 

 

Weighted average common shares outstanding

 

531.0

 

540.5

Effect of dilutive potential common shares:

 

 

 

 

Stock options

 

2.2

 

1.3

Restricted stock units (non-participating)

 

0.4

 

--

Weighted average common and dilutive potential common shares outstanding

 

533.6

 

541.8

 

 

 

 

 

Earnings per share - Basic

0.98

0.22

Earnings per share - Diluted

0.97

0.22

 

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

 

3.  Supplemental Cash Flow Information

 

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

 

5



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

($ in millions)

 

2011

 

2010

 

 

 

 

 

Net change in proceeds managed

 

 

 

 

Net change in short-term investments

(351)

171

Operating cash flow (used) provided

 

(351)

 

171

Net change in cash

 

(3)

 

6

Net change in proceeds managed

(354)

177

 

 

 

 

 

Net change in liabilities

 

 

 

 

Liabilities for collateral, beginning of year

(484)

(658)

Liabilities for collateral, end of period

 

(838)

 

(481)

Operating cash flow provided (used)

354

(177)

 

4.  Investments

 

Fair values

 

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

 

($ in millions)

 

Amortized

 

Gross unrealized

 

Fair

 

 

cost

 

Gains

 

Losses

 

value

March 31, 2011

 

 

 

 

 

 

 

 

U.S. government and agencies

6,509

277

(20)

6,766

Municipal

 

15,500

 

367

 

(621)

 

15,246

Corporate

 

41,095

 

1,675

 

(375)

 

42,395

Foreign government

 

2,822

 

306

 

(11)

 

3,117

Residential mortgage-backed securities (“RMBS”)

 

6,907

 

195

 

(572)

 

6,530

Commercial mortgage-backed securities (“CMBS”)

 

2,156

 

63

 

(166)

 

2,053

Asset-backed securities (“ABS”)

 

4,280

 

82

 

(251)

 

4,111

Redeemable preferred stock

 

23

 

1

 

--

 

24

Total fixed income securities

79,292

2,966

(2,016)

80,242

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

 

U.S. government and agencies

8,320

327

(51)

8,596

Municipal

 

16,201

 

379

 

(646)

 

15,934

Corporate

 

36,260

 

1,816

 

(421)

 

37,655

Foreign government

 

2,821

 

347

 

(10)

 

3,158

RMBS

 

8,509

 

216

 

(732)

 

7,993

CMBS

 

2,213

 

58

 

(277)

 

1,994

ABS

 

4,425

 

113

 

(294)

 

4,244

Redeemable preferred stock

 

37

 

1

 

--

 

38

Total fixed income securities

78,786

3,257

(2,431)

79,612

 

6



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Scheduled maturities

 

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

 

($ in millions)

 

Amortized

 

Fair

 

 

cost

 

value

 

 

 

 

 

Due in one year or less

2,699

2,741

Due after one year through five years

 

24,998

 

25,760

Due after five years through ten years

 

19,348

 

20,199

Due after ten years

 

21,060

 

20,901

 

 

68,105

 

69,601

RMBS and ABS

 

11,187

 

10,641

Total

79,292

80,242

 

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

 

Net investment income

 

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

 

($ in millions)

 

2011

 

2010

 

 

 

 

 

Fixed income securities

900

959

Equity securities

 

19

 

21

Mortgage loans

 

89

 

104

Limited partnership interests

 

10

 

6

Short-term investments

 

2

 

2

Other

 

11

 

1

Investment income, before expense

 

1,031

 

1,093

Investment expense

 

(49)

 

(43)

Net investment income

982

1,050

 

Realized capital gains and losses

 

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

 

($ in millions)

 

2011

 

2010

Fixed income securities

(27)

(136)

Equity securities

 

122

 

14

Mortgage loans

 

(6)

 

(25)

Limited partnership interests

 

68

 

(21)

Derivatives

 

(67)

 

(185)

Other

 

6

 

5

Realized capital gains and losses

96

(348)

 

7



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

($ in millions)

 

2011

 

2010

Impairment write-downs

(114)

(223)

Change in intent write-downs

 

(69)

 

(32)

Net other-than-temporary impairment losses recognized in earnings

 

(183)

 

(255)

Sales

 

283

 

88

Valuation of derivative instruments

 

22

 

(155)

Settlements of derivative instruments

 

(89)

 

(30)

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

 

63

 

4

Realized capital gains and losses

96

(348)

 

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

 

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

 

($ in millions)

 

2011

 

2010

 

 

Gross

 

Included
in OCI

 

Net

 

Gross

 

Included
in OCI

 

Net

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

(27)

(2)

(29)

(37)

--

(37)

Corporate

 

(5)

 

1

 

(4)

 

(47)

 

3

 

(44)

Foreign government

 

(1)

 

--

 

(1)

 

--

 

--

 

--

RMBS

 

(72)

 

(25)

 

(97)

 

(88)

 

(7)

 

(95)

CMBS

 

(16)

 

(4)

 

(20)

 

(26)

 

--

 

(26)

ABS

 

(7)

 

3

 

(4)

 

(3)

 

(1)

 

(4)

Total fixed income securities

 

(128)

 

(27)

 

(155)

 

(201)

 

(5)

 

(206)

Equity securities

 

(20)

 

--

 

(20)

 

(6)

 

--

 

(6)

Mortgage loans

 

(6)

 

--

 

(6)

 

(19)

 

--

 

(19)

Limited partnership interests

 

(1)

 

--

 

(1)

 

(24)

 

--

 

(24)

Other

 

(1)

 

--

 

(1)

 

--

 

--

 

--

Other-than-temporary impairment losses

(156)

(27)

(183)

(250)

(5)

(255)

 

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

 

($ in millions)

 

March 31,

 

December 31,

 

 

2011

 

2010

Municipal

(14)

(27)

Corporate

 

(32)

 

(31)

RMBS

 

(417)

 

(467)

CMBS

 

(42)

 

(49)

ABS

 

(26)

 

(41)

Total

(531)

(615)

 

8


 


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

 

Three months ended
March 31

 

($ in millions)

 

2011

 

 

2010

 

Beginning balance

$

(1,046

)

$

(1,187

)

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

 

(59

)

 

(101

)

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

 

(27

)

 

(79

)

Reduction in credit loss for securities disposed or collected

 

153

 

 

131

 

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

 

15

 

 

--

 

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

 

1

 

 

--

 

Ending balance

$

(963

)

$

(1,236

)

 

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

 

9



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Unrealized net capital gains and losses

 

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

 

($ in millions)

 

Fair

 

 

Gross unrealized

 

Unrealized net

March 31, 2011

 

value

 

 

Gains

 

 

Losses

 

 

gains (losses)

Fixed income securities

$

80,242

 

$

2,966

 

$

(2,016

)

 

$

950

 

Equity securities

 

4,437

 

 

707

 

 

(62

)

 

 

645

 

Short-term investments

 

1,986

 

 

--

 

 

--

 

 

 

--

 

Derivative instruments (1)

 

(26

)

 

--

 

 

(30

)

 

 

(30

)

EMA limited partnership interests (2)

 

 

 

 

 

 

 

 

 

 

 

7

 

Unrealized net capital gains and losses, pre-tax

 

 

 

 

 

 

 

 

 

 

 

1,572

 

Amounts recognized for:

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance reserves (3)

 

 

 

 

 

 

 

 

 

 

 

(2

)

DAC and DSI (4)

 

 

 

 

 

 

 

 

 

 

 

95

 

Amounts recognized

 

 

 

 

 

 

 

 

 

 

 

93

 

Deferred income taxes

 

 

 

 

 

 

 

 

 

 

 

(586

)

Unrealized net capital gains and losses, after-tax

 

 

 

 

 

 

 

 

 

 

$

1,079

 

 


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

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

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

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

 

 

 

Fair

 

 

Gross unrealized

 

Unrealized net

December 31, 2010

 

value

 

 

Gains

 

 

Losses

 

 

gains (losses)

Fixed income securities

$

79,612

 

$

3,257

 

$

(2,431

)

 

$

826

 

Equity securities

 

4,811

 

 

646

 

 

(63

)

 

 

583

 

Short-term investments

 

3,279

 

 

--

 

 

--

 

 

 

--

 

Derivative instruments (1)

 

(17

)

 

2

 

 

(24

)

 

 

(22

)

Unrealized net capital gains and losses, pre-tax

 

 

 

 

 

 

 

 

 

 

 

1,387

 

Amounts recognized for:

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance reserves

 

 

 

 

 

 

 

 

 

 

 

(41

)

DAC and DSI

 

 

 

 

 

 

 

 

 

 

 

97

 

Amounts recognized

 

 

 

 

 

 

 

 

 

 

 

56

 

Deferred income taxes

 

 

 

 

 

 

 

 

 

 

 

(508

)

Unrealized net capital gains and losses, after-tax

 

 

 

 

 

 

 

 

 

 

$

935

 

 


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

 

10



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Change in unrealized net capital gains and losses

 

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

 

($ in millions)

 

 

 

 

 

 

 

 

 

Fixed income securities

$

124

 

 

Equity securities

 

62

 

 

Derivative instruments

 

(8

)

 

EMA limited partnership interests

 

7

 

 

Total

 

185

 

 

Amounts recognized for:

 

 

 

 

Insurance reserves

 

39

 

 

DAC and DSI

 

(2

)

 

Increase in amounts recognized

 

37

 

 

Deferred income taxes

 

(78

)

 

Increase in unrealized net capital gains and losses

$

144

 

 

 

Portfolio monitoring

 

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

 

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

 

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

 

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

 

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

 

11



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

($ in millions)

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

 

 

Number

 

Fair

 

Unrealized

 

 

Number

 

Fair

 

Unrealized

 

 

unrealized

 

 

 

of issues

 

value

 

losses

 

 

of issues

 

value

 

losses

 

 

losses

 

March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

33

$

1,565

$

(20

)

 

--

$

--

$

--

 

$

(20

)

Municipal

 

815

 

3,767

 

(174

)

 

395

 

2,573

 

(447

)

 

(621

)

Corporate

 

597

 

9,339

 

(188

)

 

144

 

1,959

 

(187

)

 

(375

)

Foreign government

 

55

 

357

 

(11

)

 

1

 

10

 

--

 

 

(11

)

RMBS

 

281

 

493

 

(13

)

 

357

 

1,458

 

(559

)

 

(572

)

CMBS

 

13

 

128

 

(3

)

 

95

 

721

 

(163

)

 

(166

)

ABS

 

58

 

815

 

(6

)

 

122

 

1,268

 

(245

)

 

(251

)

Total fixed income securities

 

1,852

 

16,464

 

(415

)

 

1,114

 

7,989

 

(1,601

)

 

(2,016

)

Equity securities

 

788

 

600

 

(53

)

 

38

 

74

 

(9

)

 

(62

)

Total fixed income and equity Securities

 

2,640

$

17,064

$

(468

)

 

1,152

$

8,063

$

(1,610

)

$

(2,078

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade fixed income securities

 

1,702

$

15,130

$

(372

)

 

750

$

5,468

$

(721

)

$

(1,093

)

Below investment grade fixed income securities

 

150

 

1,334

 

(43

)

 

364

 

2,521

 

(880

)

 

(923

)

Total fixed income securities

 

1,852

$

16,464

$

(415

)

 

1,114

$

7,989

$

(1,601

)

$

(2,016

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

32

$

2,081

$

(51

)

 

--

$

--

$

--

 

$

(51

)

Municipal

 

847

 

4,130

 

(175

)

 

411

 

2,715

 

(471

)

 

(646

)

Corporate

 

438

 

5,994

 

(186

)

 

150

 

1,992

 

(235

)

 

(421

)

Foreign government

 

33

 

277

 

(9

)

 

1

 

10

 

(1

)

 

(10

)

RMBS

 

280

 

583

 

(12

)

 

422

 

1,939

 

(720

)

 

(732

)

CMBS

 

14

 

158

 

(3

)

 

114

 

835

 

(274

)

 

(277

)

ABS

 

68

 

762

 

(8

)

 

133

 

1,313

 

(286

)

 

(294

)

Total fixed income securities

 

1,712

 

13,985

 

(444

)

 

1,231

 

8,804

 

(1,987

)

 

(2,431

)

Equity securities

 

773

 

610

 

(48

)

 

44

 

91

 

(15

)

 

(63

)

Total fixed income and equity securities

 

2,485

$

14,595

$

(492

)

 

1,275

$

8,895

$

(2,002

)

$

(2,494

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade fixed income securities

 

1,607

$

13,280

$

(408

)

 

857

$

6,217

$

(943

)

$

(1,351

)

Below investment grade fixed income securities

 

105

 

705

 

(36

)

 

374

 

2,587

 

(1,044

)

 

(1,080

)

Total fixed income securities

 

1,712

$

13,985

$

(444

)

 

1,231

$

8,804

$

(1,987

)

$

(2,431

)

 

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

 

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

 

12



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

 

As of March 31, 2011, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis.  As of March 31, 2011, the Company had the intent and ability to hold equity securities with unrealized losses for a period of time sufficient for them to recover.

 

Limited partnerships

 

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

 

As of March 31, 2011 and December 31, 2010, the carrying value for cost method limited partnership interests was $1.38 billion and $1.35 billion, respectively.  To determine if an other-than-temporary impairment has occurred, the Company evaluates whether an impairment indicator has occurred in the period that may have a significant adverse effect on the carrying value of the investment.  Impairment indicators may include: significantly reduced valuations of the investments held by the limited partnerships; actual recent cash flows received being significantly less than expected cash flows; reduced valuations based on financing completed at a lower value; completed sale of a material underlying investment at a price significantly lower than expected; or any other adverse events since the last financial statements received that might affect the fair value of the investee’s capital.  Additionally, the Company’s portfolio monitoring process includes a quarterly review of all cost method limited partnerships to identify instances where the net asset value is below established thresholds for certain periods of time, as well as investments that are performing below expectations, for further impairment consideration.  If a cost method limited partnership is other-than-temporarily impaired, the carrying value is written down to fair value, generally estimated to be equivalent to the reported net asset value of the underlying funds.  The Company had write-downs related to cost method investments for the three months ended March 31, 2011 and 2010 of $1 million and $24 million, respectively.

 

Mortgage loans

 

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

 

13



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

 

($ in millions)

 

March 31, 2011

 

December 31, 2010

 

Debt service coverage
ratio distribution

 

Fixed rate
mortgage
loans

 

Variable rate
mortgage
loans

 

Total

 

Fixed rate
mortgage
loans

 

Variable rate
mortgage
loans

 

Total

 

Below 1.0

$

257

$

--

$

257

$

280

$

--

$

280

 

1.0 - 1.25

 

1,527

 

15

 

1,542

 

1,583

 

16

 

1,599

 

1.26 - 1.50

 

1,513

 

5

 

1,518

 

1,520

 

5

 

1,525

 

Above 1.50

 

2,577

 

518

 

3,095

 

2,540

 

546

 

3,086

 

Total non-impaired mortgage loans

$

5,874

$

538

$

6,412

$

5,923

$

567

$

6,490

 

 

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

 

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

 

($ in millions)

 

March 31,
2011

 

December 31,
2010

 

Impaired mortgage loans with a valuation allowance

$

148

$

168

 

Impaired mortgage loans without a valuation allowance

 

22

 

21

 

Total impaired mortgage loans

$

170

$

189

 

Valuation allowance on impaired mortgage loans

$

77

$

84

 

 

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

 

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

 

($ in millions)

 

 

 

Beginning balance

$

84

 

Net increase in valuation allowance

 

6

 

Charge offs

 

(13

)

Ending balance

$

77

 

 

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

 

($ in millions)

 

March 31,
2011

 

December 31,
2010

 

Less than 90 days past due

$

1

$

12

 

90 days or greater past due

 

65

 

78

 

Total past due

 

66

 

90

 

Current loans

 

6,516

 

6,589

 

Total mortgage loans

$

6,582

$

6,679

 

 

14



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5.  Fair Value of Assets and Liabilities

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.  Assets and liabilities recorded on the Condensed Consolidated Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:

 

Level 1:      Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.

 

Level 2:      Assets and liabilities whose values are based on the following:

 

(a)  Quoted prices for similar assets or liabilities in active markets;

 

(b)  Quoted prices for identical or similar assets or liabilities in markets that are not active; or

 

(c)  Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3:      Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.  Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.

 

The availability of observable inputs varies by instrument.  In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment.  The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3.  In many instances, valuation inputs used to measure fair value fall into different levels of the fair value hierarchy.  The category level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.  The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption.  In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.

 

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

 

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

 

Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans, limited partnership interests, bank loans and policy loans.  Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after initial recognition and the resulting remeasurement is reflected in the condensed consolidated financial statements.  In addition, derivatives embedded in fixed income securities are not disclosed in the hierarchy as free-standing derivatives since they are presented with the host contracts in fixed income securities.

 

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

 

15



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Summary of significant valuation techniques for assets and liabilities measured at fair value on a recurring basis

 

Level 1 measurements

 

·                   Fixed income securities:   Comprise U.S. Treasuries.  Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

 

·                   Equity securities:   Comprise actively traded, exchange-listed U.S. and international equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

 

·                   Short-term:   Comprise actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access.

 

·                   Separate account assets:   Comprise actively traded mutual funds that have daily quoted net asset values for identical assets that the Company can access.  Net asset values for the actively traded mutual funds in which the separate account assets are invested are obtained daily from the fund managers.

 

Level 2 measurements

 

·                   Fixed income securities:

 

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

 

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

 

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

 

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

 

RMBS - U.S. government sponsored entities (“U.S. Agency”), Prime residential mortgage-backed securities (“Prime”) and Alt-A residential mortgage-backed securities (“Alt-A”); ABS - other:   The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads.

 

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

 

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

 

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

 

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

 

·                   Other investments:   Free-standing exchange listed derivatives that are not actively traded are valued based on quoted prices for identical instruments in markets that are not active.

 

16



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

OTC derivatives, including interest rate swaps, foreign currency swaps, foreign exchange forward contracts, and certain credit default swaps, are valued using models that rely on inputs such as interest rate yield curves, currency rates, and counterparty credit spreads that are observable for substantially the full term of the contract.  The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.

 

Level 3 measurements

 

·                   Fixed income securities:

 

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

 

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

 

RMBS - Subprime residential mortgage-backed securities (“Subprime”), Prime and Alt-A:   The primary inputs to the valuation include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads.  Also included are Subprime, Prime and Alt-A securities that are valued based on non-binding broker quotes.  Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, Subprime and certain Alt-A securities are categorized as Level 3.

 

CMBS:   The primary inputs to the valuation include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields, collateral performance and credit spreads.  Also included are CMBS that are valued based on non-binding broker quotes.  Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, certain CMBS are categorized as Level 3.

 

ABS - Collateralized debt obligations (“CDO”):   Valued based on non-binding broker quotes received from brokers who are familiar with the investments.  Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, all CDO are categorized as Level 3.

 

ABS - other:   The primary inputs to the valuation include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads.  Also included are ABS that are valued based on non-binding broker quotes.  Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, certain ABS are categorized as Level 3.

 

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

 

17



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

·                   Contractholder funds:   Derivatives embedded in certain life and annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for the embedded derivatives within a block of contractholder liabilities.  The models primarily use stochastically determined cash flows based on the contractual elements of embedded derivatives, projected option cost and applicable market data, such as interest rate yield curves and equity index volatility assumptions.  These are categorized as Level 3 as a result of the significance of non-market observable inputs.

 

Assets and liabilities measured at fair value on a non-recurring basis

 

Mortgage loans written-down to fair value in connection with recognizing impairments are valued based on the fair value of the underlying collateral less costs to sell.  Limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments are valued using net asset values.

 

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

 

($ in millions)

 

Quoted prices
in active
markets for
identical
assets

 

Significant
other
observable
inputs

 

Significant
unobservable
inputs

 

Counterparty
and cash
collateral

 

Balance
as of
March 31,

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

netting

 

2011

Assets

 

 

 

 

 

 

 

 

 

 

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

   U.S. government and agencies

$

4,581

$

2,185

$

--

 

 

$

6,766

   Municipal

 

--

 

13,382

 

1,864

 

 

 

15,246

   Corporate

 

--

 

40,360

 

2,035

 

 

 

42,395

   Foreign government

 

--

 

3,117

 

--

 

 

 

3,117

   RMBS

 

--

 

5,132

 

1,398

 

 

 

6,530

   CMBS

 

--

 

1,058

 

995

 

 

 

2,053

   ABS

 

--

 

2,020

 

2,091

 

 

 

4,111

   Redeemable preferred stock

 

--

 

23

 

1

 

 

 

24

Total fixed income securities

 

4,581

 

67,277

 

8,384

 

 

 

80,242

Equity securities

 

3,980

 

414

 

43

 

 

 

4,437

Short-term investments

 

232

 

1,754

 

--

 

 

 

1,986

Other investments:

 

 

 

 

 

 

 

 

 

 

Free-standing derivatives

 

--

 

599

 

9

$

(96)

 

512

Separate account assets

 

8,603

 

--

 

--

 

 

 

8,603

Other assets

 

--

 

--

 

1

 

 

 

1

Total recurring basis assets

 

17,396

 

70,044

 

8,437

 

(96)

 

95,781

Non-recurring basis (1)

 

--

 

--

 

42

 

 

 

42

Total assets at fair value

$

17,396

$

70,044

$

8,479

$

(96)

$

95,823

% of total assets at fair value

 

18.2 %

 

 73.1 %

 

8.8 %

 

(0.1) %

 

100.0 %

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Contractholder funds:

 

 

 

 

 

 

 

 

 

 

Derivatives embedded in life and annuity contracts

$

--

$

-- 

$

(630)

 

 

$

(630)

Other liabilities:

 

 

 

 

 

 

 

 

 

 

Free-standing derivatives

 

--

 

(372)

 

(80)

$

93 

 

(359)

Total liabilities at fair value

$

--

$

(372)

$

(710)

$

93 

$

(989)

% of total liabilities at fair value

 

-- %

 

37.6 %

 

71.8 %

 

(9.4) %

 

100.0 %

 

_______________

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

 

18



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2010:

 

($ in millions)

 

Quoted prices
in active
markets for
identical
assets

 

Significant
other
observable
inputs

 

Significant
unobservable
inputs

 

Counterparty
and cash
collateral

 

Balance
as of
December 31,

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

netting

 

2010

Assets

 

 

 

 

 

 

 

 

 

 

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

   U.S. government and agencies

$

4,976

$

3,620

$

--

 

 

$

8,596

   Municipal

 

--

 

13,918

 

2,016

 

 

 

15,934

   Corporate

 

--

 

35,747

 

1,908

 

 

 

37,655

   Foreign government

 

--

 

3,158

 

--

 

 

 

3,158

   RMBS

 

--

 

6,199

 

1,794

 

 

 

7,993

   CMBS

 

--

 

1,071

 

923

 

 

 

1,994

   ABS

 

--

 

1,827

 

2,417

 

 

 

4,244

   Redeemable preferred stock

 

--

 

37

 

1

 

 

 

38

Total fixed income securities

 

4,976

 

65,577

 

9,059

 

 

 

79,612

Equity securities

 

4,316

 

432

 

63

 

 

 

4,811

Short-term investments

 

174

 

3,105

 

--

 

 

 

3,279

Other investments:

 

 

 

 

 

 

 

 

 

 

Free-standing derivatives

 

--

 

651

 

74

$

(286)

 

439

Separate account assets

 

8,676

 

--

 

--

 

 

 

8,676

Other assets

 

--

 

--

 

1

 

 

 

1

Total recurring basis assets

 

18,142

 

69,765

 

9,197

 

(286)

 

96,818

Non-recurring basis (1)

 

--

 

--

 

120

 

 

 

120

Total assets at fair value

$

18,142

$

69,765

$

9,317

$

(286)

$

96,938

% of total assets at fair value

 

18.7 %

 

72.0 %

 

9.6 %

 

(0.3) %

 

100.0 %

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Contractholder funds:

 

 

 

 

 

 

 

 

 

 

Derivatives embedded in life and annuity contracts

$

--

$

--

$

(653)

 

 

$

(653)

Other liabilities:

 

 

 

 

 

 

 

 

 

 

Free-standing derivatives

 

(2)

 

(529)

 

(95)

$

263

 

(363)

Total liabilities at fair value

$

(2)

$

(529)

$

(748)

$

263

$

(1,016)

% of total liabilities at fair value

 

0.2 %

 

52.1 %

 

73.6 %

 

(25.9) %

 

100.0 %

 

_______________

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

 

19



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

($ in millions)

 

 

 

Total realized and
unrealized gains (losses)
included in:

 

 

 

 

 

 

 

Balance as of
December 31,
2010

 

Net
income 
(1)

 

OCI on
Statement
of Financial
Position

 

Transfers
into
Level 3

 

Transfers
out of
Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

  Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

Municipal

$

2,016

$

(11)

$

21

$

--

$

(37)

 

Corporate

 

1,908

 

12

 

10

 

95

 

(47)

 

RMBS

 

1,794

 

(61)

 

105

 

--

 

(45)

 

CMBS

 

923

 

(21)

 

114

 

56

 

(59)

 

ABS

 

2,417

 

44

 

16

 

--

 

(304)

 

Redeemable preferred stock

 

1

 

--

 

--

 

--

 

--

 

Total fixed income securities

 

9,059

 

(37)

 

266

 

151

 

(492)

 

Equity securities

 

63

 

(10)

 

--

 

--

 

(10)

 

 Other investments:

 

 

 

 

 

 

 

 

 

 

 

Free-standing derivatives, net

 

(21)

 

(31)

 

--

 

--

 

--

 

Other assets

 

1

 

--

 

--

 

--

 

--

 

Total recurring Level 3 assets

$

9,102

$

(78)

$

266

$

151

$

(502)

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Contractholder funds:

 

 

 

 

 

 

 

 

 

 

 

Derivatives embedded in life and annuity contracts

$

(653)

$

8

$

--

$

--

$

--

 

Total recurring Level 3 liabilities

$

(653)

$

8

$

--

$

--

$

--

 

 

 

 

Purchases

 

Sales

 

Issuances

 

Settlements

 

Balance as
of March 31,
2011

 

Assets

 

 

 

 

 

 

 

 

 

 

 

  Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

Municipal

$

10

$

(134)

$

--

$

(1)

$

1,864

 

Corporate

 

96

 

(31)

 

--

 

(8)

 

2,035

 

RMBS

 

--

 

(318)

 

--

 

(77)

 

1,398

 

CMBS

 

8

 

(25)

 

--

 

(1)

 

995

 

ABS

 

90

 

(114)

 

--

 

(58)

 

2,091

 

Redeemable preferred stock

 

--

 

--

 

--

 

--

 

1

 

Total fixed income securities

 

204

 

(622)

 

--

 

(145)

 

8,384

 

Equity securities

 

--

 

--

 

--

 

--

 

43

 

 Other investments:

 

 

 

 

 

 

 

 

 

 

 

Free-standing derivatives, net

 

48

 

--

 

--

 

(67)

 

(71)

(2)

Other assets

 

--

 

--

 

--

 

--

 

1

 

Total recurring Level 3 assets

$

252

$

(622)

$

--

$

(212)

$

8,357

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Contractholder funds:

 

 

 

 

 

 

 

 

 

 

 

Derivatives embedded in life and annuity contracts

$

--

$

--

$

(14)

$

29

$

(630)

 

Total recurring Level 3 liabilities

$

--

$

--

$

(14)

$

29

$

(630)

 

 

_______________

(1)  The effect to net income totals $(70) million and is reported in the Condensed Consolidated Statements of Operations as follows: $(85) million in realized capital gains and losses, $7 million in net investment income, $37 million in interest credited to contractholder funds and $(45) million in life and annuity contract benefits.

(2)  Comprises $9 million of assets and $80 million of liabilities.

 

20



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the three months ended March 31, 2010.

 

($ in millions)

 

 

 

Total realized and
unrealized gains (losses)
included in:

 

 

 

 

 

 

 

 

 

 

 

Balance as of
December 31,
2009

 

Net
income
(1)

 

OCI on
Statement
of Financial
Position

 

Purchases,
sales, issuances
and
settlements,
net

 

Transfers
into
Level 3

 

Transfers
out of
Level 3

 

Balance as
of March 31,
2010

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Municipal

$

2,706

$

(16)

$

37

$

(216)

$

--

$

(29)

$

2,482

 

   Corporate

 

2,241

 

(27)

 

75

 

(11)

 

12

 

(113)

 

2,177

 

 Foreign government

 

20

 

--

 

--

 

(20)

 

--

 

--

 

--

 

   RMBS

 

1,671

 

(58)

 

163

 

303

 

--

 

--

 

2,079

 

   CMBS

 

1,404

 

(34)

 

108

 

(163)

 

24

 

(209)

 

1,130

 

   ABS

 

2,001

 

15

 

93

 

331

 

--

 

(37)

 

2,403

 

   Redeemable preferred stock

 

2

 

--

 

--

 

--

 

--

 

--

 

2

 

Total fixed income securities

 

10,045

 

(120)

 

476

 

224

 

36

 

(388)

 

10,273

 

Equity securities

 

69

 

--

 

3

 

4

 

--

 

(4)

 

72

 

Other investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Free-standing derivatives, net

 

55

 

(133)

 

--

 

40

 

--

 

--

 

(38)

(2)

Other assets

 

2

 

--

 

--

 

--

 

--

 

--

 

2

 

Total recurring

Level 3 assets

$

10,171

$

(253)

$

479

$

268

$

36

$

(392)

$

10,309

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractholder funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives embedded in life and annuity contracts

$

(110)

$

18

$

--

$

2

$

--

$

--

$

(90)

 

Total recurring

    Level 3 liabilities

$

(110)

$

18

$

--

$

2

$

--

$

--

$

(90)

 

 

_______________

(1)     The effect to net income totals $(235) million and is reported in the Condensed Consolidated Statements of Operations as follows: $(286) million in realized capital gains and losses, $32 million in net investment income, $(1) million in interest credited to contractholder funds and $(18) million in life and annuity contract benefits.

(2)     Comprises $58 million of assets and $96 million of liabilities.

 

Transfers between level categorizations may occur due to changes in the availability of market observable inputs, which generally are caused by changes in market conditions such as liquidity, trading volume or bid-ask spreads.  Transfers between level categorizations may also occur due to changes in the valuation source.  For example, in situations where a fair value quote is not provided by the Company’s independent third-party valuation service provider and as a result the price is stale or has been replaced with a broker quote, the security is transferred into Level 3.  Transfers in and out of level categorizations are reported as having occurred at the beginning of the quarter in which the transfer occurred.  Therefore, for all transfers into Level 3, all realized and changes in unrealized gains and losses in the quarter of transfer are reflected in the Level 3 rollforward table.

 

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2011 or 2010.

 

During the three months ended March 31, 2011 and 2010, certain CMBS and ABS, and certain CMBS, respectively, were transferred into Level 2 from Level 3 as a result of increased liquidity in the market and the availability of market observable quoted prices for similar assets.  When transferring these securities into Level 2, the Company did not change the source of fair value estimates or modify the estimates received from independent third-party valuation service providers or the internal valuation approach.  Accordingly, for securities included within this group, there was no change in fair value in conjunction with the transfer resulting in a realized or unrealized gain or loss.

 

Transfers into Level 3 during the three months ended March 31, 2011 and 2010 included situations where a fair value quote was not provided by the Company’s independent third-party valuation service provider and as a result the price was stale or had been replaced with a broker quote resulting in the security being classified as Level 3. 

 

21



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Transfers out of Level 3 during the three months ended March 31, 2011 and 2010 included situations where a broker quote was used in the prior period and a fair value quote became available from the Company’s independent third-party valuation service provider in the current period.  A quote utilizing the new pricing source was not available as of the prior period, and any gains or losses related to the change in valuation source for individual securities were not significant.

 

The following table provides the total gains and (losses) included in net income during the three months ended March 31 for Level 3 assets and liabilities still held as of March 31.

 

($ in millions)

 

2011

 

2010

Assets

 

 

 

 

Fixed income securities:

 

 

 

 

Municipal

$

(11)

$

(13)

Corporate

 

9

 

(28)

RMBS

 

(40)

 

(58)

CMBS

 

(16)

 

(23)

ABS

 

2

 

1

Total fixed income securities

 

(56)

 

(121)

Equity securities

 

(10)

 

--

Other investments:

 

 

 

 

Free-standing derivatives, net

 

3

 

(85)

Total recurring Level 3 assets

$

(63)

$

(206)

 

 

 

 

 

Liabilities

 

 

 

 

Contractholder funds:

 

 

 

 

Derivatives embedded in life and annuity contracts

$

8

$

18

Total recurring Level 3 liabilities

$

8

$

18

 

The amounts in the table above represent gains and losses included in net income for the period of time that the asset or liability was determined to be in Level 3.  These gains and losses total $(55) million for the three months ended March 31, 2011 and are reported in the Condensed Consolidated Statements of Operations as follows: $(69) million in realized capital gains and losses, $6 million in net investment income, $37 million in interest credited to contractholder funds and $(45) million in life and annuity contract benefits.  These gains and losses total $(188) million for the three months ended March 31, 2010 and are reported in the Condensed Consolidated Statements of Operations as follows: $(237) million in realized capital gains and losses, $31 million in net investment income and $(18) million in life and annuity contract benefits.

 

Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value.

 

Financial assets

 

($ in millions)

 

March 31, 2011

 

December 31, 2010

 

 

 

Carrying
value

 

Fair
value

 

Carrying
value

 

Fair
value

 

Mortgage loans

$

6,582

$

6,492

$

6,679

$

6,439

 

Limited partnership interests - cost basis

 

1,383

 

1,625

 

1,348

 

1,481

 

Bank loans

 

312

 

310

 

363

 

355

 

 

The fair value of mortgage loans is based on discounted contractual cash flows or, if the loans are impaired due to credit reasons, the fair value of collateral less costs to sell.  Risk adjusted discount rates are selected using current rates at which similar loans would be made to borrowers with similar characteristics, using similar types of properties as collateral.  The fair value of limited partnership interests accounted for on the cost basis is determined using reported net asset values of the underlying funds.  The fair value of bank loans, which are reported in other investments, is based on broker quotes from brokers familiar with the loans and current market conditions.

 

22



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Financial liabilities

 

($ in millions)

 

March 31, 2011

 

December 31, 2010

 

 

 

Carrying
value

 

Fair
value

 

Carrying
value

 

Fair
value

 

 

 

 

 

 

 

 

 

 

 

Contractholder funds on investment contracts

$

34,834

$

33,985

$

36,163

$

35,194

 

Long-term debt

 

5,908

 

6,261

 

5,908

 

6,325

 

Liability for collateral

 

838

 

838

 

484

 

484

 

 

The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts utilizing prevailing market rates for similar contracts adjusted for the Company’s own credit risk.  Deferred annuities included in contractholder funds are valued using discounted cash flow models which incorporate market value margins, which are based on the cost of holding economic capital, and the Company’s own credit risk.  Immediate annuities without life contingencies and fixed rate funding agreements are valued at the present value of future benefits using market implied interest rates which include the Company’s own credit risk.

 

The fair value of long-term debt is based on market observable data (such as the fair value of the debt when traded as an asset) or, in certain cases, is determined using discounted cash flow calculations based on current interest rates for instruments with comparable terms and considers the Company’s own credit risk.  The liability for collateral is valued at carrying value due to its short-term nature.

 

6.  Derivative Financial Instruments

 

The Company primarily uses derivatives for risk management, to partially mitigate potential adverse impacts from changes in risk-free interest rates, negative equity market valuations and increases in credit spreads, and asset replication.  In addition, the Company has derivatives embedded in non-derivative host contracts that are required to be separated from the host contracts and accounted for at fair value.  With the exception of non-hedge derivatives used for asset replication and non-hedge embedded derivatives, all of the Company’s derivatives are evaluated for their ongoing effectiveness as either accounting hedge or non-hedge derivative financial instruments on at least a quarterly basis.  The Company does not use derivatives for trading purposes.  Non-hedge accounting is generally used for “portfolio” level hedging strategies where the terms of the individual hedged items do not meet the strict homogeneity requirements to permit the application of hedge accounting.

 

Property-Liability uses interest rate swaps to mitigate municipal bond interest rate risk within the municipal bond portfolio.  Equity index futures are used by Property-Liability to offset valuation losses in the equity portfolio during periods of declining equity market values.  Credit default swaps are typically used to mitigate the credit risk within the Property-Liability fixed income portfolio.  Prior to March 31, 2011, Property-Liability used interest rate swaption contracts and exchange traded options on interest rate futures to offset potential declining fixed income market values resulting from potential rising interest rates.  Prior to March 31, 2011, exchange traded equity put options were utilized by Property-Liability for overall equity portfolio protection from significant declines in equity market values below a targeted level.

 

Portfolio duration management is a risk management strategy that is principally employed by Property-Liability wherein financial futures and interest rate swaps are utilized to change the duration of the portfolio in order to offset the economic effect that interest rates would otherwise have on the fair value of its fixed income securities.

 

Property-Liability uses futures to hedge the market risk related to deferred compensation liability contracts and forward contracts to hedge foreign currency risk associated with holding foreign currency denominated investments and foreign operations.

 

Asset-liability management is a risk management strategy that is principally employed by Allstate Financial to balance the respective interest-rate sensitivities of its assets and liabilities.  Depending upon the attributes of the assets acquired and liabilities issued, derivative instruments such as interest rate swaps, caps, floors, swaptions and futures are utilized to change the interest rate characteristics of existing assets and liabilities to ensure the relationship is maintained within specified ranges and to reduce exposure to rising or falling interest rates.  Allstate Financial uses financial futures and interest rate swaps to hedge anticipated asset purchases and liability issuances and futures and options for hedging the equity exposure contained in its equity indexed life and annuity product contracts that offer equity returns to contractholders.  In addition, Allstate Financial uses interest rate swaps to hedge interest rate risk inherent in funding agreements.

 

23



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Allstate Financial uses foreign currency swaps primarily to reduce the foreign currency risk associated with issuing foreign currency denominated funding agreements and holding foreign currency denominated investments.  Credit default swaps are also typically used to mitigate the credit risk within the Allstate Financial fixed income portfolio.

 

When derivatives meet specific criteria, they may be designated as accounting hedges and accounted for as fair value, cash flow, foreign currency fair value or foreign currency cash flow hedges.  Allstate Financial designates certain of its interest rate and foreign currency swap contracts and certain investment risk transfer reinsurance agreements as fair value hedges when the hedging instrument is highly effective in offsetting the risk of changes in the fair value of the hedged item.  Allstate Financial designates certain of its foreign currency swap contracts as cash flow hedges when the hedging instrument is highly effective in offsetting the exposure of variations in cash flows for the hedged risk that could affect net income.  Amounts are reclassified to net investment income or realized capital gains and losses as the hedged item affects net income.

 

Asset replication refers to the “synthetic” creation of assets through the use of derivatives and primarily investment grade host bonds to replicate securities that are either unavailable in the cash markets or more economical to acquire in synthetic form.  The Company replicates fixed income securities using a combination of a credit default swap and one or more highly rated fixed income securities to synthetically replicate the economic characteristics of one or more cash market securities.  The Company also creates “synthetic” exposure to equity markets through the use of exchange traded equity index future contracts and an investment grade host bond.

 

The Company’s primary embedded derivatives are equity options in Allstate Financial life and annuity product contracts, which provide equity returns to contractholders; equity-indexed notes containing equity call options, which provide a coupon payout that is determined using one or more equity-based indices; credit default swaps in synthetic collateralized debt obligations, which provide enhanced coupon rates as a result of selling credit protection; and conversion options in fixed income securities, which provide the Company with the right to convert the instrument into a predetermined number of shares of common stock.  Substantially all of the fixed income securities with conversion options were sold in March 2011.

 

The notional amounts specified in the contracts are used to calculate the exchange of contractual payments under the agreements and are generally not representative of the potential for gain or loss on these agreements.  However, the notional amounts specified in credit default swaps where the Company has sold credit protection represent the maximum amount of potential loss, assuming no recoveries.

 

Fair value, which is equal to the carrying value, is the estimated amount that the Company would receive or pay to terminate the derivative contracts at the reporting date.  The carrying value amounts for OTC derivatives are further adjusted for the effects, if any, of legally enforceable master netting agreements and are presented on a net basis, by counterparty agreement, in the Condensed Consolidated Statements of Financial Position.  For certain exchange traded derivatives, the exchange requires margin deposits as well as daily cash settlements of margin accounts.  As of March 31, 2011, the Company pledged $16 million of cash and securities in the form of margin deposits.

 

For those derivatives which qualify for fair value hedge accounting, net income includes the changes in the fair value of both the derivative instrument and the hedged risk, and therefore reflects any hedging ineffectiveness.  For cash flow hedges, gains and losses are amortized from accumulated other comprehensive income and are reported in net income in the same period the forecasted transactions being hedged impact net income.  For embedded derivatives in fixed income securities, net income includes the change in fair value of the embedded derivative and accretion income related to the host instrument.  For non-hedge derivatives, net income includes changes in fair value and accrued periodic settlements, when applicable.

 

24



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides a summary of the volume and fair value positions of derivative instruments as well as their reporting location in the Condensed Consolidated Statement of Financial Position as of March 31, 2011.

 

($ in millions, except number of contracts)

 

Asset derivatives

 

 

 

 

Volume (1)

 

 

 

 

 

 

 

 

 

 

Balance sheet location

 

Notional
amount

 

Number
of
contracts

 

Fair
value,
net

 

 

Gross
asset

 

Gross
liability

 

Derivatives designated as accounting hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Other investments

$

252

 

n/a

$

(16

)

$

--

$

(16

)

Foreign currency swap agreements

 

Other investments

 

50

 

n/a

 

(4

)

 

3

 

(7

)

Total

 

 

$

302

 

n/a

$

(20

)

$

3

$

(23

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as accounting hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Other investments

$

5,386

 

n/a

$

152

 

$

178

$

(26

)

Interest rate swaption agreements

 

Other investments

 

750

 

n/a

 

3

 

 

3

 

--

 

Interest rate cap and floor agreements

 

Other investments

 

1,352

 

n/a

 

(3

)

 

--

 

(3

)

Financial futures contracts and options

 

Other assets

 

n/a

 

702

 

--

 

 

--

 

--

 

Equity and index contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options, futures and warrants (2)

 

Other investments

 

142

 

18,916

 

381

 

 

381

 

--

 

Options, futures and warrants

 

Other assets

 

n/a

 

1,205

 

--

 

 

--

 

--

 

Foreign currency contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency swap agreements

 

Other investments

 

40

 

n/a

 

1

 

 

1

 

--

 

Foreign currency forwards and options

 

Other investments

 

219

 

n/a

 

1

 

 

4

 

(3

)

Embedded derivative financial instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion options

 

Fixed income securities

 

5

 

n/a

 

--

 

 

--

 

--

 

Equity-indexed call options

 

Fixed income securities

 

300

 

n/a

 

50

 

 

50

 

--

 

Credit default swaps

 

Fixed income securities

 

181

 

n/a

 

(87

)

 

--

 

(87

)

Other embedded derivative financial instruments

 

Other investments

 

1,000

 

n/a

 

--

 

 

--

 

--

 

Credit default contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps - buying protection

 

Other investments

 

48

 

n/a

 

(2

)

 

--

 

(2

)

Credit default swaps - selling protection

 

Other investments

 

30

 

n/a

 

(1

)

 

1

 

(2

)

Other contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other contracts

 

Other investments

 

6

 

n/a

 

--

 

 

--

 

--

 

Other contracts

 

Other assets

 

5

 

n/a

 

1

 

 

1

 

--

 

Total

 

 

$

9,464

 

20,823

$

496

 

$

619

$

(123

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total asset derivatives

 

 

$

9,766

 

20,823

$

476

 

$

622

$

(146

)

 


(1)       Volume for OTC derivative contracts is represented by their notional amounts.  Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded.  (n/a = not applicable)

(2)       In addition to the number of contracts presented in the table, the Company held 27,554 stock rights and 1,363,107 stock warrants.  Stock warrants can be converted to cash upon sale of those instruments or exercised for shares of common stock.

 

25



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Liability derivatives

 

 

 

 

Volume (1)

 

 

 

 

 

 

 

 

 

 

Balance sheet location

 

Notional
amount

 

Number
of
contracts

 

Fair
value,
net

 

 

Gross
asset

 

Gross
liability

 

Derivatives designated as accounting hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Other liabilities & accrued expenses

$

59

 

n/a

$

(4

)

$

--

$

(4

)

Foreign currency swap agreements

 

Other liabilities & accrued expenses

 

152

 

n/a

 

(22

)

 

--

 

(22

)

Total

 

 

$

211

 

n/a

$

(26

)

$

--

$

(26

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as accounting hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Other liabilities & accrued expenses

$

3,252

 

n/a

$

(40

)

$

26

$

(66

)

Interest rate swaption agreements

 

Other liabilities & accrued expenses

 

1,675

 

n/a

 

--

 

 

--

 

--

 

Interest rate cap and floor agreements

 

Other liabilities & accrued expenses

 

2,020

 

n/a

 

(18

)

 

2

 

(20

)

Financial futures contracts and options

 

Other liabilities & accrued expenses

 

n/a

 

440

 

--

 

 

--

 

--

 

Equity and index contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options and futures

 

Other liabilities & accrued expenses

 

4

 

19,917

 

(207

)

 

--

 

(207

)

Foreign currency contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency swap agreements

 

Other liabilities & accrued expenses

 

50

 

n/a

 

1

 

 

1

 

--

 

Foreign currency forwards and options

 

Other liabilities & accrued expenses

 

62

 

n/a

 

2

 

 

2

 

--

 

Embedded derivative financial instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guaranteed accumulation benefits

 

Contractholder funds

 

1,115

 

n/a

 

(58

)

 

--

 

(58

)

Guaranteed withdrawal benefits

 

Contractholder funds

 

761

 

n/a

 

(29

)

 

--

 

(29

)

Equity-indexed and forward starting options in life and annuity product contracts

 

Contractholder funds

 

4,624

 

n/a

 

(537

)

 

--

 

(537

)

Other embedded derivative financial instruments

 

Contractholder funds

 

85

 

n/a

 

(6

)

 

--

 

(6

)

Credit default contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps – buying protection

 

Other liabilities & accrued expenses

 

1,399

 

n/a

 

(11

)

 

4

 

(15

)

Credit default swaps – selling protection

 

Other liabilities & accrued expenses

 

583

 

n/a

 

(57

)

 

2

 

(59

)

Total

 

 

$

15,630

 

20,357

$

(960

)

$

37

$

(997

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liability derivatives

 

 

$

15,841

 

20,357

$

(986

)

$

37

$

(1,023

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

 

$

25,607

 

41,180

$

(510

)

 

 

 

 

 

 


(1)      Volume for OTC derivative contracts is represented by their notional amounts.  Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded.  (n/a = not applicable)

 

26



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides a summary of the volume and fair value positions of derivative instruments as well as their reporting location in the Condensed Consolidated Statement of Financial Position as of December 31, 2010.

 

($ in millions, except number of contracts)

 

Asset derivatives

 

 

 

 

Volume (1)

 

 

 

 

 

 

 

 

 

 

Balance sheet location

 

Notional
amount

 

Number
of
contracts

 

Fair
value,
net

 

 

Gross
asset

 

Gross
liability

 

Derivatives designated as accounting hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Other investments

$

156

 

n/a

$

(18

)

$

--

$

(18

)

Foreign currency swap agreements

 

Other investments

 

64

 

n/a

 

2

 

 

3

 

(1

)

Total

 

 

$

220

 

n/a

$

(16

)

$

3

$

(19

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as accounting hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Other investments

$

1,469

 

n/a

$

65

 

$

81

$

(16

)

Interest rate swaption agreements

 

Other investments

 

4,161

 

n/a

 

50

 

 

50

 

--

 

Interest rate cap and floor agreements

 

Other investments

 

226

 

n/a

 

(2

)

 

1

 

(3

)

Financial futures contracts and options

 

Other investments

 

n/a

 

8,000

 

3

 

 

3

 

--

 

Financial futures contracts and options

 

Other assets

 

n/a

 

1,420

 

--

 

 

--

 

--

 

Equity and index contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options, futures and warrants (2)

 

Other investments

 

64

 

38,451

 

359

 

 

359

 

--

 

Options, futures and warrants

 

Other assets

 

n/a

 

292

 

--

 

 

--

 

--

 

Foreign currency contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency swap agreements

 

Other investments

 

90

 

n/a

 

6

 

 

6

 

--

 

Foreign currency forwards and options

 

Other investments

 

257

 

n/a

 

6

 

 

7

 

(1

)

Embedded derivative financial instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion options

 

Fixed income securities

 

820

 

n/a

 

236

 

 

238

 

(2

)

Equity-indexed call options

 

Fixed income securities

 

300

 

n/a

 

47

 

 

47

 

--

 

Credit default swaps

 

Fixed income securities

 

181

 

n/a

 

(88

)

 

--

 

(88

)

Other embedded derivative financial instruments

 

Other investments

 

1,000

 

n/a

 

--

 

 

--

 

--

 

Credit default contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps - buying protection

 

Other investments

 

299

 

n/a

 

(5

)

 

2

 

(7

)

Credit default swaps - selling protection

 

Other investments

 

150

 

n/a

 

(8

)

 

2

 

(10

)

Other contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other contracts

 

Other investments

 

13

 

n/a

 

--

 

 

--

 

--

 

Other contracts

 

Other assets

 

5

 

n/a

 

1

 

 

1

 

--

 

Total

 

 

$

9,035

 

48,163

$

670

 

$

797

$

(127

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total asset derivatives

 

 

$

9,255

 

48,163

$

654

 

$

800

$

(146

)

 


(1)       Volume for OTC derivative contracts is represented by their notional amounts.  Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded.  (n/a = not applicable)

(2)       In addition to the number of contracts presented in the table, the Company held 2,768 stock rights and 1,379,932 stock warrants.  Stock warrants can be converted to cash upon sale of those instruments or exercised for shares of common stock.

 

27



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Liability derivatives

 

 

 

 

Volume (1)

 

 

 

 

 

 

 

 

 

 

Balance sheet location

 

Notional
amount

 

Number
of
contracts

 

Fair
value,
net

 

 

Gross
asset

 

Gross
liability

 

Derivatives designated as accounting hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Other liabilities & accrued expenses

$

3,345

 

n/a

$

(181

)

$

20

$

(201

)

Interest rate swap agreements

 

Contractholder funds

 

--

 

n/a

 

2

 

 

2

 

--

 

Foreign currency swap agreements

 

Other liabilities & accrued expenses

 

138

 

n/a

 

(20

)

 

--

 

(20

)

Foreign currency and interest rate swap agreements

 

Other liabilities & accrued expenses

 

435

 

n/a

 

34

 

 

34

 

--

 

Foreign currency and interest rate swap agreements

 

Contractholder funds

 

--

 

n/a

 

28

 

 

28

 

--

 

Total

 

 

$

3,918

 

n/a

$

(137

)

$

84

$

(221

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as accounting hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

Other liabilities & accrued expenses

$

4,543

 

n/a

$

29

 

$

97

$

(68

)

Interest rate swaption agreements

 

Other liabilities & accrued expenses

 

4,400

 

n/a

 

18

 

 

18

 

--

 

Interest rate cap and floor agreements

 

Other liabilities & accrued expenses

 

3,216

 

n/a

 

(22

)

 

1

 

(23

)

Financial futures contracts and options

 

Other liabilities & accrued expenses

 

n/a

 

15,150

 

(1

)

 

--

 

(1

)

Equity and index contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options and futures

 

Other liabilities & accrued expenses

 

64

 

21,585

 

(168

)

 

2

 

(170

)

Foreign currency contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forwards and options

 

Other liabilities & accrued expenses

 

316

 

n/a

 

1

 

 

2

 

(1

)

Embedded derivative financial instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guaranteed accumulation benefits

 

Contractholder funds

 

1,067

 

n/a

 

(88

)

 

--

 

(88

)

Guaranteed withdrawal benefits

 

Contractholder funds

 

739

 

n/a

 

(47

)

 

--

 

(47

)

Equity-indexed and forward starting options in life and annuity product contracts

 

Contractholder funds

 

4,694

 

n/a

 

(515

)

 

--

 

(515

)

Other embedded derivative financial instruments

 

Contractholder funds

 

85

 

n/a

 

(3

)

 

--

 

(3

)

Credit default contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps – buying protection

 

Other liabilities & accrued expenses

 

1,127

 

n/a

 

(13

)

 

6

 

(19

)

Credit default swaps – selling protection

 

Other liabilities & accrued expenses

 

482

 

n/a

 

(66

)

 

1

 

(67

)

Total

 

 

$

20,733

 

36,735

$

(875

)

$

127

$

(1,002

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liability derivatives

 

 

$

24,651

 

36,735

$

(1,012

)

$

211

$

(1,223

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

 

$

33,906

 

84,898

$

(358

)

 

 

 

 

 

 


(1)      Volume for OTC derivative contracts is represented by their notional amounts.  Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded.  (n/a = not applicable)

 

28



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table provides a summary of the impacts of the Company’s foreign currency contracts in cash flow hedging relationships in the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Financial Position for the three months ended March 31.  Amortization of net losses from accumulated other comprehensive income related to cash flow hedges is expected to be $6 million during the next twelve months.

 

($ in millions)
Effective portion

 

2011

 

2010

(Loss) gain recognized in OCI on derivatives during the period

(8

)

6

 

Loss recognized in OCI on derivatives during the term of the hedging relationship

 

(30

)

 

(18

)

Gain reclassified from AOCI into income (net investment income)

 

--

 

 

1

 

Gain reclassified from AOCI into income (realized capital gains and losses)

 

--

 

 

--

 

Ineffective portion and amount excluded from effectiveness testing

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain recognized in income on derivatives (realized capital gains and losses)

 

--

 

 

--

 

 

The following tables present gains and losses from valuation, settlements and hedge ineffectiveness reported on derivatives used in fair value hedging relationships and derivatives not designated as accounting hedging instruments in the Condensed Consolidated Statements of Operations for the three months ended March 31.

 

($ in millions)

 

2011

 

 

Net
investment
income

 

Realized
capital
gains and
losses

 

Life and
annuity
contract
benefits

 

Interest
credited to
contractholder
funds

 

Operating
costs and
expenses

 

Total gain
(loss)
recognized
in net
income on
derivatives

Derivatives in fair value accounting hedging relationships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest rate contracts

1

 

(8

)

--

 

(5

)

--

 

(12

)

  Foreign currency and interest rate contracts

 

--

 

 

--

 

 

--

 

 

(32

)

 

--

 

 

(32

)

Subtotal

 

1

 

 

(8

)

 

--

 

 

(37

)

 

--

 

 

(44

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as accounting hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest rate contracts

 

--

 

 

(51

)

 

--

 

 

--

 

 

--

 

 

(51

)

  Equity and index contracts

 

--

 

 

(19

)

 

--

 

 

38

 

 

7

 

 

26

 

  Embedded derivative financial instruments

 

--

 

 

8

 

 

45

 

 

(22

)

 

--

 

 

31

 

  Foreign currency contracts

 

--

 

 

(5

)

 

--

 

 

--

 

 

2

 

 

(3

)

  Credit default contracts

 

--

 

 

8

 

 

--

 

 

--

 

 

--

 

 

8

 

  Other contracts

 

--

 

 

--

 

 

--

 

 

2

 

 

--

 

 

2

 

Subtotal

 

--

 

 

(59

)

 

45

 

 

18

 

 

9

 

 

13

 

Total

1

 

(67

)

45

 

(19

)

9

 

(31

)

 

29



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

2010

 

 

Net
investment
income

 

Realized
capital
gains and
losses

 

Life and
annuity
contract
benefits

 

Interest
credited to
contractholder
funds

 

Operating
costs and
expenses

 

Total gain
(loss)
recognized
in net
income on
derivatives

Derivatives in fair value accounting hedging relationships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest rate contracts

(41

)

--

 

--

 

(1

)

--

 

(42

)

  Foreign currency and interest rate contracts

 

--

 

 

--

 

 

--

 

 

(24

)

 

--

 

 

(24

)

Subtotal

 

(41

)

 

--

 

 

--

 

 

(25

)

 

--

 

 

(66

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as accounting hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest rate contracts

 

--

 

 

(156

)

 

--

 

 

--

 

 

--

 

 

(156

)

  Equity and index contracts

 

--

 

 

(39

)

 

--

 

 

34

 

 

6

 

 

1

 

  Embedded derivative financial instruments

 

--

 

 

(13

)

 

20

 

 

(2

)

 

--

 

 

5

 

  Foreign currency contracts

 

--

 

 

17

 

 

--

 

 

--

 

 

(5

)

 

12

 

  Credit default contracts

 

--

 

 

6

 

 

--

 

 

--

 

 

--

 

 

6

 

Subtotal

 

--

 

 

(185

)

 

20

 

 

32

 

 

1

 

 

(132

)

Total

(41

)

(185

)

20

 

7

 

1

 

(198

)

 

The following tables provide a summary of the changes in fair value of the Company’s fair value hedging relationships in the Condensed Consolidated Statements of Operations for the three months ended March 31.

 

 

($ in millions)

 

2011

 

 

 

Gain (loss) on derivatives

 

 

Gain (loss) on hedged risk

 

 

Location of gain or (loss) recognized
in net income on derivatives

 

Interest
rate
contracts

 

 

Foreign
currency &
interest rate
contracts

 

 

Contractholder
funds

 

 

Investments

 

 

Interest credited to contractholder funds

(7

)

(34

)

41

 

--

 

 

Net investment income

 

21

 

 

--

 

 

--

 

 

(21

)

 

Realized capital gains and losses

 

(8

)

 

--

 

 

--

 

 

--

 

 

Total

6

 

(34

)

41

 

(21

)

 

 

 

 

2010

 

 

 

Gain (loss) on derivatives

 

Gain (loss) on hedged risk

 

Location of gain or (loss) recognized
in net income on derivatives

 

Interest
rate
contracts

 

 

Foreign
currency &
interest rate
contracts

 

 

Contractholder
funds

 

 

Investments

 

 

Interest credited to contractholder funds

(1

)

(33

)

34

 

--

 

 

Net investment income

 

(13

)

 

--

 

 

--

 

 

13

 

 

Realized capital gains and losses

 

--

 

 

--

 

 

--

 

 

--

 

 

Total

(14

)

(33

)

34

 

13

 

 

The Company manages its exposure to credit risk by utilizing highly rated counterparties, establishing risk control limits, executing legally enforceable master netting agreements (“MNAs”) and obtaining collateral where appropriate.  The Company uses MNAs for OTC derivative transactions, including interest rate swap, foreign currency swap, interest rate cap, interest rate floor, credit default swap, forward and certain option agreements (including swaptions).  These agreements permit either party to net payments due for transactions covered by the agreements.  Under the provisions of the agreements, collateral is either pledged or obtained when certain predetermined exposure limits are exceeded.  As of March 31, 2011, counterparties pledged $105 million in cash and securities to the Company, and the Company pledged $166 million in securities to counterparties which includes $100 million of collateral posted under MNAs for contracts containing credit-risk-contingent provisions that are in a liability position and $66 million of collateral posted under MNAs for contracts without credit-risk-contingent liabilities.  The Company has not incurred any losses on derivative financial instruments due to counterparty nonperformance.  Other derivatives, including futures and certain option contracts, are traded on organized

 

30



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

exchanges which require margin deposits and guarantee the execution of trades, thereby mitigating any potential credit risk.

 

Counterparty credit exposure represents the Company’s potential loss if all of the counterparties concurrently fail to perform under the contractual terms of the contracts and all collateral, if any, becomes worthless.  This exposure is measured by the fair value of OTC derivative contracts with a positive fair value at the reporting date reduced by the effect, if any, of legally enforceable master netting agreements.

 

The following table summarizes the counterparty credit exposure by counterparty credit rating as it relates to interest rate swap, foreign currency swap, interest rate cap, interest rate floor, free-standing credit default swap, forward and certain option agreements (including swaptions).

 

 

($ in millions)

 

March 31, 2011

 

December 31, 2010

 

Rating  (1)

 

Number
of
counter-
parties

 

Notional
amount 
(2)

 

Credit
exposure 
(2)

 

Exposure,
net of
collateral 
(2)

 

Number
of
counter-
parties

 

Notional
amount 
(2)

 

Credit
exposure 
(2)

 

Exposure,
net of
collateral 
(2)

 

AA-

 

2

 

841

 

19

 

1

 

 

2

 

2,322

 

43

 

16

 

 

A+

 

3

 

 

3,451

 

 

39

 

 

--

 

 

5

 

 

3,189

 

 

16

 

 

10

 

 

A

 

4

 

 

4,034

 

 

46

 

 

3

 

 

3

 

 

3,479

 

 

17

 

 

17

 

 

A-

 

--

 

 

--

 

 

--

 

 

--

 

 

1

 

 

89

 

 

31

 

 

31

 

 

BBB+

 

1

 

 

5

 

 

33

 

 

33

 

 

--

 

 

--

 

 

--

 

 

--

 

 

Total

 

10

 

8,331

 

137

 

37

 

 

11

 

9,079

 

107

 

74

 


(1)    Rating is the lower of S&P or Moody’s ratings.

(2)    Only OTC derivatives with a net positive fair value are included for each counterparty.

 

Market risk is the risk that the Company will incur losses due to adverse changes in market rates and prices.  Market risk exists for all of the derivative financial instruments the Company currently holds, as these instruments may become less valuable due to adverse changes in market conditions.  To limit this risk, the Company’s senior management has established risk control limits.  In addition, changes in fair value of the derivative financial instruments that the Company uses for risk management purposes are generally offset by the change in the fair value or cash flows of the hedged risk component of the related assets, liabilities or forecasted transactions.

 

Certain of the Company’s derivative instruments contain credit-risk-contingent termination events, cross-default provisions and credit support annex agreements.  Credit-risk-contingent termination events allow the counterparties to terminate the derivative on certain dates if AIC’s, ALIC’s or Allstate Life Insurance Company of New York’s (“ALNY”) financial strength credit ratings by Moody’s or S&P fall below a certain level or in the event AIC, ALIC or ALNY are no longer rated by both Moody’s and S&P.  Credit-risk-contingent cross-default provisions allow the counterparties to terminate the derivative instruments if the Company defaults by pre-determined threshold amounts on certain debt instruments.  Credit-risk-contingent credit support annex agreements specify the amount of collateral the Company must post to counterparties based on AIC’s, ALIC’s or ALNY’s financial strength credit ratings by Moody’s or S&P, or in the event AIC, ALIC or ALNY are no longer rated by both Moody’s and S&P.

 

The following summarizes the fair value of derivative instruments with termination, cross-default or collateral credit-risk-contingent features that are in a liability position, as well as the fair value of assets and collateral that are netted against the liability in accordance with provisions within legally enforceable MNAs.

 

($ in millions)

 

March 31,
2011

 

December 31,
2010

Gross liability fair value of contracts containing credit-risk-contingent features

199

 

448

 

Gross asset fair value of contracts containing credit-risk-contingent features and subject to MNAs

 

(89

)

 

(255

)

Collateral posted under MNAs for contracts containing credit-risk-contingent features

 

(100

)

 

(171

)

Maximum amount of additional exposure for contracts with credit-risk-contingent features if all features were triggered concurrently

10

 

22

 

 

31



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Credit derivatives - selling protection

 

Free-standing credit default swaps (“CDS”) are utilized for selling credit protection against a specified credit event.  A credit default swap is a derivative instrument, representing an agreement between two parties to exchange the credit risk of a specified entity (or a group of entities), or an index based on the credit risk of a group of entities (all commonly referred to as the “reference entity” or a portfolio of “reference entities”), in return for a periodic premium.  In selling protection, CDS are used to replicate fixed income securities and to complement the cash market when credit exposure to certain issuers is not available or when the derivative alternative is less expensive than the cash market alternative.  CDS typically have a five-year term.

 

The following table shows the CDS notional amounts by credit rating and fair value of protection sold as of March 31, 2011:

 

($ in millions)

 

Notional amount

 

 

 

 

 

AA

 

A

 

BBB

 

BB and
lower

 

Total

 

Fair
value

Single name

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade corporate debt

50

 

133

 

103

 

25

 

311

 

(2

)

High yield debt

 

--

 

 

--

 

 

--

 

 

2

 

 

2

 

 

--

 

Municipal

 

135

 

 

--

 

 

--

 

 

--

 

 

135

 

 

(10

)

Subtotal

 

185

 

 

133

 

 

103

 

 

27

 

 

448

 

 

(12

)

Baskets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tranche

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Investment grade corporate debt

 

--

 

 

--

 

 

--

 

 

65

 

 

65

 

 

(16

)

First-to-default

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Municipal

 

--

 

 

100

 

 

--

 

 

--

 

 

100

 

 

(30

)

Subtotal

 

--

 

 

100

 

 

--

 

 

65

 

 

165

 

 

(46

)

Total

185

 

233

 

103

 

92

 

613

 

(58

)

 

The following table shows the CDS notional amounts by credit rating and fair value of protection sold as of December 31, 2010:

 

($ in millions)

 

Notional amount

 

 

 

 

 

AA

 

A

 

BBB

 

BB and
lower

 

Total

 

Fair
value

Single name

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade corporate debt

$

50

 

148

 

103

 

25

 

326

 

(4

)

High yield debt

 

--

 

 

--

 

 

--

 

 

6

 

 

6

 

 

--

 

Municipal

 

135

 

 

--

 

 

--

 

 

--

 

 

135

 

 

(14

)

Subtotal

 

185

 

 

148

 

 

103

 

 

31

 

 

467

 

 

(18

)

Baskets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tranche

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Investment grade corporate debt

 

--

 

 

--

 

 

--

 

 

65

 

 

65

 

 

(19

)

First-to-default

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Municipal

 

--

 

 

100

 

 

--

 

 

--

 

 

100

 

 

(37

)

Subtotal

 

--

 

 

100

 

 

--

 

 

65

 

 

165

 

 

(56

)

Total

185

 

248

 

103

 

96

 

632

 

(74

)

 

In selling protection with CDS, the Company sells credit protection on an identified single name, a basket of names in a first-to-default (“FTD”) structure or a specific tranche of a basket, or credit derivative index (“CDX”) that is generally investment grade, and in return receives periodic premiums through expiration or termination of the agreement.  With single name CDS, this premium or credit spread generally corresponds to the difference between the yield on the reference entity’s public fixed maturity cash instruments and swap rates at the time the agreement is executed.  With a FTD basket or a tranche of a basket, because of the additional credit risk inherent in a basket of named reference entities, the premium generally corresponds to a high proportion of the sum of the credit spreads of the names in the basket and the correlation between the names.  CDX index is utilized to take a position on multiple

 

32



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(generally 125) reference entities.  Credit events are typically defined as bankruptcy, failure to pay, or restructuring, depending on the nature of the reference entities.  If a credit event occurs, the Company settles with the counterparty, either through physical settlement or cash settlement.  In a physical settlement, a reference asset is delivered by the buyer of protection to the Company, in exchange for cash payment at par, whereas in a cash settlement, the Company pays the difference between par and the prescribed value of the reference asset.  When a credit event occurs in a single name or FTD basket (for FTD, the first credit event occurring for any one name in the basket), the contract terminates at the time of settlement.  When a credit event occurs in a tranche of a basket, there is no immediate impact to the Company until cumulative losses in the basket exceed the contractual subordination.  To date, realized losses have not exceeded the subordination.  For CDX index, the reference entity’s name incurring the credit event is removed from the index while the contract continues until expiration.  The maximum payout on a CDS is the contract notional amount.  A physical settlement may afford the Company with recovery rights as the new owner of the asset.

 

The Company monitors risk associated with credit derivatives through individual name credit limits at both a credit derivative and a combined cash instrument/credit derivative level.  The ratings of individual names for which protection has been sold are also monitored.

 

In addition to the CDS described above, the Company’s synthetic collateralized debt obligations contain embedded credit default swaps which sell protection on a basket of reference entities.  The synthetic collateralized debt obligations are fully funded; therefore, the Company is not obligated to contribute additional funds when credit events occur related to the reference entities named in the embedded credit default swaps.  The Company’s maximum amount at risk equals the amount of its aggregate initial investment in the synthetic collateralized debt obligations.

 

7.  Reserve for Property - Liability Insurance Claims and Claims Expense

 

The Company establishes reserves for claims and claims expense on reported and unreported claims of insured losses.  The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions.  In the normal course of business, the Company may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims.  The effects of inflation are implicitly considered in the reserving process.

 

Because reserves are estimates of unpaid portions of losses that have occurred, including incurred but not reported losses, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process.  The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates.  The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled.  The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims.  Changes in prior year reserve estimates, which may be material, are reported in property-liability insurance claims and claims expense in the Condensed Consolidated Statements of Operations in the period such changes are determined.

 

Management believes that the reserve for property-liability insurance claims and claims expense, net of reinsurance recoverables, is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by the date of the Condensed Consolidated Statements of Financial Position based on available facts, technology, laws and regulations.

 

8.  Reinsurance

 

Property-liability insurance premiums earned and life and annuity premiums and contract charges for the three months ended March 31 have been reduced by the reinsurance ceded amounts shown in the following table:

 

($ in millions)

 

2011

 

 

2010

 

Property-liability insurance premiums earned

270

 

268

 

Life and annuity premiums and contract charges

 

193

 

 

191

 

 

33



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Property-liability insurance claims and claims expense and life and annuity contract benefits and interest credited to contractholder funds for the three months ended March 31 have been reduced by the reinsurance ceded amounts shown in the following table.

 

($ in millions)

 

2011

 

 

2010

 

Property-liability insurance claims and claims expense

137

 

80

 

Life and annuity contract benefits

 

84

 

 

130

 

Interest credited to contractholder funds

 

8

 

 

7

 

 

9.  Company Restructuring

 

The Company undertakes various programs to reduce expenses.  These programs generally involve a reduction in staffing levels, and in certain cases, office closures.  Restructuring and related charges include employee termination and relocation benefits, and post-exit rent expenses in connection with these programs, and non-cash charges resulting from pension benefit payments made to agents in connection with the 1999 reorganization of Allstate’s multiple agency programs to a single exclusive agency program.  In the three months ended March 31, 2011, restructuring programs primarily relate to Allstate Protection’s field claim office consolidations.  The expenses related to these activities are included in the Condensed Consolidated Statements of Operations as restructuring and related charges, and totaled $9 million and $11 million during the three months ended March 31, 2011 and 2010, respectively.

 

The following table presents changes in the restructuring liability during the three months ended March 31, 2011.

 

($ in millions)

 

Employee
costs

 

 

Exit
costs

 

 

Total
liability

 

Balance as of December 31, 2010

13

 

3

 

16

 

Expense incurred

 

4

 

 

4

 

 

8

 

Adjustments to liability

 

(4

)

 

--

 

 

(4

)

Payments applied against liability

 

(5

)

 

(1

)

 

(6

)

Balance as of March 31, 2011

8

 

6

 

14

 

 

The payments applied against the liability for employee costs primarily reflect severance costs, and the payments for exit costs generally consist of post-exit rent expenses and contract termination penalties.  As of March 31, 2011, the cumulative amount incurred to date for active programs totaled $99 million for employee costs and $44 million for exit costs.

 

10.  Guarantees and Contingent Liabilities

 

State facility assessments

 

The Company is required to participate in assigned risk plans, reinsurance facilities and joint underwriting associations in various states that provide insurance coverage to individuals or entities that otherwise are unable to purchase such coverage from private insurers.  Underwriting results related to these arrangements, which tend to be adverse, have been immaterial to the Company’s results of operations.  Because of the Company’s participation, it may be exposed to losses that surpass the capitalization of these facilities and/or assessments from these facilities.

 

Shared markets

 

As a condition of maintaining its licenses to write personal property and casualty insurance in various states, the Company is required to participate in assigned risk plans, reinsurance facilities and joint underwriting associations that provide various types of insurance coverage to individuals or entities that otherwise are unable to purchase such coverage from private insurers.  Underwriting results related to these arrangements, which tend to be adverse, have been immaterial to the Company’s results of operations.

 

Guarantees

 

The Company owns certain fixed income securities that obligate the Company to exchange credit risk or to forfeit principal due, depending on the nature or occurrence of specified credit events for the reference entities.  In the event all such specified credit events were to occur, the Company’s maximum amount at risk on these fixed income securities, as measured by the amount of the aggregate initial investment, was $67 million as of March 31,

 

34



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2011.  The obligations associated with these fixed income securities expire at various dates on or before March 11, 2018.

 

Related to the disposal through reinsurance of substantially all of Allstate Financial’s variable annuity business to Prudential in 2006, the Company and its consolidated subsidiaries, ALIC and ALNY, have agreed to indemnify Prudential for certain pre-closing contingent liabilities (including extra-contractual liabilities of ALIC and ALNY and liabilities specifically excluded from the transaction) that ALIC and ALNY have agreed to retain.  In addition, the Company, ALIC and ALNY will each indemnify Prudential for certain post-closing liabilities that may arise from the acts of ALIC, ALNY and their agents, including in connection with ALIC’s and ALNY’s provision of transition services.  The reinsurance agreements contain no limitations or indemnifications with regard to insurance risk transfer, and transferred all of the future risks and responsibilities for performance on the underlying variable annuity contracts to Prudential, including those related to benefit guarantees.  Management does not believe this agreement will have a material adverse effect on results of operations, cash flows or financial position of the Company.

 

The Company provides residual value guarantees on Company leased automobiles.  If all outstanding leases were terminated effective March 31, 2011, the Company’s maximum obligation pursuant to these guarantees, assuming the automobiles have no residual value, would be $9 million as of March 31, 2011.  The remaining term of each residual value guarantee is equal to the term of the underlying lease that ranges from less than one year to three years.  Historically, the Company has not made any material payments pursuant to these guarantees.

 

In the normal course of business, the Company provides standard indemnifications to contractual counterparties in connection with numerous transactions, including acquisitions and divestitures.  The types of indemnifications typically provided include indemnifications for breaches of representations and warranties, taxes and certain other liabilities, such as third party lawsuits.  The indemnification clauses are often standard contractual terms and are entered into in the normal course of business based on an assessment that the risk of loss would be remote.  The terms of the indemnifications vary in duration and nature.  In many cases, the maximum obligation is not explicitly stated and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur.  Consequently, the maximum amount of the obligation under such indemnifications is not determinable.  Historically, the Company has not made any material payments pursuant to these obligations.

 

The aggregate liability balance related to all guarantees was not material as of March 31, 2011.

 

Regulation and Compliance

 

The Company is subject to changing social, economic and regulatory conditions.  From time to time, regulatory authorities or legislative bodies seek to influence and restrict premium rates, require premium refunds to policyholders, require reinstatement of terminated policies, restrict the ability of insurers to cancel or non-renew policies, require insurers to continue to write new policies or limit their ability to write new policies, limit insurers’ ability to change coverage terms or to impose underwriting standards, impose additional regulations regarding agent and broker compensation, regulate the nature of and amount of investments, and otherwise expand overall regulation of insurance products and the insurance industry.  The Company has established procedures and policies to facilitate compliance with laws and regulations, to foster prudent business operations, and to support financial reporting.  The Company routinely reviews its practices to validate compliance with laws and regulations and with internal procedures and policies.  As a result of these reviews, from time to time the Company may decide to modify some of its procedures and policies.  Such modifications, and the reviews that led to them, may be accompanied by payments being made and costs being incurred.  The ultimate changes and eventual effects of these actions on the Company’s business, if any, are uncertain.

 

Legal and regulatory proceedings and inquiries

 

Background

 

The Company and certain subsidiaries are involved in a number of lawsuits, regulatory inquiries, and other legal proceedings arising out of various aspects of its business.  As background to both the “Claims related proceedings” and “Other proceedings” subsections below, please note the following:

 

·                   These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including the underlying facts of each matter; novel legal issues; variations between jurisdictions in which matters are being litigated, heard, or investigated; differences in applicable laws and

 

35



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

judicial interpretations; the length of time before many of these matters might be resolved by settlement, through litigation, or otherwise; the fact that some of the lawsuits are putative class actions in which a class has not been certified and in which the purported class may not be clearly defined; the fact that some of the lawsuits involve multi-state class actions in which the applicable law(s) for the claims at issue is in dispute and therefore unclear; and the current challenging legal environment faced by large corporations and insurance companies.

 

·                   The outcome of these matters may be affected by decisions, verdicts, and settlements, and the timing of such decisions, verdicts, and settlements, in other individual and class action lawsuits that involve the Company, other insurers, or other entities and by other legal, governmental, and regulatory actions that involve the Company, other insurers, or other entities.  The outcome may also be affected by future state or federal legislation, the timing or substance of which cannot be predicted.

 

·                   In the lawsuits, plaintiffs seek a variety of remedies which may include equitable relief in the form of injunctive and other remedies and monetary relief in the form of contractual and extra-contractual damages.  In some cases, the monetary damages sought may include punitive or treble damages.  Often specific information about the relief sought, such as the amount of damages, is not available because plaintiffs have not requested specific relief in their pleadings.  When specific monetary demands are made, they are often set just below a state court jurisdictional limit in order to seek the maximum amount available in state court, regardless of the specifics of the case, while still avoiding the risk of removal to federal court.  In Allstate’s experience, monetary demands in pleadings bear little relation to the ultimate loss, if any, to the Company.

 

·                   In connection with regulatory examinations and proceedings, government authorities may seek various forms of relief, including penalties, restitution, and changes in business practices.  The Company may not be advised of the nature and extent of relief sought until the final stages of the examination or proceeding.

 

·                   For the reasons specified above, it is not possible to make meaningful estimates of the amount or range of loss that could result from the matters described below in the “Claims related proceedings” and “Other proceedings” subsections.  The Company reviews these matters on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions.  When assessing reasonably possible and probable outcomes, the Company bases its decisions on its assessment of the ultimate outcome following all appeals.

 

·                   Due to the complexity and scope of the matters disclosed in the “Claims related proceedings” and “Other proceedings” subsections below and the many uncertainties that exist, the ultimate outcome of these matters cannot be reasonably predicted.  In the event of an unfavorable outcome in one or more of these matters, the ultimate liability may be in excess of amounts currently reserved, if any, and may be material to the Company’s operating results or cash flows for a particular quarterly or annual period.  However, based on information currently known to it, management believes that the ultimate outcome of all matters described below, as they are resolved over time, is not likely to have a material adverse effect on the financial position of the Company.

 

Claims related proceedings

 

The Company is vigorously defending a number of matters in various stages of development filed in the aftermath of Hurricane Katrina, including individual lawsuits and a statewide putative class action in Louisiana.  The Louisiana Attorney General filed a putative class action lawsuit in state court against Allstate and other insurers on behalf of Road Home fund recipients alleging that the insurers have failed to pay all damages owed under their policies.  The insurers removed the matter to federal court.  The district court denied plaintiffs’ motion to remand the matter to state court and the U.S. Court of Appeals for the Fifth Circuit (“Fifth Circuit”) affirmed that ruling.  The defendants filed a motion to dismiss and the plaintiffs filed a motion to remand the claims involving a Road Home subrogation agreement.  In March 2009, the district court denied the State’s request that its claims be remanded to state court.  As for the defendant insurers’ motion, the judge granted it in part and denied it in part.  Dismissal of all of the extra-contractual claims, including the bad faith and breach of fiduciary duty claims, was granted.  Dismissal also was granted of all claims based on the Valued Policy Law and all flood loss claims based on the levee breaches finding that the insurers flood exclusions precluded coverage.  The remaining claims are for breach of contract and for declaratory relief on the alleged underpayment of claims by the insurers.  The judge did not dismiss the class action allegations.

 

36



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The defendants also had moved to dismiss the complaint on grounds that the State had no standing to bring the lawsuit as an assignee of insureds because of anti-assignment language in the insurers’ policies.  The judge denied the defendants’ motion for reconsideration on the assignment issue but found the matter was ripe for consideration by the federal appellate court.  The defendants have filed a petition for permission to appeal to the Fifth Circuit.  The Fifth Circuit has accepted review.  After the Fifth Circuit accepted review, plaintiffs filed a motion to remand the case to state court, asserting that the class claims on which federal jurisdiction was premised have now effectively been dismissed as a result of a ruling in a related case.  The Fifth Circuit has denied the motion for remand, without prejudice to plaintiffs’ right to refile the motion for remand after the Fifth Circuit disposes of the pending appeal.  On July 28, 2010, the Fifth Circuit issued an order stating that since there is no controlling Louisiana Supreme Court precedent on the issue of whether an insurance policy’s anti-assignment clause prohibits post-loss assignments, the Fifth Circuit is certifying that issue to the Louisiana Supreme Court.  The issue has been briefed to the Louisiana Supreme Court.  That court heard oral argument on the appeal on March 14, 2011 and a decision is pending.  If the insurers are not successful on the appeal, we anticipate the State to vigorously pursue the case once it returns to the trial court. 

 

There are one nationwide and several statewide class action lawsuits pending against Allstate alleging that it failed to properly pay general contractors overhead and profit on many homeowner structural loss claims.  Most of these lawsuits contain counts for breach of contract, as well as one or more counts asserting other theories of liability such as bad faith, fraud, unjust enrichment, or unfair claims practices.  General contractors overhead and profit is an amount that is added to payments on claims where the services of a general contractor are reasonably likely to be required.  To a large degree, these lawsuits mirror similar lawsuits filed against other carriers in the industry, some of which have settled.  These lawsuits are pending in various state and federal courts, and they are in different stages of development.  The Company has reached an agreement to settle on a 48-state basis the nationwide class action.  This settlement received preliminary approval from the court on December 6, 2010, and the case was certified as a class for settlement purposes only.  The settlement was accrued as a prior year reserve reestimate in property-liability insurance claims and claims expense in 2010.  No other classes have been certified against Allstate on this issue.  The hearing for final approval of the settlement is scheduled for May 6, 2011.

 

Allstate has been vigorously defending a lawsuit in regards to certain claims employees involving worker classification issues.  This lawsuit is a certified class action challenging a state wage and hour law.  In this case, plaintiffs sought monetary relief, such as penalties and liquidated damages, and non-monetary relief, such as injunctive relief.  In December 2009, the liability phase of the case was tried, and, on July 6, 2010, the court issued its decision finding in favor of Allstate on all claims.  The plaintiffs are appealing the decision.

 

Other proceedings

 

The Company is defending certain matters relating to the Company’s agency program reorganization announced in 1999.  These matters are in various stages of development.

 

·                   These matters include a lawsuit filed in 2001 by the U.S. Equal Employment Opportunity Commission (“EEOC”) alleging retaliation under federal civil rights laws (the “EEOC I” suit) and a class action filed in 2001 by former employee agents alleging retaliation and age discrimination under the Age Discrimination in Employment Act (“ADEA”), breach of contract and ERISA violations (the “Romero I” suit).  In 2004, in the consolidated EEOC I and Romero I litigation, the trial court issued a memorandum and order that, among other things, certified classes of agents, including a mandatory class of agents who had signed a release, for purposes of effecting the court’s declaratory judgment that the release is voidable at the option of the release signer.  The court also ordered that an agent who voids the release must return to Allstate “any and all benefits received by the [agent] in exchange for signing the release.”  The court also stated that, “on the undisputed facts of record, there is no basis for claims of age discrimination.”  The EEOC and plaintiffs asked the court to clarify and/or reconsider its memorandum and order and in January 2007, the judge denied their request.  In June 2007, the court granted the Company’s motions for summary judgment.  Following plaintiffs’ filing of a notice of appeal, the U.S. Court of Appeals for the Third Circuit (“Third Circuit”) issued an order in December 2007 stating that the notice of appeal was not taken from a final order within the meaning of the federal law and thus not appealable at this time.  In March 2008, the Third Circuit decided that the appeal should not summarily be dismissed and that the question of whether the matter is appealable at this time will be addressed by the Third Circuit along with the merits of the appeal.  In July 2009, the Third Circuit vacated the decision which granted the Company’s summary judgment

 

37



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

motions, remanded the cases to the trial court for additional discovery, and directed that the cases be reassigned to another trial court judge.  In January 2010, the cases were assigned to a new judge for further proceedings in the trial court.

 

·                   A putative nationwide class action has also been filed by former employee agents alleging various violations of ERISA, including a worker classification issue.  These plaintiffs are challenging certain amendments to the Agents Pension Plan and are seeking to have exclusive agent independent contractors treated as employees for benefit purposes.  This matter was dismissed with prejudice by the trial court, was the subject of further proceedings on appeal, and was reversed and remanded to the trial court in 2005.  In June 2007, the court granted the Company’s motion to dismiss the case.  Following plaintiffs’ filing of a notice of appeal, the Third Circuit issued an order in December 2007 stating that the notice of appeal was not taken from a final order within the meaning of the federal law and thus not appealable at this time.  In March 2008, the Third Circuit decided that the appeal should not summarily be dismissed and that the question of whether the matter is appealable at this time will be addressed by the Third Circuit along with the merits of the appeal.  In July 2009, the Third Circuit vacated the decision which granted the Company’s motion to dismiss the case, remanded the case to the trial court for additional discovery, and directed that the case be reassigned to another trial court judge.  In January 2010, the case was assigned to a new judge for further proceedings in the trial court.

 

In these agency program reorganization matters, plaintiffs seek compensatory and punitive damages, and equitable relief.  Allstate has been vigorously defending these lawsuits and other matters related to its agency program reorganization.

 

Other Matters

 

Various other legal, governmental, and regulatory actions, including state market conduct exams, and other governmental and regulatory inquiries are currently pending that involve the Company and specific aspects of its conduct of business.  Like other members of the insurance industry, the Company is the target of a number of class action lawsuits and other types of proceedings, some of which involve claims for substantial or indeterminate amounts.  These actions are based on a variety of issues and target a range of the Company’s practices.  The outcome of these disputes is currently unpredictable.

 

One or more of these matters could have an adverse effect on the Company’s operating results or cash flows for a particular quarterly or annual period.  However, based on information currently known to it, management believes that the ultimate outcome of all matters described in this “Other Matters” subsection, in excess of amounts currently reserved, if any, as they are resolved over time, is not likely to have a material effect on the operating results, cash flows or financial position of the Company.

 

Asbestos and environmental

 

Allstate’s reserves for asbestos claims were $1.09 billion and $1.10 billion, net of reinsurance recoverables of $544 million and $555 million, as of March 31, 2011 and December 31, 2010, respectively.  Reserves for environmental claims were $193 million and $201 million, net of reinsurance recoverables of $44 million and $47 million, as of March 31, 2011 and December 31, 2010, respectively.  Approximately 61% and 60% of the total net asbestos and environmental reserves as of March 31, 2011 and December 31, 2010, respectively, were for incurred but not reported estimated losses.

 

Management believes its net loss reserves for asbestos, environmental and other discontinued lines exposures are appropriately established based on available facts, technology, laws and regulations.  However, establishing net loss reserves for asbestos, environmental and other discontinued lines claims is subject to uncertainties that are much greater than those presented by other types of claims.  The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimate.  Among the complications are lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure and unresolved legal issues regarding policy coverage; unresolved legal issues regarding the determination, availability and timing of exhaustion of policy limits; plaintiffs’ evolving and expanding theories of liability; availability and collectability of recoveries from reinsurance; retrospectively determined premiums and other contractual agreements; estimates of the extent and timing of any contractual liability; the impact of bankruptcy protection sought by various asbestos producers and other asbestos defendants; and other uncertainties.  There are also complex legal issues concerning the interpretation of various insurance policy provisions and whether those losses are covered, or were ever intended

 

38



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

to be covered, and could be recoverable through retrospectively determined premium, reinsurance or other contractual agreements.  Courts have reached different and sometimes inconsistent conclusions as to when losses are deemed to have occurred and which policies provide coverage; what types of losses are covered; whether there is an insurer obligation to defend; how policy limits are determined; how policy exclusions and conditions are applied and interpreted; and whether clean-up costs represent insured property damage.  Management believes these issues are not likely to be resolved in the near future, and the ultimate costs may vary materially from the amounts currently recorded resulting in material changes in loss reserves.  In addition, while the Company believes that improved actuarial techniques and databases have assisted in its ability to estimate asbestos, environmental, and other discontinued lines net loss reserves, these refinements may subsequently prove to be inadequate indicators of the extent of probable losses.  Due to the uncertainties and factors described above, management believes it is not practicable to develop a meaningful range for any such additional net loss reserves that may be required.

 

11 .  Components of Net Periodic Pension and Postretirement Benefit Costs

 

The components of net periodic cost for the Company’s pension and postretirement benefit plans for the three months ended March 31 are as follows:

 

 

($ in millions)

 

2011

 

2010

Pension benefits

 

 

 

 

Service cost

38

 

 38

 

Interest cost

 

81

 

 

80

 

Expected return on plan assets

 

(92

)

 

(83

)

Amortization of:

 

 

 

 

 

 

Prior service credit

 

--

 

 

(1

)

Net actuarial loss

 

38

 

 

40

 

Settlement loss

 

9

 

 

13

 

Net periodic pension cost

74

 

87

 

 

 

 

 

 

 

 

Postretirement benefits

 

 

 

 

 

 

Service cost

3

 

3

 

Interest cost

 

9

 

 

10

 

Amortization of:

 

 

 

 

 

 

Prior service credit

 

(6

)

 

(6

)

Net actuarial gain

 

(7

)

 

(5

)

Net periodic postretirement cost

(1

)

2

 

 

39



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

12.  Business Segments

 

Summarized revenue data for each of the Company’s business segments for the three months ended March 31 are as follows:

 

($ in millions)

 

2011

 

2010

Revenues

 

 

 

 

 

 

Property-Liability

 

 

 

 

 

 

Property-liability insurance premiums

 

 

 

 

 

 

Standard auto

$

4,088

 

$

4,137

 

Non-standard auto

 

211

 

 

234

 

Total auto

 

4,299

 

 

4,371

 

Homeowners

 

1,539

 

 

1,516

 

Other personal lines

 

611

 

 

616

 

Allstate Protection

 

6,449

 

 

6,503

 

Discontinued Lines and Coverages

 

(1

)

 

--

 

Total property-liability insurance premiums

 

6,448

 

 

6,503

 

Net investment income

 

284

 

 

304

 

Realized capital gains and losses

 

57

 

 

(190)

 

Total Property-Liability

 

6,789

 

 

6,617

 

 

 

 

 

 

 

 

Allstate Financial

 

 

 

 

 

 

Life and annuity premiums and contract charges

 

 

 

 

 

 

Traditional life insurance

 

108

 

 

106

 

Immediate annuities with life contingencies

 

43

 

 

27

 

Accident and health insurance

 

161

 

 

156

 

Total life and annuity premiums

 

312

 

 

289

 

Interest-sensitive life insurance

 

248

 

 

242

 

Fixed annuities

 

9

 

 

13

 

Total contract charges

 

257

 

 

255

 

Total life and annuity premiums and contract charges

 

569

 

 

544

 

Net investment income

 

684

 

 

731

 

Realized capital gains and losses

 

39

 

 

(162

)

Total Allstate Financial

 

1,292

 

 

1,113

 

 

 

 

 

 

 

 

Corporate and Other

 

 

 

 

 

 

Service fees

 

2

 

 

3

 

Net investment income

 

14

 

 

15

 

Realized capital gains and losses

 

--

 

 

4

 

Total Corporate and Other before reclassification of service fees

 

16

 

 

22

 

Reclassification of service fees (1)

 

(2

)

 

(3

)

Total Corporate and Other

 

14

 

 

19

 

Consolidated revenues

$

8,095

 

$

7,749

 

 


(1)        For presentation in the Condensed Consolidated Statements of Operations, service fees of the Corporate and Other segment are reclassified to
operating costs and expenses.

 

40



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Summarized financial performance data for each of the Company’s reportable segments for the three months ended March 31 are as follows:

 

($ in millions)

 

2011

 

2010

Net income

 

 

 

 

 

 

Property-Liability

 

 

 

 

 

 

Underwriting income

 

 

 

 

 

 

Allstate Protection

333

 

75

 

Discontinued Lines and Coverages

 

(6

)

 

(4

)

Total underwriting income

 

327

 

 

71

 

Net investment income

 

284

 

 

304

 

Income tax expense on operations

 

(181

)

 

(88

)

Realized capital gains and losses, after-tax

 

38

 

 

(123

)

Property-Liability net income

 

468

 

 

164

 

 

 

 

 

 

 

 

Allstate Financial

 

 

 

 

 

 

Life and annuity premiums and contract charges

 

569

 

 

544

 

Net investment income

 

684

 

 

731

 

Periodic settlements and accruals on non-hedge derivative financial instruments

 

17

 

 

17

 

Contract benefits and interest credited to contractholder funds

 

(879

)

 

(905

)

Operating costs and expenses and amortization of deferred policy acquisition costs

 

(222

)

 

(178

)

Restructuring and related charges

 

2

 

 

--

 

Income tax expense on operations

 

(55

)

 

(70

)

Operating income

 

116

 

 

139

 

Realized capital gains and losses, after-tax

 

25

 

 

(105

)

Valuation changes on embedded derivatives that are not hedged, after-tax

 

8

 

 

--

 

DAC and DSI amortization relating to realized capital gains and losses and valuation changes on embedded derivatives that are not hedged, after-tax

 

(26

)

 

(2

)

DAC and DSI unlocking relating to realized capital gains and losses, after-tax

 

1

 

 

(18

)

Reclassification of periodic settlements and accruals on non-hedge financial instruments, after-tax

 

(12

)

 

(11

)

(Loss) gain on disposition of operations, after-tax

 

(15

)

 

1

 

Allstate Financial net income

 

97

 

 

4

 

 

 

 

 

 

 

 

Corporate and Other

 

 

 

 

 

 

Service fees (1)

 

2

 

 

3

 

Net investment income

 

14

 

 

15

 

Operating costs and expenses (1)

 

(93

)

 

(100

)

Income tax benefit on operations

 

31

 

 

32

 

Operating loss

 

(46

)

 

(50

)

Realized capital gains and losses, after-tax

 

--

 

 

2

 

Corporate and Other net loss

 

(46

)

 

(48

)

Consolidated net income

519

 

120

 

 


(1)        For presentation in the Condensed Consolidated Statements of Operations, service fees of the Corporate and Other segment are reclassified to
operating costs and expenses.

 

41



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

13.  Other Comprehensive Income

 

The components of other comprehensive income on a pre - tax and after-tax basis for the three months ended March 31 are as follows:

 

 

($ in millions)

 

2011

 

2010

 

 

Pre-tax

 

Tax

 

After-
tax

 

Pre-tax

 

Tax

 

After-
tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net holding gains and losses arising during the period, net of related offsets

375

(132

)

243

1,086

 

(379

)

707

 

Less: reclassification adjustment of realized capital gains and losses

 

153

 

(54

)

 

99

 

(122

)

 

43

 

 

(79

)

Unrealized net capital gains and losses

 

222

 

(78

)

 

144

 

1,208

 

 

(422

)

 

786

 

Unrealized foreign currency translation adjustments

 

15

 

(5

)

 

10

 

22

 

 

(8

)

 

14

 

Unrecognized pension and other postretirement benefit cost

 

23

 

(8

)

 

15

 

26

 

 

(9

)

 

17

 

Other comprehensive income

260

(91

)

 

169

1,256

 

(439

)

 

817

 

Net income

 

 

 

 

 

 

519

 

 

 

 

 

 

 

120

 

Comprehensive income

 

 

 

 

 

688

 

 

 

 

 

 

937

 

 

42



 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

The Allstate Corporation

Northbrook, IL 60062

 

We have reviewed the accompanying condensed consolidated statement of financial position of The Allstate Corporation and subsidiaries (the “Company”) as of March 31, 2011, and the related condensed consolidated statements of operations and cash flows for the three-month periods ended March 31, 2011 and 2010.  These interim financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of The Allstate Corporation and subsidiaries as of December 31, 2010, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 24, 2011, which report includes an explanatory paragraph relating to a change in the Company’s recognition and presentation for other-than-temporary impairments of debt securities in 2009, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2010 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.

 

 

/s/ Deloitte & Touche LLP

 

Chicago, Illinois

April 27, 2011

 

43



 

Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

OVERVIEW

 

The following discussion highlights significant factors influencing the consolidated financial position and results of operations of The Allstate Corporation (referred to in this document as “we”, “our”, “us”, the “Company” or “Allstate”).  It should be read in conjunction with the condensed consolidated financial statements and notes thereto found under Part I. Item 1. contained herein, and with the discussion, analysis, consolidated financial statements and notes thereto in Part I. Item 1. and Part II. Item 7. and Item 8. of The Allstate Corporation Annual Report on Form 10-K for 2010.  Further analysis of our insurance segments is provided in the Property-Liability Operations (which includes the Allstate Protection and the Discontinued Lines and Coverages segments) and in the Allstate Financial Segment sections of Management’s Discussion and Analysis (“MD&A”).  The segments are consistent with the way in which we use financial information to evaluate business performance and to determine the allocation of resources.

 

Allstate is focused on three priorities:

 

·                   improve our operating results;

·                   grow our businesses profitably; and

·                   differentiate ourselves from the competition by reinventing our business.

 

HIGHLIGHTS

 

·                   Consolidated net income was $519 million in the first quarter of 2011 compared to $120 million in the first quarter of 2010.  Net income per diluted share was $0.97 in the first quarter of 2011 compared to $0.22 in the first quarter of 2010.

·                   Property-Liability net income was $468 million in the first quarter of 2011 compared to $164 million in the first quarter of 2010.

·                   The Property-Liability combined ratio was 94.9 in the first quarter of 2011 compared to 98.9 in the first quarter of 2010.

·                   Allstate Financial had net income of $97 million in the first quarter of 2011 compared to $4 million in the first quarter of 2010.

·                   Total revenues were $8.10 billion in the first quarter of 2011 compared to $7.75 billion in the first quarter of 2010.

·                   Property-Liability premiums earned in the first quarter of 2011 totaled $6.45 billion, a decrease of 0.8% from $6.50 billion in the first quarter of 2010.

·                   Net realized capital gains were $96 million in the first quarter of 2011 compared to net realized capital losses of $348 million in the first quarter of 2010.

·                   Investments as of March 31, 2011 totaled $99.61 billion, a decrease of 0.9% from $100.48 billion as of December 31, 2010.  Net investment income in the first quarter of 2011 was $982 million, a decrease of 6.5% from $1.05 billion in the first quarter of 2010.

·                   Book value per diluted share (ratio of shareholders’ equity to total shares outstanding and dilutive potential shares outstanding) was $36.51 as of March 31, 2011, an increase of 13.2% from $32.26 as of March 31, 2010 and an increase of 3.4% from $35.32 as of December 31, 2010.

·                   For the twelve months ended March 31, 2011, return on the average of beginning and ending period shareholders’ equity was 7.2%, a decrease of 1.2 points from 8.4% for the twelve months ended March 31, 2010.

·                   As of March 31, 2011, we had $19.31 billion in shareholders’ equity.  This total included $3.65 billion in deployable invested assets at the parent holding company level.

 

44



 

Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

CONSOLIDATED NET INCOME

 

($ in millions)

 

Three months ended
March 31,

 

 

2011

 

2010

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

)

Total revenues

 

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

)

Total costs and expenses

 

(7,338

)

 

(7,643

)

 

 

 

 

 

 

 

(Loss) gain on disposition of operations

 

(23

)

 

1

 

Income tax (expense) benefit

 

(215

)

 

13

 

Net income

$

519

 

$

120

 

 

 

 

 

 

 

 

Property-Liability

$

468

 

$

164

 

Allstate Financial

 

97

 

 

4

 

Corporate and Other

 

(46

)

 

(48

)

Net income

$

519

 

$

120

 

 

PROPERTY-LIABILITY HIGHLIGHTS

 

·                   Premiums written, an operating measure that is defined and reconciled to premiums earned in the Property-Liability Operations section of the MD&A, decreased 0.7% to $6.22 billion in the first quarter of 2011 from $6.26 billion in the first quarter of 2010 and decreased 0.4% from $6.24 billion in the fourth quarter of 2010.

                 Allstate brand standard auto premiums written decreased 1.0% to $3.98 billion in the first quarter of 2011 from $4.02 billion in the first quarter of 2010.

                 Allstate brand homeowners premiums written increased 3.0% to $1.23 billion in the first quarter of 2011 from $1.19 billion in the first quarter of 2010.

                 Encompass brand premiums written decreased 6.8% to $245 million in the first quarter of 2011 from $263 million in the first quarter of 2010.

·                   Premium operating measures and statistics contributing to overall Allstate brand standard auto premiums written decrease were the following:

                 0.7% decrease in policies in force (“PIF”) as of March 31, 2011 compared to March 31, 2010

                 0.9% decrease in the six month policy term average gross premium before reinsurance to $439 in the first quarter of 2011 from $443 in the first quarter of 2010

                 0.1 point increase in the six month renewal ratio to 88.9% in the first quarter of 2011 compared to 88.8% in the first quarter of 2010

                 11.9% increase in new issued applications in the first quarter of 2011 compared to the first quarter of 2010

 

45



 

Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

·                   Premium operating measures and statistics contributing to overall Allstate brand homeowners premiums written increase were the following:

                 3.7% decrease in PIF as of March 31, 2011 compared to March 31, 2010

                 5.9% increase in the twelve month policy term average gross premium before reinsurance to $975 in the first quarter of 2011 from $921 in the first quarter of 2010

                 0.3 point increase in the twelve month renewal ratio to 88.3% in the first quarter of 2011 compared to 88.0% in the first quarter of 2010

                 4.2% decrease in new issued applications in the first quarter of 2011 compared to the first quarter of 2010

                 $11 million decrease in catastrophe reinsurance costs to $124 million in the first quarter of 2011 from $135 million in the first quarter of 2010

·                   Factors comprising the Allstate brand standard auto loss ratio increase of 0.9 points to 70.3 in the first quarter of 2011 from 69.4 in the first quarter of 2010 were the following:

                  1.2% increase in standard auto claim frequency (rate of claim occurrence per policy in force) for property damage in the first quarter of 2011 compared to the first quarter of 2010

                  3.1% increase in standard auto claim frequency for bodily injury in the first quarter of 2011 compared to the first quarter of 2010

                  0.8% increase in auto paid claim severities (average cost per claim) for property damage in the first quarter of 2011 compared to the first quarter of 2010

                  3.6% increase in auto paid claim severities for bodily injury in the first quarter of 2011 compared to the first quarter of 2010

·                   Factors comprising the Allstate brand homeowners loss ratio, which includes catastrophes, decrease of 19.6 points to 67.9 in the first quarter of 2011 from 87.5 in the first quarter of 2010 were the following:

                  19.4 point decrease in the effect of catastrophe losses to 17.7 points in the first quarter of 2011 compared to 37.1 points in the first quarter of 2010

                  1.7% increase in homeowner claim frequency, excluding catastrophes, in the first quarter of 2011 compared to the first quarter of 2010

                  3.5% increase in paid claim severity, excluding catastrophes, in the first quarter of 2011 compared to the first quarter of 2010

·                   Factors comprising the $315 million decrease in catastrophe losses to $333 million in the first quarter of 2011 compared to $648 million in the first quarter of 2010 were the following:

                  16 events with losses of $367 million in the first quarter of 2011 compared to 11 events with losses of $663 million in the first quarter of 2010

                  $34 million favorable prior year reserve reestimates in the first quarter of 2011 compared to $15 million favorable reserve reestimates in the first quarter of 2010

·                   Factors comprising prior year reserve reestimates of $41 million favorable in the first quarter of 2011 compared to $23 million favorable in the first quarter of 2010 included:

                  prior year reserve reestimates related to auto, homeowners and other personal lines in the first quarter of 2011 contributed $19 million favorable, $38 million favorable and $13 million unfavorable, respectively, compared to prior year reserve reestimates in the first quarter of 2010 of $5 million unfavorable, $8 million favorable and $22 million favorable, respectively

                  prior year reestimates in the first quarter of 2011 and 2010 are largely attributable to prior year catastrophes

·                  Property-Liability underwriting income was $327 million in the first quarter of 2011 compared to $71 million in the first quarter of 2010.  Underwriting income, a measure not based on accounting principles generally accepted in the United States of America (“GAAP”), is defined below.

·                   Net realized capital gains were $57 million in the first quarter of 2011 compared to net realized capital losses of $190 million in the first quarter of 2010.

·                   Property-Liability investments as of March 31, 2011 were $35.46 billion, an increase of 1.2% from $35.05 billion as of December 31, 2010.  Net investment income was $284 million in the first quarter of 2011, a decrease of 6.6% from $304 million in the first quarter of 2010.

 

46



 

Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

PROPERTY-LIABILITY OPERATIONS

 

Overview Our Property-Liability operations consist of two business segments: Allstate Protection and Discontinued Lines and Coverages.  Allstate Protection comprises two brands, the Allstate brand and Encompass ®  brand.  Allstate Protection is principally engaged in the sale of personal property and casualty insurance, primarily private passenger auto and homeowners insurance, to individuals in the United States and Canada.  Discontinued Lines and Coverages includes results from insurance coverage that we no longer write and results for certain commercial and other businesses in run-off.  These segments are consistent with the groupings of financial information that management uses to evaluate performance and to determine the allocation of resources.

 

Underwriting income, a measure that is not based on GAAP and is reconciled to net income below, is calculated as premiums earned, less claims and claims expense (“losses”), amortization of deferred policy acquisition costs (“DAC”), operating costs and expenses and restructuring and related charges, as determined using GAAP.  We use this measure in our evaluation of results of operations to analyze the profitability of the Property-Liability insurance operations separately from investment results.  It is also an integral component of incentive compensation.  It is useful for investors to evaluate the components of income separately and in the aggregate when reviewing performance.  Net income is the GAAP measure most directly comparable to underwriting income.  Underwriting income should not be considered as a substitute for net income and does not reflect the overall profitability of the business.

 

The table below includes GAAP operating ratios we use to measure our profitability.  We believe that they enhance an investor’s understanding of our profitability.  They are calculated as follows:

 

·                   Claims and claims expense (“loss”) ratio - the ratio of claims and claims expense to premiums earned.  Loss ratios include the impact of catastrophe losses.

·                   Expense ratio - the ratio of amortization of DAC, operating costs and expenses, and restructuring and related charges to premiums earned.

·                   Combined ratio - the ratio of claims and claims expense, amortization of DAC, operating costs and expenses, and restructuring and related charges to premiums earned.  The combined ratio is the sum of the loss ratio and the expense ratio.  The difference between 100% and the combined ratio represents underwriting income as a percentage of premiums earned, or underwriting margin.

 

We have also calculated the following impacts of specific items on the GAAP operating ratios because of the volatility of these items between fiscal periods.

 

·                   Effect of catastrophe losses on combined ratio - the percentage of catastrophe losses included in claims and claims expense to premiums earned.  This ratio includes prior year reserve reestimates of catastrophe losses.

·                   Effect of prior year reserve reestimates on combined ratio - the percentage of prior year reserve reestimates included in claims and claims expense to premiums earned.  This ratio includes prior year reserve reestimates of catastrophe losses.

·                   Effect of restructuring and related charges on combined ratio - the percentage of restructuring and related charges to premiums earned.

·                   Effect of Discontinued Lines and Coverages on combined ratio - the ratio of claims and claims expense and other costs and expenses in the Discontinued Lines and Coverages segment to Property-Liability premiums earned.  The sum of the effect of Discontinued Lines and Coverages on the combined ratio and the Allstate Protection combined ratio is equal to the Property-Liability combined ratio.

 

47



 

Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Summarized financial data, a reconciliation of underwriting income to net income, and GAAP operating ratios for our Property-Liability operations are presented in the following table.

 

($ in millions, except ratios)

 

Three months ended
March 31,

 

 

2011

 

2010

Premiums written

6,215

 

6,258

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

Premiums earned

6,448

 

6,503

 

Net investment income

 

284

 

 

304

 

Realized capital gains and losses

 

57

 

 

(190

)

Total revenues

 

6,789

 

 

6,617

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

Claims and claims expense

 

(4,476

)

 

(4,792

)

Amortization of DAC

 

(904

)

 

(925

)

Operating costs and expenses

 

(730

)

 

(704

)

Restructuring and related charges

 

(11

)

 

(11

)

Total costs and expenses

 

(6,121

)

 

(6,432

)

 

 

 

 

 

 

 

Income tax expense

 

(200

)

 

(21

)

Net income

468

 

164

 

 

 

 

 

 

 

 

Underwriting income

327

 

71

 

Net investment income

 

284

 

 

304

 

Income tax expense on operations

 

(181

)

 

(88

)

Realized capital gains and losses, after-tax

 

38

 

 

(123

)

Net income

468

 

164

 

 

 

 

 

 

 

 

Catastrophe losses (1)

333

 

648

 

 

 

 

 

 

 

 

GAAP operating ratios

 

 

 

 

 

 

Claims and claims expense ratio

 

69.4

 

 

73.7

 

Expense ratio

 

25.5

 

 

25.2

 

Combined ratio

 

94.9

 

 

98.9

 

Effect of catastrophe losses on combined ratio (1)

 

5.2

 

 

10.0

 

Effect of prior year reserve reestimates on combined ratio (1)

 

(0.7

)

 

(0.4

)

Effect of restructuring and related charges on combined ratio

 

0.2

 

 

0.2

 

Effect of Discontinued Lines and Coverages on combined ratio

 

0.1

 

 

0.1

 


(1)   Prior year reserve reestimates included in catastrophe losses totaled $34 million favorable in the three months ended March 31, 2011
compared to $15 million favorable in the three months ended March 31, 2010.

 

48



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Premiums written , an operating measure, is the amount of premiums charged for policies issued during a fiscal period.  Premiums earned is a GAAP measure.  Premiums are considered earned and are included in the financial results on a pro-rata basis over the policy period.  The portion of premiums written applicable to the unexpired terms of the policies is recorded as unearned premiums on our Condensed Consolidated Statements of Financial Position.

 

A reconciliation of premiums written to premiums earned is shown in the following table.

 

($ in millions)

 

Three months ended
March 31,

 

 

2011

 

2010

Premiums written:

 

 

 

 

Allstate Protection

6,216

 

6,258

 

Discontinued Lines and Coverages

 

(1

)

 

--

 

Property-Liability premiums written

 

6,215

 

 

6,258

 

Decrease in unearned premiums

 

234

 

 

245

 

Other

 

(1

)

 

--

 

Property-Liability premiums earned

6,448

 

6,503

 

 

 

 

 

 

 

 

Premiums earned:

 

 

 

 

 

 

Allstate Protection

6,449

 

6,503

 

Discontinued Lines and Coverages

 

(1

)

 

--

 

Property-Liability

6,448

 

6,503

 

 

ALLSTATE PROTECTION SEGMENT

 

Premiums written by brand are shown in the following table.

 

($ in millions) 

 

Three months ended March 31,

 

 

Allstate brand

 

Encompass brand

 

Allstate Protection

 

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

Standard auto

$

3,984

$

4,023

$

144

$

160

$

4,128

$

4,183

Non-standard auto

 

210

 

237

 

1

 

3

 

211

 

240

Homeowners

 

1,225

 

1,189

 

79

 

80

 

1,304

 

1,269

Other personal lines (1)

 

552

 

546

 

21

 

20

 

573

 

566

Total

$

5,971

$

5,995

$

245

$

263

$

6,216

$

6,258


(1)   Other personal lines include commercial, condominium, renters, involuntary auto and other personal lines.

 

Allstate brand premiums written by the direct channel, excluding Allstate Canada, increased 11.4% to $206 million in the first quarter of 2011 from $185 million in the first quarter of 2010, reflecting an impact by profitability management actions taken in New York, Florida, California and North Carolina.  The direct channel includes call centers and the internet.

 

Premiums earned by brand are shown in the following table.

 

($ in millions) 

 

Three months ended March 31,

 

 

Allstate brand

 

Encompass brand

 

Allstate Protection

 

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

Standard auto

$

3,928

$

3,943

$

160

$

194

$

4,088

$

4,137

Non-standard auto

 

210

 

230

 

1

 

4

 

211

 

234

Homeowners

 

1,448

 

1,416

 

91

 

100

 

1,539

 

1,516

Other personal lines

 

588

 

592

 

23

 

24

 

611

 

616

Total

$

6,174

$

6,181

$

275

$

322

$

6,449

$

6,503

 

49



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Premium operating measures and statistics that are used to analyze the business are calculated and described below.  Measures and statistics presented for Allstate brand exclude Allstate Canada, loan protection and specialty auto.

 

·                   PIF:  Policy counts are based on items rather than customers.  A multi-car customer would generate multiple item (policy) counts, even if all cars were insured under one policy.

·                   Average premium-gross written:  Gross premiums written divided by issued item count.  Gross premiums written include the impacts from discounts and surcharges, and exclude the impacts from mid-term premium adjustments, ceded reinsurance premiums, and premium refund accruals.  Allstate brand average gross premiums represent the appropriate policy term for each line, which is 6 months for standard and non-standard auto and 12 months for homeowners.  Encompass brand average gross premiums represent the appropriate policy term for each line, which is 12 months for standard auto and homeowners and 6 months for non-standard auto.

·                   Renewal ratio:  Renewal policies issued during the period, based on contract effective dates, divided by the total policies issued 6 months prior for standard and non-standard auto (12 months prior for Encompass brand standard auto) or 12 months prior for homeowners.

·                   New issued applications:  Item counts of automobiles or homeowners insurance applications for insurance policies that were issued during the period.  Does not include automobiles that are added by existing customers.

·                   Net items added to existing policies:  Net increases in insured cars by policy endorsement activity.

 

Standard auto premiums written totaled $4.13 billion in the first quarter of 2011, a decrease of 1.3% from $4.18 billion in the first quarter of 2010.

 

 

 

Allstate brand

 

Encompass brand

Standard Auto

 

2011

 

2010

 

2011

 

2010

PIF (thousands)

 

17,456

 

17,581

 

676

 

802

Average premium-gross written (1)

$

439

$

443

$

953

$

996

Renewal ratio (%) (1)

 

88.9

 

88.8

 

71.2

 

68.6

 


(1)  Policy term is six months for Allstate brand and twelve months for Encompass brand.

 

Allstate brand standard auto premiums written totaled $3.98 billion in the first quarter of 2011, a decrease of 1.0% from $4.02 billion in the first quarter of 2010 and an increase of 3.7% from $3.84 billion in the fourth quarter of 2010.  Contributing to the Allstate brand standard auto premiums written decrease in the first quarter of 2011 compared to the first quarter of 2010 were the following:

 

                  decrease in PIF as of March 31, 2011 compared to March 31, 2010, due to fewer policies available to renew and a slight decrease in net items added to existing policies

                  11.9% increase in new issued applications on a countrywide basis to 519 thousand in the first quarter of 2011 from 464 thousand in the first quarter of 2010.  Excluding Florida and New York (impacted by actions to improve profitability), new issued applications on a countrywide basis increased 16.6% to 449 thousand in the first quarter of 2011 from 385 thousand in the first quarter of 2010.  New issued applications increased in 41 states.

                  decreased average gross premium in the first quarter of 2011 compared to the first quarter of 2010, partially due to rate decreases taken during 2010 to improve competitive position, as well as customers electing to lower coverage levels on their policy

                 0.1 point increase in the renewal ratio in the first quarter of 2011 compared to the first quarter of 2010.  Approximately half of the 51 states are showing favorable comparisons to same period of prior year.  No single state is having a significant impact on countrywide results, either favorably or unfavorably.

 

50



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Rate changes that are indicated based on loss trend analysis to achieve a targeted return will continue to be pursued.  The following table shows the rate changes that were approved for standard auto and does not include rating plan enhancements, including the introduction of discounts and surcharges, that result in no change in the overall rate level in the state.  These rate changes do not reflect initial rates filed for insurance subsidiaries initially writing business in a state.

 

 

Three months ended March 31,

 

 

# of States

 

 

Countrywide(%) (1)

 

State Specific(%) (2) (3)

 

 

2011

 

 

2010

 

 

 

2011

 

 

2010

 

 

 

2011

 

 

2010

 

Allstate brand

 

13 (4) (5)

 

 

8

 

 

 

1.1

 

 

0.3

 

 

 

4.1

 

 

2.9

 

Encompass brand

 

 3        

 

 

6

 

 

 

4.9

 

 

1.5

 

 

 

5.0

 

 

7.1

 

 


(1)

Represents the impact in the states where rate changes were approved during the three months ended March 31, 2011 and 2010, respectively, as a percentage of total countrywide prior year-end premiums written.

(2)

Represents the impact in the states where rate changes were approved during the three months ended March 31, 2011 and 2010, respectively, as a percentage of its respective total prior year-end premiums written in those states.

(3)

Based on historical premiums written in those states, rate changes approved for standard auto totaled $176 million in the three months ended March 31, 2011 compared to $59 million in the three months ended March 31, 2010.

(4)

Includes targeted rate decreases in certain markets to improve our competitive position for target customers .

(5)

Includes the impact of a 20.9% and 2.3% rate increase in Florida and a 12.0% rate increase in New York in the first quarter of 2011.

 

Non-s tandard auto premiums written totaled $211 million in the first quarter of 2011, a decrease of 12.1% from $240 million in the first quarter of 2010.

 

 

 

Allstate brand

 

Encompass brand

Non-Standard Auto

 

2011

 

2010

 

2011

 

2010

PIF (thousands)

 

627

 

724

 

4

 

14 

Average premium-gross written (6 months)

$

621

$

619

$

402

$

441 

Renewal ratio (%) (6 months)

 

70.4

 

71.8

 

68.0

 

48.7 

 

Allstate brand non-standard auto premiums written totaled $210 million in the first quarter of 2011, a decrease of 11.4% from $237 million in the first quarter of 2010.  Contributing to the Allstate brand non-standard auto premiums written decrease were the following:

 

                 decrease in PIF as of March 31, 2011 compared to March 31, 2010, due to a decline in the number of policies available to renew, a lower retention rate and fewer new issued applications

                 21.2% decrease in new issued applications to 78 thousand in the first quarter of 2011 from 99 thousand in the first quarter of 2010

                 increase in average gross premium in the first quarter of 2011 compared to the first quarter of 2010

                 1.4 point decrease in the renewal ratio in the first quarter of 2011 compared to the first quarter of 2010

 

Rate changes that are indicated based on loss trend analysis to achieve a targeted return will continue to be pursued.  The following table shows the rate changes that were approved for non-standard auto and does not include rating plan enhancements, including the introduction of discounts and surcharges, that result in no change in the overall rate level in the state.  These rate changes do not reflect initial rates filed for insurance subsidiaries initially writing business in a state.

 

 

Three months ended March 31,

 

 

# of States

 

 

Countrywide(%) (1)

 

State Specific(%) (2) (3)

 

 

2011

 

 

2010

 

 

 

2011

 

 

2010

 

 

 

2011

 

 

2010

 

Allstate brand

 

3

 

 

1

 

 

 

3.6

 

 

0.9 

 

 

 

18.4 

 

 

22.1 

 

Encompass brand

 

--

 

 

--

 

 

 

--

 

 

-- 

 

 

 

-- 

 

 

-- 

 

 


(1)

Represents the impact in the states where rate changes were approved during the three months ended March 31, 2011 and 2010, respectively, as a percentage of total countrywide prior year-end premiums written.

(2)

Represents the impact in the states where rate changes were approved during the three months ended March 31, 2011 and 2010, respectively, as a percentage of its respective total prior year-end premiums written in those states.

(3)

Based on historical premiums written in those states, rate changes approved for non-standard auto totaled $30 million in the three months ended March 31, 2011 compared to $8 million in the three months ended March 31, 2010.

 

51



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Homeowners premiums written totaled $1.30 billion in the first quarter of 2011, an increase of 2.8% from $1.27 billion in the first quarter of 2010.  Excluding the cost of catastrophe reinsurance, premiums written increased 1.7% in the first quarter of 2011 compared to the first quarter of 2010.

 

 

 

Allstate brand

 

Encompass brand

Homeowners

 

2011

 

2010

 

2011

 

2010

PIF (thousands)

 

6,631

 

6,886

 

310

 

354

Average premium-gross written (12 months)

$

975

$

921

$

1,296

$

1,299

Renewal ratio (%) (12 months)

 

88.3

 

88.0

 

82.3

 

77.3

 

Allstate brand homeowners premiums written totaled $1.23 billion in the first quarter of 2011, an increase of 3.0% from $1.19 billion in the first quarter of 2010.  Contributing to the Allstate brand homeowners premiums written increase were the following:

 

                 decrease in PIF of 3.7% as of March 31, 2011 compared to March 31, 2010, due to fewer policies available to renew and fewer new issued applications

                  4.2% decrease in new issued applications to 114 thousand in the first quarter of 2011 from 119 thousand in the first quarter of 2010.  Our Castle Key Indemnity Company subsidiary continues to have a slightly favorable impact on new issued applications, due to a 2008 regulatory consent decree to sell 50,000 new homeowners policies in Florida by November 2011.  Excluding Florida, new issued applications on a countrywide basis decreased 5.2% to 109 thousand in the first quarter of 2011 from 115 thousand in the first quarter of 2010.

                  increase in average gross premium in the first quarter of 2011 compared to the first quarter of 2010, primarily due to rate changes

                  0.3 point increase in the renewal ratio in the first quarter of 2011 compared to the first quarter of 2010

                  decrease in the cost of our catastrophe reinsurance program in the first quarter of 2011 compared to the first quarter of 2010

 

Rate changes that are indicated based on loss trend analysis to achieve a targeted return will continue to be pursued.  The following table shows the rate changes that were approved for homeowners, including rate changes approved based on our net cost of reinsurance, and does not include rating plan enhancements, including the introduction of discounts and surcharges, that result in no change in the overall rate level in the state.

 

 

Three months ended March 31,

 

 

# of States

 

 

Countrywide(%) (1)

 

State Specific(%) (2) (3)

 

 

2011

 

 

2010

 

 

 

2011

 

 

2010

 

 

 

2011

 

 

2010

 

Allstate brand

 

12 (4)

 

 

6

 

 

 

1.8

 

 

0.9

 

 

 

9.9

 

 

7.4

 

Encompass brand

 

 5        

 

 

5

 

 

 

0.8

 

 

0.7

 

 

 

2.9

 

 

5.2

 

 


(1)

Represents the impact in the states where rate changes were approved during the three months ended March 31, 2011 and 2010, respectively, as a percentage of total countrywide prior year-end premiums written.

(2)

Represents the impact in the states where rate changes were approved during the three months ended March 31, 2011 and 2010, respectively, as a percentage of its respective total prior year-end premiums written in those states.

(3)

Based on historical premiums written in those states, rate changes approved for homeowners totaled $114 million in the three months ended March 31, 2011 compared to $54 million in the three months ended March 31, 2010.

(4)

Includes Washington D.C.

 

52



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Underwriting results are shown in the following table.

 

($ in millions)

 

Three months ended
March 31,

 

 

2011

 

2010

Premiums written

$

6,216

 

$

6,258

 

Premiums earned

$

6,449

 

$

6,503

 

Claims and claims expense

 

(4,472

)

 

(4,790

)

Amortization of DAC

 

(904

)

 

(925

)

Other costs and expenses

 

(729

)

 

(702

)

Restructuring and related charges

 

(11

)

 

(11

)

Underwriting income

$

333

 

$

75

 

Catastrophe losses

$

333

 

$

648

 

 

 

 

 

 

 

 

Underwriting income (loss) by line of business

 

 

 

 

 

 

Standard auto

$

188

 

$

213

 

Non-standard auto

 

25

 

 

15

 

Homeowners

 

127

 

 

(192

)

Other personal lines

 

(7

)

 

39

 

Underwriting income

$

333

 

$

75

 

 

 

 

 

 

 

 

Underwriting income (loss) by brand

 

 

 

 

 

 

Allstate brand

$

334

 

$

118

 

Encompass brand

 

(1

)

 

(43

)

Underwriting income

$

333

 

$

75

 

 

Allstate Protection experienced underwriting income of $333 million in the first quarter of 2011 compared to $75 million in the first quarter of 2010, primarily due to increases in homeowners underwriting income, partially offset by decreases in other personal lines and standard auto underwriting income. Homeowners underwriting income increased $319 million to an underwriting income of $127 million in the first quarter of 2011 from an underwriting loss of $192 million in the first quarter of 2010 primarily due to decreases in catastrophe losses, including prior year reestimates for catastrophes.  Other personal lines underwriting income decreased $46 million to an underwriting loss of $7 million in the first quarter of 2011 from an underwriting income of $39 million in the first quarter of 2010 primarily due to a litigation accrual and unfavorable reserve reestimates.  Standard auto underwriting income decreased 11.7% to an underwriting income of $188 million in the first quarter of 2011 from an underwriting income of $213 million in the first quarter of 2010 primarily due to increases in auto claim frequency, partially offset by favorable reserve reestimates and decreases in catastrophe losses.

 

Catastrophe losses in the first quarter of 2011 were $333 million as detailed in the table below.  This compares to catastrophe losses in the first quarter of 2010 of $648 million.

 

We define a “catastrophe” as an event that produces pre-tax losses before reinsurance in excess of $1 million and involves multiple first party policyholders, or an event that produces a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time following the event.  Catastrophes are caused by various natural events including high winds, winter storms, tornadoes, hailstorms, wildfires, tropical storms, hurricanes, earthquakes and volcanoes.  We are also exposed to man-made catastrophic events, such as certain acts of terrorism or industrial accidents.  The nature and level of catastrophes in any future period cannot be reliably predicted.

 

53



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Catastrophe losses related to events that occurred by the size of the event are shown in the following table.

 

 ($ in millions)

 

Three months ended

March 31, 2011

 

 

Number
of events

 

 

 

Claims
and
claims
expense

 

 

 

Combined
ratio
impact

 

Average
catastrophe
loss per event

Size of catastrophe

 

 

 

 

 

 

 

 

 

 

 

 

$50 million to $100 million

 

2

 

12.5%

$

161 

 

48.3%

 

2.5

$

81

Less than $50 million

 

14

 

87.5   

 

206 

 

61.9   

 

3.2

 

15

Total

 

16

 

100.0%

 

367 

 

110.2   

 

5.7

 

23

Prior year reserve reestimates

 

 

 

 

 

(34)

 

(10.2)  

 

(0.5)

 

 

Total catastrophe losses

 

 

 

 

$

333 

 

100.0%

 

5.2

 

 

 

Catastrophe losses incurred by the type of event are shown in the following table.

 

($ in millions)

 

Three months ended
March 31,

 

 

 

2011

 

2010

 

 

 

 

 

Number
of events

 

 

 

Number
of events

 

Tornadoes

$

19 

 

1

$

-- 

 

--

 

Wind/Hail

 

176 

 

10

 

379 

 

6

 

Wildfires

 

 

2

 

-- 

 

--

 

Other events

 

167 

 

3

 

284 

 

5

 

Prior year reserve reestimates

 

(34)

 

 

 

(15)

 

 

 

Total catastrophe losses

$

333 

 

16

$

648 

 

11

 

 

54



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Combined ratio  Loss ratios are a measure of profitability.  Loss ratios by product, and expense and combined ratios by brand, are shown in the following table.  These ratios are defined in the Property-Liability Operations section of the MD&A.

 

 

 

Three months ended March 31,

 

 

 

Loss ratio (1)

 

Effect of
catastrophe
losses on the

loss ratio

 

Effect of
pre-tax reserve
reestimates on the
combined ratio

 

 

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

 

Allstate brand loss ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

Standard auto

 

70.3

 

69.4

 

0.5

 

0.7

 

(0.4)

 

(0.1)

 

Non-standard auto

 

64.8

 

68.7

 

--

 

0.4

 

(3.3)

 

(1.3)

 

Homeowners

 

67.9

 

87.5

 

17.7

 

37.1

 

(2.7)

 

(0.4)

 

Other personal lines

 

67.3

 

63.5

 

7.0

 

7.3

 

2.6 

 

(3.9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Allstate brand loss ratio

 

69.2

 

73.0

 

5.1

 

9.7

 

(0.8)

 

(0.6)

 

Allstate brand expense ratio

 

25.4

 

25.1

 

 

 

 

 

 

 

 

 

Allstate brand combined ratio

 

94.6

 

98.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Encompass brand loss ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

Standard auto

 

75.7

 

76.8

 

--

 

1.0

 

3.1 

 

5.2 

 

Non-standard auto

 

100.0

 

100.0

 

--

 

--

 

-- 

 

-- 

 

Homeowners

 

65.9

 

103.0

 

16.5

 

46.0

 

1.1 

 

(2.0)

 

Other personal lines

 

65.2

 

91.7

 

8.7

 

12.5

 

(8.7)

 

4.2 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Encompass brand loss ratio

 

71.7

 

86.4

 

6.2

 

15.8

 

1.5 

 

2.8 

 

Encompass brand expense ratio

 

28.7

 

27.0

 

 

 

 

 

 

 

 

 

Encompass brand combined ratio

 

100.4

 

113.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allstate Protection loss ratio

 

69.3

 

73.6

 

5.2

 

10.0

 

(0.7) 

 

(0.4)

 

Allstate Protection expense ratio

 

25.5

 

25.2

 

 

 

 

 

 

 

 

 

Allstate Protection combined ratio

 

94.8

 

98.8

 

 

 

 

 

 

 

 

 

 


(1)  Ratios are calculated using the premiums earned for the respective line of business.

 

Standard auto loss ratio for the Allstate brand increased 0.9 points in the first quarter of 2011 compared to the first quarter of 2010 due to higher claim frequency, partially offset by favorable reserve reestimates and lower catastrophe losses.  Florida and New York continue to have a loss ratio higher than countrywide average.  In the first quarter of 2011, claim frequencies in the bodily injury and physical damage coverages have increased compared to the first quarter of 2010, but remain within historical norms.  We continued to address adverse loss cost trends during the first quarter of 2011, particularly in the states of New York and Florida.  These actions included rate increases, underwriting restrictions, increased claims staffing and review, and continued advocacy for legislative reform.  Bodily injury and physical damage coverages severity results increased in line with historical Consumer Price Index (“CPI”) trends.

 

Non-standard auto loss ratio for the Allstate brand decreased 3.9 points in the first quarter of 2011 compared to the first quarter of 2010 due to higher favorable reserve reestimates and lower catastrophe losses, partially offset by higher claim frequencies.  Bodily injury and physical damage coverages severity results increased in line with historical CPI trends.

 

Homeowners loss ratio for the Allstate brand decreased 19.6 points to 67.9 in the first quarter of 2011 from 87.5 in the first quarter of 2010 due to lower catastrophe losses including prior year reserve reestimates for catastrophes.

 

Expense ratio for Allstate Protection increased 0.3 points in the first quarter of 2011 compared to the first quarter of 2010, driven by a litigation accrual, marketing costs and lower premiums earned, partially offset by

 

55



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

improved operational efficiencies.  Restructuring costs in the first quarter of 2011 were comparable to the first quarter of 2010.

 

The impact of specific costs and expenses on the expense ratio are included in the following table.

 

 

 

Three months ended March 31,

 

 

Allstate brand

 

Encompass brand

 

Allstate Protection

 

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

Amortization of DAC

 

13.9

 

14.0

 

18.0 

 

18.5

 

14.0

 

14.2

Other costs and expenses

 

11.3

 

11.0

 

10.9 

 

7.8

 

11.3

 

10.8

Restructuring and related charges

 

0.2

 

0.1

 

(0.2)

 

0.7

 

0.2

 

0.2

Total expense ratio

 

25.4

 

25.1

 

28.7 

 

27.0

 

25.5

 

25.2

 

Reserve reestimates   The tables below show Allstate Protection net reserves representing the estimated cost of outstanding claims as they were recorded at the beginning of years 2011 and 2010, and the effect of reestimates in each year.

 

($ in millions)

 

January 1 reserves

 

 

 

2011

 

2010

 

Auto

$

11,034

$

10,606

 

Homeowners

 

2,442

 

2,399

 

Other personal lines

 

2,141

 

2,145

 

Total Allstate Protection

$

15,617

$

15,150

 

 

($ in millions, except ratios)

 

Three months ended
March 31,

 

 

2011

 

2010

 

 

Reserve
reestimate
(1) (2)

 

Effect on
combined
ratio
(2)

 

Reserve
reestimate
(1) (2)

 

Effect on
combined
ratio
(2)

Auto

$

(19)

 

(0.3)

$

 

0.1 

Homeowners

 

(38)

 

(0.6)

 

(8)

 

(0.1)

Other personal lines

 

13 

 

0.2 

 

(22)

 

(0.4)

Total Allstate Protection (3)

$

(44)

 

(0.7)

$

(25)

 

(0.4)

 

 

 

 

 

 

 

 

 

Allstate brand

$

(48)

 

(0.8)

$

(34)

 

(0.5)

Encompass brand

 

 

0.1 

 

 

0.1 

Total Allstate Protection (3)

$

(44)

 

(0.7)

$

(25)

 

(0.4)

 


(1)

Favorable reserve reestimates are shown in parentheses.

(2)

Discontinued Lines and Coverages segment reserve reestimates in the three months ended March 31, 2011 totaled $3 million unfavorable compared to $2 million unfavorable in the three months ended March 31, 2010. There was no effect on the combined ratio in the three months ended March 31, 2011 and 2010.

(3)

Reserve reestimates included in catastrophe losses totaled $34 million favorable in the three months ended March 31, 2011 compared to $15 million favorable in the three months ended March 31, 2010.

 

DISCONTINUED LINES AND COVERAGES SEGMENT

 

Overview  The Discontinued Lines and Coverages segment includes results from insurance coverage that we no longer write and results for certain commercial and other businesses in run-off.  Our exposure to asbestos, environmental and other discontinued lines claims is reported in this segment.  We have assigned management of this segment to a designated group of professionals with expertise in claims handling, policy coverage interpretation, exposure identification and reinsurance collection.  As part of its responsibilities, this group is also regularly engaged in policy buybacks, settlements and reinsurance assumed and ceded commutations.

 

56



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Summarized underwriting results are presented in the following table.

 

 

 

Three months ended
March 31,

($ in millions)

 

2011

 

2010

Premiums written

$

(1

)

$

--

 

 

 

 

 

 

 

 

Premiums earned

$

(1

)

$

--

 

Claims and claims expense

 

(4

)

 

(2

)

Operating costs and expenses

 

(1

)

 

(2

)

Underwriting loss

$

(6

)

$

(4

)

 

PROPERTY-LIABILITY INVESTMENT RESULTS

 

Net investment income decreased 6.6% or $20 million to $284 million in the first quarter of 2011 from $304 million in the first quarter of 2010.  The decrease was primarily due to lower yields resulting from prior risk mitigation actions.  Net investment income was $284 million and $291 million in the third and fourth quarter of 2010, respectively.

 

Net realized capital gains and losses are presented in the following table.

 

($ in millions)

 

Three months ended
March 31,

 

 

2011

 

2010

Impairment write-downs

$

(64

)

$

(79

)

Change in intent write-downs

 

(27

)

 

(9

)

Net other-than-temporary impairment losses recognized in earnings

 

(91

)

 

(88

)

Sales

 

172

 

 

41

 

Valuation of derivative instruments

 

26

 

 

(101

)

Settlements of derivative instruments

 

(95

)

 

(49

)

EMA limited partnership income

 

45

 

 

7

 

Realized capital gains and losses, pre-tax

 

57

 

 

(190

)

Income tax (expense) benefit

 

(19

)

 

67

 

Realized capital gains and losses, after-tax

$

38

 

$

(123

)

 

For a further discussion of net realized capital gains and losses, see the Investments section of the MD&A.

 

57



 

Item 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

ALLSTATE FINANCIAL HIGHLIGHTS

 

·

Net income was $97 million in first quarter of 2011 compared to $4 million in the first quarter of 2010.

 

 

·

Premiums and contract charges on underwritten products, including traditional life, interest-sensitive life and accident and health insurance, totaled $517 million in 2011, an increase of 2.6% or $13 million from $504 million in 2010.

 

 

·

During the first quarter of 2011, an $11 million pre-tax charge to income was recorded related to our annual comprehensive review of the DAC, deferred sales inducement costs (“DSI”) and secondary guarantee liability balances and assumptions for our interest-sensitive life, fixed annuities and other investment contracts. This compares to a $12 million pre-tax credit to income in the first quarter of 2010.

 

 

·

Loss on disposition of $25 million, pre-tax, recorded related to the agreement to sell substantially all of the deposits of Allstate Bank to Discover Bank and our plans to wind down the remainder of the Allstate Bank’s operations, dissolve or settle any residual assets and liabilities, and cancel its banking charter.

 

 

·

Net realized capital gains totaled $39 million in the first quarter of 2011 compared to net realized capital losses of $162 million in the first quarter of 2010.

 

 

·

Investments as of March 31, 2011 totaled $60.48 billion, reflecting a decrease in carrying value of $1.10 billion from $61.58 billion as of December 31, 2010. Net investment income decreased 6.4% to $684 million in the first quarter of 2011 from $731 million in the first quarter of 2010.

 

 

·

Contractholder funds as of March 31, 2011 totaled $46.83 billion, reflecting decreases of $1.36 billion from $48.19 billion as of December 31, 2010 and $4.19 billion from $51.03 billion as of March 31, 2010.

 

ALLSTATE FINANCIAL SEGMENT

 

Summary analysis   Summarized financial data is presented in the following table.

 

($ in millions)

 

Three months ended
March 31,

 

 

2011

 

2010

Revenues

 

 

 

 

Life and annuity premiums and contract charges

$

569

 

$

544

 

Net investment income

 

684

 

 

731

 

Realized capital gains and losses

 

39

 

 

(162

)

Total revenues

 

1,292

 

 

1,113

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

Life and annuity contract benefits

 

(454

)

 

(442

)

Interest credited to contractholder funds

 

(418

)

 

(463

)

Amortization of DAC

 

(147

)

 

(89

)

Operating costs and expenses

 

(109

)

 

(120

)

Restructuring and related charges

 

2

 

 

--

 

Total costs and expenses

 

(1,126

)

 

(1,114

)

 

 

 

 

 

 

 

(Loss) gain on disposition of operations

 

(23

)

 

1

 

Income tax (expense) benefit

 

(46

)

 

4

 

Net income

$

97

 

$

4

 

 

 

 

 

 

 

 

Investments at March 31

$

60,484

 

$

62,336

 

 

Net income in the first quarter of 2011 was $97 million compared to $4 million in the first quarter of 2010.  The increase of $93 million was primarily due to net realized capital gains in the current year compared to net realized capital losses in the prior year, decreased interest credited to contractholder funds and higher premiums and contract charges, partially offset by higher amortization of DAC, loss on disposition related to the Allstate Bank and lower net investment income.

 

Analysis of revenues   Total revenues increased 16.1% or $179 million in the first quarter of 2011 compared to

 

58



 

Item 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

the first quarter of 2010 due to net realized capital gains in the current year compared to net realized capital losses in the prior year and higher premiums and contract charges, partially offset by lower net investment income.

 

Life and annuity premiums and contract charges    Premiums represent revenues generated from traditional life insurance, immediate annuities with life contingencies, and accident and health insurance products that have significant mortality or morbidity risk.  Contract charges are revenues generated from interest-sensitive and variable life insurance and fixed annuities for which deposits are classified as contractholder funds or separate account liabilities.  Contract charges are assessed against the contractholder account values for maintenance, administration, cost of insurance and surrender prior to contractually specified dates.

 

The following table summarizes life and annuity premiums and contract charges by product.

 

($ in millions)

 

Three months ended
March 31,

 

 

2011

 

2010

Underwritten products

 

 

 

 

 

 

Traditional life insurance premiums

$

108

 

$

106

 

Accident and health insurance premiums

 

161

 

 

156

 

Interest-sensitive life insurance contract charges

 

248

 

 

242

 

Subtotal

 

517

 

 

504

 

 

 

 

 

 

 

 

Annuities

 

 

 

 

 

 

Immediate annuities with life contingencies premiums

 

43

 

 

27

 

Other fixed annuity contract charges

 

9

 

 

13

 

Subtotal

 

52

 

 

40

 

 

 

 

 

 

 

 

Life and annuity premiums and contract charges (1)

$

569

 

$

544

 

 


(1) Contract charges related to the cost of insurance totaled $162 million and $156 million, for the first quarter of 2011 and 2010, respectively.

 

Total premiums and contract charges increased 4.6% in the first quarter of 2011 compared to the first quarter of 2010 primarily due to higher sales of immediate annuities with life contingencies due to more competitive pricing, higher contract charges on interest-sensitive life insurance products resulting from a shift in the mix of policies in force to contracts with higher cost of insurance rates, and higher sales of accident and health insurance products at Allstate Benefits.

 

59



 

Item 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Contractholder funds represent interest-bearing liabilities arising from the sale of individual and institutional products, such as interest-sensitive life insurance, fixed annuities, funding agreements and bank deposits.  The balance of contractholder funds is equal to the cumulative deposits received and interest credited to the contractholder less cumulative contract maturities, benefits, surrenders, withdrawals and contract charges for mortality or administrative expenses.  The following table shows the changes in contractholder funds.

 

($ in millions)

 

Three months ended
March 31,

 

 

2011

 

2010

 

 

 

 

 

 

 

Contractholder funds, beginning balance

$

48,195

 

$

52,582

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

Fixed annuities

 

164

 

 

291

 

Interest-sensitive life insurance

 

329

 

 

395

 

Bank and other deposits

 

213

 

 

252

 

Total deposits

 

706

 

 

938

 

 

 

 

 

 

 

 

Interest credited

 

410

 

 

462

 

 

 

 

 

 

 

 

Maturities, benefits, withdrawals and other adjustments

 

 

 

 

 

 

Maturities and retirements of institutional products

 

(487

)

 

(954

)

Benefits

 

(372

)

 

(395

)

Surrenders and partial withdrawals

 

(1,293

)

 

(1,248

)

Contract charges

 

(251

)

 

(241

)

Net transfers from separate accounts

 

3

 

 

2

 

Fair value hedge adjustments for institutional products

 

(34

)

 

(123

)

Other adjustments (1)

 

(43

)

 

4

 

Total maturities, benefits, withdrawals and other adjustments

 

(2,477

)

 

(2,955

)

Contractholder funds, ending balance

$

46,834

 

$

51,027

 

 


(1)   The table above illustrates the changes in contractholder funds, which are presented gross of reinsurance recoverables on the Condensed Consolidated Statements of Financial Position.  The table above is intended to supplement our discussion and analysis of revenues, which are presented net of reinsurance on the Condensed Consolidated Statements of Operations.  As a result, the net change in contractholder funds associated with products reinsured to third parties is reflected as a component of the other adjustments line.

 

Contractholder funds decreased 2.8% and 3.0% in the first quarter of 2011 and 2010, respectively.  Average contractholder funds decreased 8.3% in the first quarter of 2011 compared to the same period of 2010.

 

Contractholder deposits decreased 24.7% in the first quarter of 2011 compared to the same period of 2010 primarily due to lower deposits on fixed annuities.  Deposits on fixed annuities decreased 43.6% in the first quarter of 2011 compared to the same period of 2010 due to our decision to discontinue distributing fixed annuities through banks and broker dealers in the first quarter of 2010 and our goal to reduce our concentration in spread based products and improve returns on new business.

 

Maturities and retirements of institutional products decreased 49.0% to $487 million in the first quarter of 2011 from $954 million in the same period of 2010.

 

Surrenders and partial withdrawals on deferred fixed annuities, interest-sensitive life insurance products and Allstate Bank products (including maturities of certificates of deposit) increased 3.6% to $1.29 billion in the first quarter of 2011 from $1.25 billion in the same period of 2010 primarily due to higher surrenders and partial withdrawals on Allstate Bank products and fixed annuities, partially offset by lower surrenders and partial withdrawals on interest-sensitive life insurance products.  The annualized surrender and partial withdrawal rate on deferred fixed annuities, interest-sensitive life insurance products and Allstate Bank products, based on the beginning of year contractholder funds, was 12.8% in the first quarter of 2011 compared to 11.7% in the same period of 2010.

 

60



 

Item 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Net investment income decreased 6.4% or $47 million to $684 million in the first quarter of 2011 from $731 million in the same period of 2010 primarily due to reduced average investment balances.  Net investment income was $707 million and $692 million in the third and fourth quarter of 2010, respectively.

 

Net realized capital gains and losses are presented in the following table.

 

($ in millions)

 

Three months ended
March 31,

 

 

2011

 

2010

 

 

 

 

 

 

 

Impairment write-downs

$

(50

)

$

(144

)

Change in intent write-downs 

 

(42

)

 

(23

)

Net other-than-temporary impairment losses recognized in earnings

 

(92

)

 

(167

)

Sales

 

111

 

 

44

 

Valuation of derivative instruments

 

(4

)

 

(54

)

Settlements of derivative instruments

 

6

 

 

19

 

EMA limited partnership income

 

18

 

 

(4

)

Realized capital gains and losses, pre-tax

 

39

 

 

(162

)

Income tax (expense) benefit

 

(14

)

 

57

 

Realized capital gains and losses, after-tax

$

25

 

$

(105

)

 

For further discussion of realized capital gains and losses, see the Investments section of the MD&A.

 

Analysis of costs and expenses   Total costs and expenses increased 1.1% or $12 million in the first quarter of 2011 compared to the same period of 2010 primarily due to higher amortization of DAC and contract benefits, partially offset by lower interest credited to contractholder funds and operating costs and expenses.

 

Life and annuity contract benefits increased 2.7% or $12 million in the first quarter of 2011 compared to the same period of 2010 primarily due to higher contract benefits on immediate annuities with life contingencies, reflecting the increase in premiums on these products.

 

We analyze our mortality and morbidity results using the difference between premiums and contract charges earned for the cost of insurance and life and annuity contract benefits excluding the portion related to the implied interest on immediate annuities with life contingencies (“benefit spread”).  This implied interest totaled $135 million and $139 million in the first quarter of 2011 and 2010, respectively.

 

The benefit spread by product group is disclosed in the following table.

 

($ in millions)

 

Three months ended
March 31,

 

 

2011

 

2010

Life insurance

$

93

 

$

88

 

Accident and health insurance

 

74

 

 

64

 

Annuities

 

(12

)

 

(10

)

Total benefit spread

$

155

 

$

142

 

 

Benefit spread increased 9.2% or $13 million in the first quarter of 2011 compared to the same period of 2010.  The increase was primarily due to lower morbidity experience on certain accident and health products and growth at Allstate Benefits, and increased cost of insurance contract charges on interest-sensitive life insurance products.

 

Interest credited to contractholder funds decreased 9.7% or $45 million in the first quarter of 2011 compared to the same period of 2010 primarily due to lower average contractholder funds and lower interest crediting rates on interest-sensitive life insurance and immediate fixed annuities.  Additionally, valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged decreased interest credited to contractholder funds by $12 million in the first quarter of 2011.

 

61



 

Item 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Amortization of DSI in the first quarter of 2011 was $10 million compared to $5 million in the same period of 2010.  The increase was primarily due to higher amortization resulting from realized capital gains on sales of fixed income securities in 2011.

 

In order to analyze the impact of net investment income and interest credited to contractholders on net income, we monitor the difference between net investment income and the sum of interest credited to contractholder funds and the implied interest on immediate annuities with life contingencies, which is included as a component of life and annuity contract benefits on the Condensed Consolidated Statements of Operations (“investment spread”).

 

The investment spread by product group is shown in the following table.

 

($ in millions)

 

Three months ended
March 31,

 

 

2011

 

2010

Annuities and institutional products

$

48

 

$

50

 

Life insurance

 

11

 

 

7

 

Allstate Bank products

 

8

 

 

8

 

Accident and health insurance

 

5

 

 

4

 

Net investment income on investments supporting capital

 

59

 

 

60

 

Total investment spread

$

131

 

$

129

 

 

Investment spread increased 1.6% or $2 million in the first quarter of 2011 compared to the same period of 2010 primarily due to decreased interest credited to contractholder funds, partially offset by lower net investment income.

 

To further analyze investment spreads, the following table summarizes the weighted average investment yield on assets supporting product liabilities and capital, interest crediting rates and investment spreads for three months ended March 31.

 

 

 

Weighted average investment yield

 

Weighted average interest crediting rate

 

Weighted average investment spreads

 

 

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

 

Interest-sensitive life insurance

 

5.4

%

5.4

%

4.2

%

4.4

%

1.2

%

1.0

 

%

Deferred fixed annuities and institutional products

 

4.5

 

4.4

 

3.3

 

3.2

 

1.2

 

1.2

 

 

Immediate fixed annuities with and without life contingencies

 

6.2

 

6.3

 

6.2

 

6.4

 

--

 

(0.1

)

 

Investments supporting capital, traditional life and other products

 

3.7

 

3.6

 

n/a

 

n/a

 

n/a

 

n/a

 

 

 

The following table summarizes our product liabilities and indicates the account value of those contracts and policies in which an investment spread is generated.

 

($ in millions)

 

March 31,

 

 

2011

 

2010

Immediate fixed annuities with life contingencies

$

8,753

 

$

8,517

 

Other life contingent contracts and other

 

4,799

 

 

4,535

 

Reserve for life-contingent contract benefits

$

13,552

 

$

13,052

 

 

 

 

 

 

 

 

Interest-sensitive life insurance

$

10,720

 

$

10,417

 

Deferred fixed annuities

 

28,586

 

 

31,570

 

Immediate fixed annuities without life contingencies

 

3,797

 

 

3,870

 

Institutional products

 

2,193

 

 

3,448

 

Allstate Bank products

 

1,033

 

 

1,095

 

Market value adjustments related to fair value hedges and other

 

505

 

 

627

 

Contractholder funds

$

46,834

 

$

51,027

 

 

62



 

Item 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Amortization of DAC increased 65.2% or $58 million in the first quarter of 2011 compared to the same period of 2010.  The components of amortization of DAC are summarized in the following table.

 

($ in millions)

 

Three months ended 
March 31,

 

 

2011

 

2010

Amortization of DAC before amortization relating to realized capital gains and losses and changes in assumptions

$

(100

)

$

(98

)

Amortization relating to realized capital gains and losses (1)

 

(35

)

 

(3

)

Amortization (acceleration) deceleration for changes in assumptions (“DAC unlocking”)

 

(12

)

 

12

 

Total amortization of DAC

$

(147

)

$

(89

)

 


(1) The impact of realized capital gains and losses on amortization of DAC is dependent upon the relationship between the assets that give rise to the gain or loss and the product liability supported by the assets.  Fluctuations result from changes in the impact of realized capital gains and losses on actual and expected gross profits.

 

The increase of $58 million in the first quarter of 2011 was primarily due to increased amortization relating to realized capital gains and losses and an unfavorable change in amortization acceleration/deceleration for changes in assumptions.  DAC amortization relating to realized capital gains and losses primarily resulted from realized capital gains on sales of fixed income securities in the first quarter of 2011.

 

Our annual comprehensive review of the profitability of our products to determine DAC balances for our interest-sensitive life, fixed annuities and other investment contracts covers assumptions for investment returns, including capital gains and losses, interest crediting rates to policyholders, the effect of any hedges, persistency, mortality and expenses in all product lines.  In the first quarter of 2011, the review resulted in an acceleration of DAC amortization (charge to income) of $12 million.  Amortization acceleration of $17 million related to interest-sensitive life insurance and was primarily due to an increase in projected expenses.  Amortization deceleration of $5 million related to equity-indexed annuities and was primarily due to an increase in projected investment margins.

 

In the first quarter of 2010, the review resulted in a deceleration of DAC amortization (credit to income) of $12 million.  Amortization deceleration of $45 million related to variable life insurance and was primarily due to appreciation in the underlying separate account valuations.  Amortization acceleration of $32 million related to interest-sensitive life insurance and was primarily due to an increase in projected realized capital losses and lower projected renewal premium (which is also expected to reduce persistency), partially offset by lower expenses.

 

The following table provides the effect on DAC amortization of changes in assumptions relating to the gross profit components of investment margin, benefit margin and expense margin.

 

($ in millions)

 

Three months ended
March 31,

 

 

2011

 

2010

Investment margin

$

2

 

$

15

 

Benefit margin

 

7

 

 

(45

)

Expense margin

 

(21

)

 

42

 

Net (acceleration) deceleration

$

(12

)

$

12

 

 

63



 

Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Operating costs and expenses decreased 9.2% or $11 million in the first quarter of 2011 compared to the same period of 2010.  The following table summarizes operating costs and expenses.

 

($ in millions)

 

Three months ended
March 31,

 

 

 

2011

 

2010

 

Non-deferrable acquisition costs

$

42

 

$

44

 

 

Other operating costs and expenses

 

67

 

 

76

 

 

Total operating costs and expenses

$

109

 

$

120

 

 

 

 

 

 

 

 

 

 

Restructuring and related charges

$

(2

)

$

--

 

 

 

Non-deferrable acquisition costs decreased 4.5% or $2 million in the first quarter of 2011 compared to the same period of 2010 primarily due to lower non-deferrable commissions and premium tax expenses related to discontinuing sales through banks and broker dealers effective March 31, 2010.  Other operating costs and expenses decreased 11.8% or $9 million in the first quarter of 2011 compared to the same period of 2010 primarily due to increased reinsurance expense allowances, lower occupancy costs due to consolidation of office buildings and non-recurring offsets to certain administrative costs of $4 million.

 

Loss on disposition of $23 million includes $25 million related to the agreement to sell substantially all of the deposits of Allstate Bank to Discover Bank and our plans to wind down the remainder of the Allstate Bank’s operations, dissolve or settle any residual assets and liabilities, and cancel its banking charter.

 

Income tax expense of $46 million was recognized for the first quarter of 2011 compared to an income tax benefit of $4 million in the same period of 2010.  This change was due to the proportionate change in the income on which the income tax expense was determined.

 

INVESTMENTS HIGHLIGHTS

 

·                   Investments as of March 31, 2011 totaled $99.61 billion, a decrease of 0.9% from $100.48 billion as of December 31, 2010.

·                   Unrealized net capital gains totaled $1.57 billion as of March 31, 2011, improving from $1.39 billion as of December 31, 2010.

·                   As of March 31, 2011, the fair value for our below investment grade fixed income securities with gross unrealized losses totaled $3.86 billion compared to $3.29 billion as of December 31, 2010.  The gross unrealized losses for these securities totaled $923 million as of March 31, 2011, an improvement of 14.5% from $1.08 billion as of December 31, 2010.

·                   Net investment income was $982 million in the first quarter of 2011, a decrease of 6.5% from $1.05 billion in the first quarter of 2010.

·                   Net realized capital gains were $96 million in the first quarter of 2011 compared to net realized capital losses of $348 million in the first quarter of 2010.

·                   Derivative net realized capital losses totaled $67 million in the first quarter of 2011 compared to net realized capital losses of $185 million in the first quarter of 2010.  Derivative net realized capital losses in the first quarter of 2011 resulted primarily from our risk management actions.

·                   Substantially all of the macro hedge program was terminated during the first quarter of 2011.  The macro hedge program resulted in $69 million of net realized capital losses in the first quarter of 2011.

·               During the first quarter of 2011, our fixed income and mortgage loan portfolio generated $2.25 billion of cash flows from interest and maturities.

 

INVESTMENTS

 

Improved market fundamentals in combination with our risk mitigation and return optimization strategies have strengthened our capital position, enabling us to execute yield and return enhancement strategies, while continuing to manage interest rate, credit, equity, real estate and municipal bond investment risks.  Consistent with our economic outlook, we modified the maturity profile of our fixed income portfolio through shifts out of longer term fixed rate and shorter term lower yielding securities into intermediate term maturity securities.  Additionally, we increased our exposure to below investment grade corporate fixed income securities through a higher targeted allocation and reinvestment of proceeds from the sale of lower rated structured securities.

 

64



 

Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

The composition of the investment portfolios as of March 31, 2011 is presented in the table below.

 

($ in millions)

 

Property-Liability  (5)

 

Allstate Financial  (5)

 

Corporate
and Other 
(5)

 

Total

 

 

 

 

 

Percent
to total

 

 

 

Percent
to total

 

 

 

Percent
to total

 

 

 

Percent
to total

 

Fixed income securities (1)

$  

28,068

 

 

79.2

%

$  

49,178

 

 

81.3

%

$  

2,996

 

 

81.6

%

$  

80,242

 

 

80.6

%

 

Equity securities (2)

 

4,199

 

 

11.9

 

 

238

 

 

0.4

 

 

--

 

 

--

 

 

4,437

 

 

4.4

 

 

Mortgage loans

 

16

 

 

--

 

 

6,566

 

 

10.9

 

 

--

 

 

--

 

 

6,582

 

 

6.6

 

 

Limited partnership   interests (3)

 

2,684

 

 

7.6

 

 

1,358

 

 

2.2

 

 

35

 

 

1.0

 

 

4,077

 

 

4.1

 

 

Short-term (4)

 

473

 

 

1.3

 

 

874

 

 

1.4

 

 

639

 

 

17.4

 

 

1,986

 

 

2.0

 

 

Other

 

17

 

 

--

 

 

2,270

 

 

3.8

 

 

--

 

 

--

 

 

2,287

 

 

2.3

 

 

Total

$  

35,457

 

 

100.0

%

$  

60,484

 

 

100.0

%

$  

3,670

 

 

100.0

%

$  

99,611

 

 

100.0

%

 

 


 

(1)

Fixed income securities are carried at fair value. Amortized cost basis for these securities was $28.06 billion, $48.28 billion and $2.95 billion for Property-Liability, Allstate Financial and Corporate and Other, respectively.

 

(2)

Equity securities are carried at fair value. Cost basis for these securities was $3.62 billion and $176 million for Property-Liability and Allstate Financial, respectively.

 

(3)

We have commitments to invest in additional limited partnership interests totaling $915 million and $736 million for Property-Liability and Allstate Financial, respectively.

 

(4)

Short-term investments are carried at fair value. Amortized cost basis for these investments was $473 million, $874 million and $639 million for Property-Liability, Allstate Financial and Corporate and Other, respectively.

 

(5)

Balances reflect the elimination of related party investments between segments.

 

Total investments decreased to $99.61 billion as of March 31, 2011, from $100.48 billion as of December 31, 2010, primarily due to net reductions in contractholder obligations, partially offset by an increase of $374 million in collateral from securities lending activities and higher valuations for fixed income securities.  Valuations of fixed income securities are typically driven by a combination of changes in relevant risk-free interest rates and credit spreads over the period.  Risk-free interest rates are typically defined as the yield on U.S. Treasury securities, whereas credit spread is the additional yield on fixed income securities above the risk-free rate that market participants require to compensate them for assuming credit, liquidity and/or prepayment risks.  The increase in valuation of fixed income securities for the three months ended March 31, 2011 was mainly due to tightening of credit spreads in certain sectors.

 

The Property-Liability investment portfolio increased to $35.46 billion as of March 31, 2011, from $35.05 billion as of December 31, 2010, primarily due to positive operating cash flows and increased collateral from securities lending activities, partially offset by dividends paid by Allstate Insurance Company (“AIC”) to its parent, The Allstate Corporation (the “Corporation”).

 

The Allstate Financial investment portfolio decreased to $60.48 billion as of March 31, 2011, from $61.58 billion as of December 31, 2010, primarily due to net reductions in contractholder obligations of $1.36 billion, partially offset by higher valuations for fixed income securities.

 

The Corporate and Other investment portfolio decreased to $3.67 billion as of March 31, 2011, from $3.85 billion as of December 31, 2010, primarily due to share repurchases, dividends paid to shareholders and interest paid on debt, partially offset by dividends of $200 million paid by AIC to the Corporation.

 

65



 

Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Fixed income securities by type are listed in the table below.

 

($ in millions)

 

Fair value as of
March 31, 2011

 

Percent to
total

investments

 

Fair value as of
December 31, 2010

 

Percent to
total

investments

 

U.S. government and agencies

$  

6,766

 

 

6.8

%

$

8,596

 

 

8.6

%

 

Municipal

 

15,246

 

 

15.3

 

 

15,934

 

 

15.9

 

 

Corporate

 

42,395

 

 

42.6

 

 

37,655

 

 

37.5

 

 

Foreign government

 

3,117

 

 

3.1

 

 

3,158

 

 

3.1

 

 

Residential mortgage-backed securities (“RMBS”)

 

6,530

 

 

6.6

 

 

7,993

 

 

7.9

 

 

Commercial mortgage-backed securities (“CMBS”)

 

2,053

 

 

2.1

 

 

1,994

 

 

2.0

 

 

Asset-backed securities (“ABS”)

 

4,111

 

 

4.1

 

 

4,244

 

 

4.2

 

 

Redeemable preferred stock

 

24

 

 

--

 

 

38

 

 

--

 

 

Total fixed income securities

$  

80,242

 

 

80.6

%

$

79,612

 

 

79.2

%

 

 

As of March 31, 2011, 90.5% of the consolidated fixed income securities portfolio was rated investment grade, which 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.  All of our fixed income securities are rated by third party credit rating agencies, the National Association of Insurance Commissioners (“NAIC”), and/or internally rated.  Our initial investment decisions and ongoing monitoring procedures for fixed income securities are based on a thorough due diligence process which includes, but is not limited to, an assessment of the credit quality, sector, structure, and liquidity risks of each issue.

 

66



 

Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

The following table summarizes the fair value and unrealized net capital gains and losses for fixed income securities by credit rating as of March 31, 2011.

 

($ in millions)

 

Aaa

 

Aa

 

A

 

 

 

Fair
value

 

Unrealized
gain/(loss)

 

Fair
value

 

Unrealized
gain/(loss)

 

Fair
value

 

Unrealized
gain/(loss)

 

U.S. government and agencies

$  

6,766

 

$  

257

 

$  

--

 

$  

--

 

$  

--

 

$  

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax exempt

 

1,401

 

 

79

 

 

4,185

 

 

72

 

 

2,382

 

 

(10

)

 

Taxable

 

184

 

 

--

 

 

2,528

 

 

2

 

 

1,064

 

 

(38

)

 

Auction rate securities (“ARS”)

 

811

 

 

(48

)

 

61

 

 

(6

)

 

99

 

 

(13

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Public

 

1,293

 

 

11

 

 

3,055

 

 

81

 

 

9,843

 

 

324

 

 

Privately placed

 

1,047

 

 

10

 

 

1,947

 

 

50

 

 

4,220

 

 

162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign government

 

1,693

 

 

224

 

 

522

 

 

17

 

 

535

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government sponsored entities (“U.S. Agency”)

 

3,628

 

 

131

 

 

--

 

 

--

 

 

--

 

 

--

 

 

Prime residential mortgage-backed securities (“Prime”)   

 

375

 

 

9

 

 

69

 

 

--

 

 

178

 

 

(1

)

 

Alt-A residential mortgage-backed securities (“Alt-A”)

 

15

 

 

--

 

 

56

 

 

--

 

 

62

 

 

--

 

 

Subprime residential mortgage-backed securities (“Subprime”)

 

51

 

 

--

 

 

83

 

 

(19

)

 

46

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMBS

 

1,063

 

 

40

 

 

284

 

 

--

 

 

166

 

 

(9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ABS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized debt obligations (“CDO”)

 

21

 

 

--

 

 

642

 

 

(7

)

 

471

 

 

(39

)

 

Consumer and other asset-backed securities (“Consumer and other ABS”)

 

1,305

 

 

21

 

 

397

 

 

2

 

 

340

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable preferred stock

 

--

 

 

--

 

 

1

 

 

--

 

 

--

 

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed income securities

$  

19,653

 

$  

734

 

$  

13,830

 

$  

192

 

$  

19,406

 

$  

404

 

 

 

 

 

Baa

 

Ba or lower

 

Total

 

 

 

Fair
value

 

Unrealized
gain/(loss)

 

Fair
value

 

Unrealized
gain/(loss)

 

Fair
value

 

Unrealized
gain/(loss)

 

U.S. government and agencies

$  

--

 

$  

--

 

$  

--

 

$  

--

 

$  

6,766

 

$  

257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax exempt

 

1,232

 

 

(64

)

 

509

 

 

(92

)

 

9,709

 

 

(15

)

 

Taxable

 

465

 

 

(73

)

 

119

 

 

(38

)

 

4,360

 

 

(147

)

 

ARS

 

102

 

 

(11

)

 

104

 

 

(14

)

 

1,177

 

 

(92

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Public

 

9,923

 

 

382

 

 

2,544

 

 

59

 

 

26,658

 

 

857

 

 

Privately placed

 

6,608

 

 

190

 

 

1,915

 

 

31

 

 

15,737

 

 

443

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign government

 

367

 

 

22

 

 

--

 

 

--

 

 

3,117

 

 

295

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency

 

--

 

 

--

 

 

--

 

 

--

 

 

3,628

 

 

131

 

 

Prime   

 

7

 

 

--

 

 

577

 

 

2

 

 

1,206

 

 

10

 

 

Alt-A

 

41

 

 

1

 

 

437

 

 

(75

)

 

611

 

 

(74

)

 

Subprime

 

91

 

 

(25

)

 

814

 

 

(394

)

 

1,085

 

 

(444

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CMBS

 

354

 

 

(53

)

 

186

 

 

(81

)

 

2,053

 

 

(103

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ABS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CDO

 

279

 

 

(56

)

 

432

 

 

(86

)

 

1,845

 

 

(188

)

 

Consumer and other ABS

 

199

 

 

(1

)

 

25

 

 

(5

)

 

2,266

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable preferred stock

 

23

 

 

1

 

 

--

 

 

--

 

 

24

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total fixed income securities

$  

19,691

 

$  

313

 

$  

7,662

 

$  

(693

)

$  

80,242

 

$  

950

 

 

 

67



 

Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Municipal bonds , including tax exempt, taxable and ARS securities, totaled $15.25 billion as of March 31, 2011 with an unrealized net capital loss of $254 million.  The municipal bond portfolio includes general obligations of state and local issuers, revenue bonds and pre-refunded bonds, which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest.

 

The following table summarizes by state the fair value, amortized cost and credit rating of our municipal bonds, excluding $1.80 billion of pre-refunded bonds, as of March 31, 2011.

 

($ in millions)

State

 

State
general
obligation

 

Local general
obligation

 

Revenue  (1)

 

Fair value

 

Amortized
cost

 

Average
credit
rating 
(2)

 

California

$  

98

 

$  

803

 

$  

792

 

$  

1,693

 

$  

1,835

 

 

A

 

Texas

 

17

 

 

429

 

 

730

 

 

1,176

 

 

1,196

 

 

Aa

 

Florida

 

56

 

 

233

 

 

545

 

 

834

 

 

844

 

 

A

 

New York

 

32

 

 

30

 

 

544

 

 

606

 

 

607

 

 

Aa

 

Ohio

 

38

 

 

205

 

 

286

 

 

529

 

 

571

 

 

A

 

Illinois

 

--

 

 

187

 

 

338

 

 

525

 

 

539

 

 

A

 

Missouri

 

34

 

 

176

 

 

273

 

 

483

 

 

489

 

 

A

 

New Jersey

 

146

 

 

37

 

 

290

 

 

473

 

 

485

 

 

A

 

Pennsylvania

 

95

 

 

124

 

 

251

 

 

470

 

 

476

 

 

Aa

 

Michigan

 

40

 

 

137

 

 

286

 

 

463

 

 

481

 

 

Aa

 

All others

 

719

 

 

1,360

 

 

4,111

 

 

6,190

 

 

6,302

 

 

A

 

Total

$  

1,275

 

$  

3,721

 

$  

8,446

 

$  

13,442

 

$  

13,825

 

 

A

 

 


(1)

The nature of the activities supporting revenue municipals is highly diversified and includes transportation, health care, industrial development, housing, higher education, utilities, recreation/convention centers and other activities.

 

(2)

The municipal bonds are rated by third party credit rating agencies, the NAIC and/or internally rated.

 

Our practice for acquiring and monitoring municipal bonds is predominantly based on the underlying credit quality of the primary obligor.  We currently rely on the primary obligor to pay all contractual cash flows and are not relying on bond insurers for payments.  As a result of downgrades in the insurers’ credit ratings, the ratings of the insured municipal bonds generally reflect the underlying ratings of the primary obligor.  As of March 31, 2011, 99.3% of our insured municipal bond portfolio is rated investment grade.  Given the effects of the economic crisis on bond insurers, the value inherent in the insurance has declined.  Further, we believe the fair value of our insured municipal bond portfolio substantially reflects the decline in the value of the insurance.  We believe that the loss of the benefit of insurance would not result in a material adverse impact on our results of operations, financial position or liquidity.

 

Included in our municipal bond holdings as of March 31, 2011 are $894 million of municipal securities which are not rated by third party credit rating agencies, but are rated by the NAIC and are also internally rated.  These holdings include $431 million of below investment grade municipal bonds, most of which were purchased to provide the opportunity to achieve incremental returns.

 

Corporate bonds , including publicly traded and privately placed, totaled $42.40 billion as of March 31, 2011 with an unrealized net capital gain of $1.30 billion.  Privately placed securities primarily consist of corporate issued senior debt securities that are in unregistered form or are directly negotiated with the borrower.

 

RMBS, CMBS and ABS are structured securities that are primarily collateralized by residential and commercial real estate loans and other consumer or corporate borrowings.  The cash flows from the underlying collateral paid to the securitization trust are generally applied in a pre-determined order and are designed so that each security issued by the trust, typically referred to as a “class”, qualifies for a specific original rating.  For example, the “senior” portion or “top” of the capital structure, or rating class, which would originally qualify for a rating of Aaa typically has priority in receiving principal repayments on the underlying collateral and retains this priority until the class is paid in full.  In a sequential structure, underlying collateral principal repayments are directed to the most senior rated Aaa class in the structure until paid in full, after which principal repayments are directed to the next most senior Aaa class in the structure until it is paid in full.  Senior Aaa classes generally share any losses from the underlying collateral on a pro-rata basis after losses are absorbed by classes with lower original ratings.  The payment priority and class subordination included in these securities serves as credit enhancement for holders of the senior or top portions of the structures.  These securities continue to retain the payment priority features that existed at the origination of the securitization trust.  Other forms of credit enhancement may include structural features embedded in the securitization trust, such as overcollateralization, excess spread and bond insurance.  The underlying collateral

 

68



 

Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

can have fixed interest rates, variable interest rates (such as adjustable rate mortgages (“ARM”)) or may contain features of both fixed and variable rate mortgages.

 

RMBS , including U.S. Agency, Prime, Alt-A and Subprime, totaled $6.53 billion, with 72.0% rated investment grade, as of March 31, 2011.  The RMBS portfolio is subject to interest rate risk, but unlike other fixed income securities, is additionally subject to significant prepayment risk from the underlying residential mortgage loans.  The credit risk associated with our RMBS portfolio is mitigated due to the fact that 55.6% of the portfolio consists of securities that were issued by or have underlying collateral guaranteed by U.S. government agencies.  The unrealized net capital loss of $377 million as of March 31, 2011 was the result of wider credit spreads than at initial purchase on the non-U.S. Agency portion of our RMBS portfolio, largely due to higher risk premiums caused by macroeconomic conditions and credit market deterioration, including the impact of lower real estate valuations, which began to show signs of stabilization in certain geographic areas in 2010.  The following table shows our RMBS portfolio as of March 31, 2011 based upon vintage year of the issuance of the securities.

 

($ in millions)

 

U.S. Agency

 

Prime

 

Alt-A

 

Subprime

 

Total RMBS

 

 

 

Fair
value

 

 

Unrealized
gain/(loss)

 

Fair
value

 

Unrealized
gain/(loss)

 

Fair
value

 

Unrealized
gain/(loss)

 

Fair
value

 

Unrealized
gain/(loss)

 

Fair
value

 

Unrealized
gain/(loss)

 

2010

$  

173

 

$  

1

 

$  

201

 

$  

3

 

$  

59

 

$  

1

 

$  

--

 

$  

--

 

$  

433

 

$  

5

 

 

2009

 

687

 

 

10

 

 

74

 

 

1

 

 

8

 

 

--

 

 

--

 

 

--

 

 

769

 

 

11

 

 

2008

 

630

 

 

12

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

630

 

 

12

 

 

2007

 

246

 

 

7

 

 

273

 

 

9

 

 

84

 

 

(32

)

 

247

 

 

(140

)

 

850

 

 

(156

)

 

2006

 

212

 

 

9

 

 

222

 

 

2

 

 

175

 

 

(18

)

 

304

 

 

(125

)

 

913

 

 

(132

)

 

2005

 

456

 

 

20

 

 

189

 

 

(8

)

 

127

 

 

(10

)

 

289

 

 

(112

)

 

1,061

 

 

(110

)

 

Pre-2005

 

1,224

 

 

72

 

 

247

 

 

3

 

 

158

 

 

(15

)

 

245

 

 

(67

)

 

1,874

 

 

(7

)

 

Total

$  

3,628

 

$  

131

 

$  

1,206

 

$  

10

 

$  

611

 

$  

(74

)

$  

1,085

 

$  

(444

)

$  

6,530

 

$  

(377

)

 

 

Prime are collateralized by residential mortgage loans issued to prime borrowers.  As of March 31, 2011, $908 million of the Prime had fixed rate underlying collateral and $298 million had variable rate underlying collateral.

 

Alt-A includes securities collateralized by residential mortgage loans issued to borrowers who do not qualify for prime financing terms due to high loan-to-value ratios or limited supporting documentation, but have stronger credit profiles than subprime borrowers.  As of March 31, 2011, $455 million of the Alt-A had fixed rate underlying collateral and $156 million had variable rate underlying collateral.

 

Subprime includes securities collateralized by residential mortgage loans issued to borrowers that cannot qualify for Prime or Alt-A financing terms due in part to weak or limited credit history.  It also includes securities that are collateralized by certain second lien mortgages regardless of the borrower’s credit history.  The Subprime portfolio consisted of $829 million and $256 million of first lien and second lien securities, respectively.  As of March 31, 2011, $603 million of the Subprime had fixed rate underlying collateral and $482 million had variable rate underlying collateral.

 

CMBS totaled $2.05 billion, with 90.9% rated investment grade, as of March 31, 2011.  The CMBS portfolio is subject to credit risk, but unlike certain other structured securities, is generally not subject to prepayment risk due to protections within the underlying commercial mortgage loans.  Of the CMBS investments, 94.5% are traditional conduit transactions collateralized by commercial mortgage loans, broadly diversified across property types and geographical area.  The remainder consists of non-traditional CMBS such as small balance transactions, large loan pools and single borrower transactions.

 

The following table shows our CMBS portfolio as of March 31, 2011 based upon vintage year of the underlying collateral.

 

($ in millions)

 

Fair
value

 

Unrealized
gain/(loss)

 

2011

$  

1

 

$  

--

 

 

2010

 

23

 

 

--

 

 

2007

 

284

 

 

(9

)

 

2006

 

635

 

 

(80

)

 

2005

 

336

 

 

(23

)

 

Pre-2005

 

774

 

 

9

 

 

Total CMBS

$  

2,053

 

$  

(103

)

 

 

69



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

The unrealized net capital loss of $103 million as of March 31, 2011 on our CMBS portfolio was the result of wider credit spreads than at initial purchase, largely due to the macroeconomic conditions and credit market deterioration, including the impact of lower real estate valuations, which began to show signs of stabilization in certain geographic areas in 2010.  While CMBS spreads tightened during 2009 and 2010, credit spreads in most rating classes remain wider than at initial purchase, which is particularly evident in our 2005-2007 vintage year CMBS.

 

ABS , including CDO and Consumer and other ABS, totaled $4.11 billion, with 88.9% rated investment grade, as of March 31, 2011.  Credit risk is managed by monitoring the performance of the underlying collateral.  Many of the securities in the ABS portfolio have credit enhancement with features such as overcollateralization, subordinated structures, reserve funds, guarantees and/or insurance.  The unrealized net capital loss of $169 million as of March 31, 2011 on our ABS portfolio was the result of wider credit spreads than at initial purchase.

 

CDO totaled $1.85 billion, with 76.6% rated investment grade, as of March 31, 2011.  CDO consist primarily of obligations collateralized by high yield and investment grade corporate credits including $1.41 billion of cash flow collateralized loan obligations (“CLO”) with unrealized losses of $92 million.  The remaining $435 million of securities consisted of synthetic CDO, trust preferred CDO, project finance CDO, market value CDO, collateralized bond obligations and other CLO with unrealized losses of $96 million.

 

Consumer and other ABS totaled $2.27 billion, with 98.9% rated investment grade, as of March 31, 2011.  Consumer and other ABS consists of $1.05 billion of consumer auto and $1.22 billion of other ABS with unrealized gains of $5 million and $14 million, respectively.

 

Mortgage loans   Our mortgage loan portfolio, which is primarily held in the Allstate Financial portfolio, totaled $6.58 billion as of March 31, 2011, compared to $6.68 billion as of December 31, 2010, and primarily comprises loans secured by first mortgages on developed commercial real estate.  Key considerations used to manage our exposure include property type and geographic diversification by state and metropolitan area.

 

We recognized $6 million of realized capital losses related to net increases in the valuation allowance on impaired mortgage loans for the three months ended March 31, 2011, primarily due to deteriorating debt service coverage resulting from a decrease in occupancy and the risk associated with refinancing near-term maturities due to declining underlying collateral valuations.

 

For further detail on our mortgage loan portfolio, see Note 4 of the condensed consolidated financial statements.

 

Limited partnership interests consist of investments in private equity/debt funds, real estate funds, hedge funds and tax credit funds.  The limited partnership interests portfolio is well diversified across a number of characteristics including fund sponsors, vintage years, strategies, geography (including international), and company/property types.  The following table presents information about our limited partnership interests as of March 31, 2011.

 

($ in millions)

 

 

Private
equity/debt
funds

 

Real estate
funds

 

Hedge
funds

 

Tax
credit
funds

 

Total

Cost method of accounting (“Cost”)

965

332

79

7

1,383

Equity method of accounting (“EMA”)

 

695

 

353

 

1,411

 

235

 

2,694

  Total

1,660

685

1,490

242

4,077

 

 

 

 

 

 

 

 

 

 

 

Number of sponsors

 

90

 

42

 

12

 

7

 

 

Number of individual funds

 

146

 

87

 

101

 

7

 

 

Largest exposure to single fund

36

35

82

50

 

 

 

Our aggregate limited partnership exposure represented 4.1% and 3.8% of total invested assets as of March 31, 2011 and December 31, 2010, respectively.

 

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Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

The following table shows the results from our limited partnership interests by fund type and accounting classification for the three months ended March 31.

 

($ in millions)

 

2011

 

2010

 

 

Cost

 

EMA

 

Total
income

 

Impairment
write-downs 
(1)

 

Cost

 

EMA

 

Total
income

 

Impairment
write-downs 
(1)

Private equity/debt funds

$

9

$

19

$

28

$

(1)

$

6

$

15 

$

21 

$

(2)

Real estate funds

 

1

 

8

 

9

 

-- 

 

--

 

(28)

 

(28)

 

(21)

Hedge funds

 

--

 

36

 

36

 

-- 

 

--

 

17 

 

17 

 

(1)

Total

$

10

$

63

$

73

$

(1)

$

6

$

$

10 

$

(24)

 


(1)  Impairment write-downs related to Cost limited partnerships were $1 million and $24 million in the three months ended March 31, 2011 and 2010, respectively.  There were no impairment write-downs related to EMA limited partnerships in the three months ended March 31, 2011 and 2010.

 

Limited partnership interests, excluding impairment write-downs, produced income of $73 million in the three months ended March 31, 2011 compared to $10 million in the three months ended March 31, 2010.  Income on EMA limited partnerships is recognized on a delay due to the availability of the related financial statements.  The recognition of income on hedge funds is primarily on a one-month delay and the income recognition on private equity/debt funds, real estate funds and tax credit funds are generally on a three-month delay.  Income on Cost limited partnerships is recognized only upon receipt of amounts distributed by the partnerships.

 

Unrealized net capital gains totaled $1.57 billion as of March 31, 2011 compared to unrealized net capital gains of $1.39 billion as of December 31, 2010.  The improvement since December 31, 2010 for fixed income securities was primarily a result of tightening of credit spreads in certain sectors.  The improvement for equity securities was primarily due to improved equity valuations.  The following table presents unrealized net capital gains and losses, pre-tax and after-tax.

 

($ in millions)

 

March 31,
2011

 

December 31,
2010

U.S. government and agencies

$

257 

$

276 

Municipal

 

(254)

 

(267)

Corporate

 

1,300 

 

1,395 

Foreign government

 

295 

 

337 

RMBS

 

(377)

 

(516)

CMBS

 

(103)

 

(219)

ABS

 

(169)

 

(181)

Redeemable preferred stock

 

 

Fixed income securities (1)

 

950 

 

826 

Equity securities

 

645 

 

583 

EMA limited partnership interests

 

 

-- 

Derivatives

 

(30)

 

(22)

Unrealized net capital gains and losses, pre-tax

 

1,572 

 

1,387 

Amounts recognized for:

 

 

 

 

Insurance reserves (2)

 

(2)

 

(41)

DAC and DSI (3)

 

95 

 

97 

Amounts recognized

 

93 

 

56 

Deferred income taxes

 

(586)

 

(508)

Unrealized net capital gains and losses, after-tax

$

1,079 

$

935 

 


(1)   Unrealized net capital gains and losses for fixed income securities as of March 31, 2011 and December 31, 2010 comprise $(257) million and $(293) million, respectively, related to unrealized net capital losses on fixed income securities with other-than-temporary impairment and $1.21 billion and $1.12 billion, respectively, related to other unrealized net capital gains and losses.

(2)   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 we evaluate premium deficiencies on the combined performance of our 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.

 

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Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

 

(3)

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.  Only the unrealized net capital gains and losses on the Allstate Financial fixed annuity and interest-sensitive life product portfolios are used in this calculation.  The DAC and DSI adjustment balance, subject to limitations, is determined by applying the DAC and DSI amortization rate to unrealized net capital gains or losses.  Recapitalization of the DAC and DSI balances is limited to the originally deferred costs plus interest.

 

 

The unrealized net capital gains for the fixed income portfolio totaled $950 million and comprised $2.97 billion of gross unrealized gains and $2.02 billion of gross unrealized losses as of March 31, 2011.  This is compared to unrealized net capital gains for the fixed income portfolio totaling $826 million, comprised of $3.26 billion of gross unrealized gains and $2.43 billion of gross unrealized losses as of December 31, 2010.

 

Gross unrealized gains and losses as of March 31, 2011 on fixed income securities by type and sector are provided in the table below.

 

($ in millions)

 

 

 

 

 

Gross unrealized

 

 

 

Amortized
cost as a 

 

Fair value
as a

 

 

 

Par
value 
(1)

 

Amortized
cost

 

Gains

 

Losses

 

Fair
value

 

percent of
par value 
(2)

 

percent of
par value  (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking

$

4,862

$

4,773

$

114

$

(114)

$

4,773

 

98.2

%

98.2

%

Utilities

 

6,544

 

6,561

 

399

 

(67)

 

6,893

 

100.3

 

105.3

 

Consumer goods (cyclical and non-cyclical)

 

7,475

 

7,601

 

266

 

(54)

 

7,813

 

101.7

 

104.5

 

Financial services

 

4,027

 

3,973

 

132

 

(34)

 

4,071

 

98.7

 

101.1

 

Capital goods

 

4,731

 

4,748

 

226

 

(29)

 

4,945

 

100.4

 

104.5

 

Transportation

 

1,982

 

2,003

 

96

 

(24)

 

2,075

 

101.1

 

104.7

 

Technology

 

1,809

 

1,829

 

53

 

(15)

 

1,867

 

101.1

 

103.2

 

Basic industry

 

2,064

 

2,083

 

88

 

(14)

 

2,157

 

100.9

 

104.5

 

Communications

 

2,638

 

2,633

 

105

 

(10)

 

2,728

 

99.8

 

103.4

 

Energy

 

3,038

 

3,079

 

129

 

(6)

 

3,202

 

101.3

 

105.4

 

FDIC guaranteed

 

167

 

168

 

2

 

-- 

 

170

 

100.6

 

101.8

 

Other

 

1,757

 

1,644

 

65

 

(8)

 

1,701

 

93.6

 

96.8

 

Total corporate fixed income portfolio

 

41,094

 

41,095

 

1,675

 

(375)

 

42,395

 

100.0

 

103.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

7,142

 

6,509

 

277

 

(20)

 

6,766

 

91.1

 

94.7

 

Municipal

 

18,535

 

15,500

 

367

 

(621)

 

15,246

 

83.6

 

82.3

 

Foreign government

 

3,262

 

2,822

 

306

 

(11)

 

3,117

 

86.5

 

95.6

 

RMBS

 

7,583

 

6,907

 

195

 

(572)

 

6,530

 

91.1

 

86.1

 

CMBS

 

2,179

 

2,156

 

63

 

(166)

 

2,053

 

98.9

 

94.2

 

ABS

 

4,574

 

4,280

 

82

 

(251)

 

4,111

 

93.6

 

89.9

 

Redeemable preferred stock

 

21

 

23

 

1

 

-- 

 

24

 

109.5

 

114.3

 

Total fixed income securities

$

84,390

$

79,292

$

2,966

$

(2,016)

$

80,242

 

94.0

 

95.1

 

 


(1)  Included in par value are zero-coupon securities that are generally purchased at a deep discount to the par value that is received at maturity.  These primarily included corporate, U.S. government and agencies, municipal and foreign government zero-coupon securities with par value of $684 million, $1.68 billion, $4.67 billion and $1.36 billion, respectively.

(2)  Excluding the impact of zero-coupon securities, the percentage of amortized cost to par value would be 100.4% for corporates, 101.2% for U.S. government and agencies, 99.7% for municipals and 103.5% for foreign governments.  Similarly, excluding the impact of zero-coupon securities, the percentage of fair value to par value would be 103.5% for corporates, 103.0% for U.S. government and agencies, 98.9% for municipals and 108.1% for foreign governments.

 

The banking, utilities, consumer goods, financial services and capital goods sectors had the highest concentration of gross unrealized losses in our corporate fixed income securities portfolio as of March 31, 2011.  In general, credit spreads remain wider than at initial purchase for most of the securities with gross unrealized losses in these categories.

 

The unrealized net capital gain for the equity portfolio totaled $645 million and comprised $707 million of gross unrealized gains and $62 million of gross unrealized losses as of March 31, 2011.  This is compared to an

 

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Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

unrealized net capital gain for the equity portfolio totaling $583 million, comprised of $646 million of gross unrealized gains and $63 million of gross unrealized losses as of December 31, 2010.

 

We have a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security that may be other-than-temporarily impaired.  The 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 we may have a concern, are evaluated based on facts and circumstances for inclusion on our watch-list.  All investments in an unrealized loss position as of March 31, 2011 were included in our portfolio monitoring process for determining whether declines in value were other than temporary.

 

The extent and duration of a decline in fair value for fixed income securities have become less indicative of actual credit deterioration with respect to an issue or issuer.  While we continue to use declines in fair value and the length of time a security is in an unrealized loss position as indicators of potential credit deterioration, our determination of whether a security’s decline in fair value is other than temporary has placed greater emphasis on our analysis of the underlying credit and collateral and related estimates of future cash flows.

 

The following table summarizes the fair value and gross unrealized losses of fixed income securities by type and investment grade classification as of March 31, 2011.

 

($ in millions)

 

Investment grade

 

Below investment grade

 

Total

 

 

Fair
value

 

Unrealized
losses

 

Fair
value

 

Unrealized
losses

 

Fair
value

 

Unrealized
losses

U.S. government and agencies

$

1,565

$

(20)

$

--

$

-- 

$

1,565

$

(20)

Municipal

 

5,745

 

(464)

 

595

 

(157)

 

6,340

 

(621)

Corporate

 

9,817

 

(315)

 

1,481

 

(60)

 

11,298

 

(375)

Foreign government

 

367

 

(11)

 

--

 

-- 

 

367

 

(11)

RMBS

 

708

 

(61)

 

1,243

 

(511)

 

1,951

 

(572)

CMBS

 

693

 

(81)

 

156

 

(85)

 

849

 

(166)

ABS

 

1,703

 

(141)

 

380

 

(110)

 

2,083

 

(251)

Total

$

20,598

$

(1,093)

$

3,855

$

(923)

$

24,453

$

(2,016)

 

We have experienced declines in the fair values of fixed income securities primarily due to wider credit spreads resulting from higher risk premiums since the time of initial purchase, largely due to macroeconomic conditions and credit market deterioration, including the impact of lower real estate valuations, which began to show signs of stabilization in certain geographic areas in 2010.  Consistent with their ratings, our portfolio monitoring process indicates that investment grade securities have a low risk of default.  Securities rated below investment grade, comprising securities with a rating of Ba, B and Caa or lower, have a higher risk of default.

 

As of March 31, 2011, 62% of our below investment grade gross unrealized losses were concentrated in RMBS, specifically Alt-A and Subprime, and CMBS.  The fair value of these securities totaled $1.24 billion, an increase of 2.0%, compared to $1.22 billion as of December 31, 2010, due to improved valuations resulting from tighter credit spreads driven by lower risk premiums.  Gross unrealized losses on these securities totaled $571 million as of March 31, 2011, a decrease of 17.0%, compared to $688 million as of December 31, 2010, due to improved valuations, impairment write-downs, sales and principal collections, partially offset by the downgrade of certain securities to below investment grade during the first quarter of 2011.

 

Fair values for our structured securities are obtained from third-party valuation service providers and are subject to review as disclosed in our Application of Critical Accounting Estimates.  In accordance with GAAP, when fair value is less than the amortized cost of a security and we have not made the decision to sell the security and it is not more likely than not we will be required to sell the security before recovery of its amortized cost basis, we evaluate if we expect to receive cash flows sufficient to recover the entire amortized cost basis of the security.  We calculate the estimated recovery value by discounting our best estimate of future cash flows at the security’s original or current effective rate, as appropriate, and compare this to the amortized cost of the security.  If we do not expect to receive cash flows sufficient to recover the entire amortized cost basis of the security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors (“non-credit-related”) recognized in other comprehensive income (“OCI”).

 

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Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

The non-credit-related unrealized losses for our structured securities, including our below investment grade Alt-A, Subprime and CMBS, are heavily influenced by risk factors other than those related to our best estimate of future cash flows.  The difference between these securities’ original or current effective rates and the yields implied by their fair value indicates that a higher risk premium is included in the valuation of these securities than existed at initial issue or purchase.  This risk premium represents the return that a market participant requires as compensation to assume the risk associated with the uncertainties regarding the future performance of the underlying collateral.  The risk premium is comprised of: default risk, which reflects the probability of default and the uncertainty related to collection of contractual principal and interest; liquidity risk, which reflects the risk associated with exiting the investment in an illiquid market, both in terms of timeliness and cost; and volatility risk, which reflects the potential valuation volatility during an investor’s holding period.  Other factors reflected in the risk premium include the costs associated with underwriting, monitoring and holding these types of complex securities.  Certain aspects of the default risk are included in the development of our best estimate of future cash flows, as appropriate.  Other aspects of the risk premium are considered to be temporary in nature and are expected to reverse over the remaining lives of the securities as future cash flows are received.

 

Other-than-temporary impairment assessment for below investment grade Alt-A and Subprime RMBS

 

As of March 31, 2011, the fair value of our below investment grade Alt-A securities with gross unrealized losses totaled $340 million, an increase of 18.1% compared to $288 million as of December 31, 2010.  As of March 31, 2011, gross unrealized losses for our below investment grade Alt-A portfolio totaled $89 million, a decrease of 23.3% compared to $116 million as of December 31, 2010, due to impairment write-downs and sales and principal collections, partially offset by downgrades of certain Alt-A securities to below investment grade during first quarter of 2011.  For our below investment grade Alt-A securities with gross unrealized gains of $14 million, we have recognized cumulative write-downs in earnings totaling $29 million as of March 31, 2011.

 

As of March 31, 2011, the fair value of our below investment grade Subprime securities with gross unrealized losses totaled $747 million, a decrease of 6.2% compared to $796 million as of December 31, 2010.  As of March 31, 2011, gross unrealized losses for our below investment grade Subprime portfolio totaled $397 million, a decrease of 9.4% compared to $438 million as of December 31, 2010, due to improved valuations resulting from lower risk premiums, sales and principal collections and impairment write-downs, partially offset by downgrades of certain Subprime securities to below investment grade during the first quarter of 2011.  For our below investment grade Subprime with gross unrealized gains totaling $3 million, we have recognized cumulative write-downs in earnings totaling $70 million as of March 31, 2011.

 

The credit loss evaluation for Alt-A and Subprime securities with gross unrealized losses is performed in two phases.  The first phase estimates the future cash flows of the entire securitization trust from which our security was issued.  A critical part of this estimate involves forecasting default rates and loss severities of the residential mortgage loans that collateralize the securitization trust.  The factors that affect the default rates and loss severities include, but are not limited to, historical collateral performance, collateral type, transaction vintage year, geographic concentrations, borrower credit quality, origination practices of the transaction sponsor, and practices of the mortgage loan servicers.  Current loan-to-value ratios of underlying collateral are not consistently available and accordingly they are not a primary factor in our impairment evaluation.   While our projections are developed internally and customized to our specific holdings, they are informed by and benchmarked against credit opinions obtained from third parties, such as industry analysts, nationally recognized credit rating agencies and an RMBS loss modeling advisory service.   The default rate and loss severity forecasts result in an estimate of trust-level projected additional collateral loss.

 

We then analyze the actual cumulative collateral losses incurred to date by the securitization trust, our projected additional collateral losses expected to be incurred and the position of the class of securities we own in the securitization trust relative to the trust’s other classes to determine whether any of the collateral losses will be applied to our class.  If our class has remaining credit enhancement sufficient to withstand the projected additional collateral losses, no collateral losses will be realized by our class and we expect to collect all contractual principal and interest of the security we own.  Remaining credit enhancement is measured in terms of (i) subordination from other classes of securities in the trust that are contractually obligated to absorb losses before the class of security we own and (ii) the expected impact of other structural features embedded in the securitization trust beneficial to our class, such as overcollateralization and excess spread.

 

For securities where there is insufficient remaining credit enhancement for the class of securities we own, a recovery value is calculated based on our best estimate of future cash flows specific to that security.  This estimate is

 

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Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

based on the contractual principal payments and current interest payments of the securities we own, adjusted for actual cumulative collateral losses incurred to date and the projected additional collateral losses expected to be incurred.  This estimate also takes into consideration additional secondary sources of credit support, such as reliable bond insurance.  For securities without secondary sources of credit support or for which the secondary sources do not fully offset the actual and projected additional collateral losses applied to them, a credit loss is recorded in earnings to the extent amortized cost exceeds recovery value.

 

96.7% and 3.3% of the fair value of our below investment grade Alt-A securities with gross unrealized losses were issued with Aaa and Aa original ratings and capital structure classifications, respectively.  74.5%, 19.9% and 4.5% of the fair value of our below investment grade Subprime securities with gross unrealized losses were issued with Aaa, Aa and A original ratings and capital structure classifications, respectively.  As described previously, Alt-A and Subprime securities with higher original ratings typically have priority in receiving the principal repayments on the underlying collateral compared to those with lower original ratings.  While the projected cash flow assumptions for our below investment grade Alt-A and Subprime securities with gross unrealized losses have deteriorated since the securities were originated, as reflected by their current credit ratings, these securities continue to retain the payment priority features that existed at the origination of the securitization trust.

 

The following tables show trust-level, class-level and security-specific detailed information for our below investment grade Alt-A securities with gross unrealized losses, by credit rating.

 

($ in millions)

March 31, 2011

 

With other-than-
temporary
impairments recorded
in earnings

 

Without other-than-temporary
impairments recorded in earnings

 

 

 

 

Caa or
lower

 

Total

 

Ba

 

B

 

Caa or
lower

 

Total

 

Total

Trust-level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual cumulative collateral losses incurred to date (1)

 

8.5 

%

8.5 

%

0.5 

%

1.2 

%

3.8 

%

1.9 

%

n/a 

Projected additional collateral losses to be incurred (2)

 

24.6 

%

24.6 

%

6.3 

%

11.8 

%

17.0 

%

11.4 

%

n/a 

Class-level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average remaining credit enhancement (3)

 

6.3 

%

6.3 

%

10.4 

%

15.8 

%

19.7 

%

14.9 

%

n/a 

Security-specific

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of positions

 

33 

 

33 

 

 

 

 

18 

 

51 

Par value

$

481 

$

481 

$

59 

$

23 

$

53 

$

135 

$

616 

Amortized cost

$

302 

$

302 

$

59 

$

23 

$

45 

$

127 

$

429 

Fair value

$

234 

$

234 

$

55 

$

16 

$

35 

$

106 

$

340 

Gross unrealized losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

(68)

$

(68)

$

(4)

$

(7)

$

(10)

$

(21)

$

(89)

12-24 months (4)

$

-- 

$

-- 

$

-- 

$

-- 

$

-- 

$

-- 

$

-- 

Over 24 months (5)

$

(62)

$

(62)

$

(4)

$

(7)

$

(9)

$

(20)

$

(82)

Cumulative write-downs recognized (6)

$

(134)

$

(134)

$

-- 

$

-- 

$

-- 

$

-- 

$

(134)

Principal payments received during the period (7)

$

10 

$

10 

$

$

-- 

$

$

$

12 

 

75



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

 

 

December 31, 2010

 

 

 

With other-than-temporary
impairments recorded in earnings

 

Without other-than-temporary
impairments recorded in earnings

 

 

 

 

 

Ba

 

B

 

Caa or
lower

 

Total

 

Ba

 

B

 

Caa or
lower

 

Total

 

Total

 

Trust-level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Actual cumulative collateral losses incurred to date (1)

 

0.5

%

0.7

%

8.1

%

8.0

%

0.1

%

3.1

%

3.7

%

3.0

%

n/a

 

   Projected additional collateral losses to be incurred (2)

 

9.9

%

22.5

%

24.6

%

24.5

%

4.8

%

16.6

%

17.8

%

15.4

%

n/a

 

Class-level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Average remaining credit enhancement (3)

 

9.9

%

19.0

%

6.8

%

6.9

%

5.3

%

27.1

%

23.9

%

20.7

%

n/a

 

Security-specific

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Number of positions

 

1

 

1

 

27

 

29

 

2

 

2

 

8

 

12

 

41

 

   Par value

$

4

$

3

$

439

$

446

$

16

$

4

$

68

$

88

$

534

 

   Amortized cost

$

4

$

2

$

316

$

322

$

16

$

4

$

62

$

82

$

404

 

   Fair value

$

1

$

1

$

220

$

222

$

13

$

2

$

51

$

66

$

288

 

   Gross unrealized losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

           Total

$

(3)

$

(1)

$

(96)

$

(100)

$

(3)

$

(2)

$

(11)

$

(16)

$

(116)

 

           12-24 months (4)

$

--

$

--

$

--

$

--

$

--

$

--

$

--

$

--

$

--

 

           Over 24 months (5)

$

(3)

$

(1)

$

(90)

$

(94)

$

(3)

$

(2)

$

(10)

$

(15)

$

(109)

 

    Cumulative write-downs recognized (6)

$

--

$

(1)

$

(92)

$

(93)

$

--

$

--

$

--

$

--

$

(93)

 

    Principal payments received during the period (7)

$

--

$

--

$

59

$

59

$

1

$

1

$

6

$

8

$

67

 

 


(1)      Weighted average actual cumulative collateral losses incurred to date as of period end are based on the actual principal losses incurred as a percentage of the remaining principal amount of the loans in the trust.  The weighting calculation is based on the par value of each security.  Actual losses on the securities we hold are less than the losses on the underlying collateral as presented in this table.  Actual cumulative realized principal losses on the below investment grade Alt-A securities we own, as reported by the trust servicers, were $6 million as of March 31, 2011.

(2)      Weighted average projected additional collateral losses to be incurred as of period end are based on our projections of future losses to be incurred by the trust, taking into consideration the actual cumulative collateral losses incurred to date, as a percentage of the remaining principal amount of the loans in the trust.  Our projections are developed internally and customized to our specific holdings and are informed by and benchmarked against credit opinions obtained from third parties, such as industry analysts, nationally recognized credit rating agencies and an RMBS loss modeling advisory service.   Projected additional collateral losses to be incurred are compared to average remaining credit enhancement for each security.  For securities where the projected additional collateral losses exceed remaining credit enhancement, a recovery value is calculated to determine whether impairment losses should be recorded in earnings.  The weighting calculation is based on the par value of each security.

(3)      Weighted average remaining credit enhancement as of period end is based on structural subordination and the expected impact of other structural features existing in the securitization trust beneficial to our class and reflects our projection of future principal losses that can occur as a percentage of the remaining principal amount of the loans in the trust before the class of the security we own will incur its first dollar of principal loss.  The weighting calculation is based on the par value of each security.

(4)      Includes total gross unrealized losses on securities in an unrealized loss position for a period of 12 to 24 consecutive months.

(5)      Includes total gross unrealized losses on securities in an unrealized loss position for a period more than 24 consecutive months.  As of March 31, 2011, $40 million of unrealized losses on securities with other-than-temporary impairments recognized in earnings and $13 million of unrealized losses on securities without other-than-temporary impairments recognized in earnings have been greater than or equal to 20% of those securities’ amortized cost for a period of more than 24 consecutive months.  As of December 31, 2010, $70 million of unrealized losses on securities with other-than-temporary impairments recognized in earnings and $11 million of unrealized losses on securities without other-than-temporary impairments recognized in earnings have been greater than or equal to 20% of those securities’ amortized cost for a period of more than 24 consecutive months.

(6)      Includes cumulative write-downs recorded in accordance with GAAP.

(7)      Reflects principal payments for the three months ended March 31, 2011 or the year ended December 31, 2010, respectively.

 

The above tables include information about our below investment grade Alt-A securities with gross unrealized losses as of each period presented.  The par value and composition of securities included can vary significantly from period to period due to changes in variables such as credit ratings, principal payments, sales, purchases and realized principal losses.

 

As of March 31, 2011, our below investment grade Alt-A securities with gross unrealized losses and without other-than-temporary impairments recorded in earnings had incurred actual cumulative collateral losses of 1.9%.  Our impairment evaluation forecasts more severe assumptions than the trusts are actually experiencing, including a projected weighted average underlying default rate of 26.0% and a projected weighted average loss severity of 44.2%, which resulted in projected additional collateral losses of 11.4%.  As the average remaining credit

 

76



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

enhancement for these securities of 14.9% exceeds the projected additional collateral losses of 11.4%, these securities have not been impaired.

 

As of March 31, 2011, our below investment grade Alt-A securities with gross unrealized losses and with other-than-temporary impairments recorded in earnings had incurred actual cumulative collateral losses of 8.5%.  Our impairment evaluation forecasts more severe assumptions than the trusts are actually experiencing, including a projected weighted average underlying default rate of 43.4% and a projected weighted average loss severity of 56.1%, which resulted in projected additional collateral losses of 24.6%.  As the average remaining credit enhancement for these securities of 6.3% is insufficient to withstand the projected additional collateral losses, we have recognized cumulative write-downs in earnings on these securities as reflected in the table above using our calculated recovery value at the time of impairment.  The current average recovery value of these securities as a percentage of par was 65.1% and exceeded these securities’ current average amortized cost as a percentage of par of 63.0%, which demonstrates our conclusion that the nature of the remaining unrealized loss on these securities is temporary and will reverse over time.  The comparison indicates that recovery value exceeds amortized cost based on a comprehensive evaluation of financial, economic and capital markets assumptions developed for this reporting period.

 

We believe the unrealized losses on our Alt-A securities, including those over 24 months, result from the current risk premium on these securities, which should continue to reverse over the securities’ remaining lives, as demonstrated by improved valuations in 2010.  We expect to receive our estimated share of contractual principal and interest collections used to determine the securities’ recovery value.  As of March 31, 2011, we do not have the intent to sell and it is not more likely than not we will be required to sell these securities before the recovery of their amortized cost basis.  We believe that our valuation and impairment processes are comprehensive, employ the most current views about collateral and securitization trust financial positions, and demonstrate our recorded impairments and that the remaining unrealized losses on these positions are temporary.

 

The following tables show trust-level, class-level and security-specific detailed information for our below investment grade Subprime securities with gross unrealized losses that are not reliably insured, by credit rating.

 

($ in millions)

March 31, 2011

 

 

With other-than-temporary
impairments recorded in earnings

 

Without other-than-temporary
impairments recorded in earnings

 

 

 

 

 

 

B

 

Caa or
lower

 

Total

 

Ba

 

B

 

Caa or
lower

 

Total

 

Total

 

Trust-level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Actual cumulative collateral losses incurred to date (1)

 

 

15.7

%

16.9

%

16.8

%

3.0

%

6.4

%

10.0

%

7.6

%

n/a

 

   Projected additional collateral losses to be incurred

 

 

40.3

%

42.3

%

42.3

%

33.4

%

32.5

%

34.9

%

34.0

%

n/a

 

Class-level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Average remaining credit enhancement

 

 

24.1

%

20.4

%

20.5

%

47.2

%

44.2

%

42.2

%

43.8

%

n/a

 

Security-specific

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Number of positions

 

 

4

 

77

 

81

 

7

 

14

 

34

 

55

 

136

 

   Par value

 

$

32

$

893

$

925

$

80

$

82

$

202

$

364

$

1,289

 

   Amortized cost

 

$

26

$

615

$

641

$

80

$

82

$

202

$

364

$

1,005

 

   Fair value

 

$

17

$

407

$

424

$

63

$

55

$

108

$

226

$

650

 

   Gross unrealized losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

           Total

 

$

(9)

$

(208)

$

(217)

$

(17)

$

(27)

$

(94)

$

(138)

$

(355)

 

           12-24 months

 

$

--

$

(2)

$

(2)

$

--

$

--

$

--

$

--

$

(2)

 

           Over 24 months (2)

 

$

(9)

$

(206)

$

(215)

$

(17)

$

(27)

$

(94)

$

(138)

$

(353)

 

   Cumulative write-downs recognized

 

$

(5)

$

(273)

$

(278)

$

--

$

--

$

--

$

--

$

(278)

 

   Principal payments received during the period

 

$

1

$

12

$

13

$

3

$

2

$

4

$

9

$

22

 

 

77



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

 

December 31, 2010

 

 

With other-than-temporary
impairments recorded in earnings

 

Without other-than-temporary
impairments recorded in earnings

 

 

 

 

 

B

 

Caa or
lower

 

Total

 

Ba

 

B

 

Caa or
lower

 

Total

 

Total

 

Trust-level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Actual cumulative collateral losses incurred to date

 

12.0

%

16.1

%

16.0

%

13.2

%

12.5

%

12.6

%

12.7

%

n/a

 

   Projected additional collateral losses to be incurred

 

38.2

%

43.2

%

43.0

%

46.5

%

42.7

%

40.8

%

42.1

%

n/a

 

Class-level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Average remaining credit enhancement

 

26.0

%

22.6

%

22.8

%

72.7

%

63.6

%

50.5

%

56.7

%

n/a

 

Security-specific

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Number of positions

 

5

 

81

 

86

 

11

 

10

 

35

 

56

 

142

 

   Par value

$

42

$

952

$

994

$

73

$

69

$

265

$

407

$

1,401

 

   Amortized cost

$

33

$

650

$

683

$

73

$

69

$

265

$

407

$

1,090

 

   Fair value

$

21

$

425

$

446

$

62

$

54

$

158

$

274

$

720

 

   Gross unrealized losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

           Total

$

(12)

$

(225)

$

(237)

$

(11)

$

(15)

$

(107)

$

(133)

$

(370)

 

           12-24 months

$

--

$

(9)

$

(9)

$

--

$

--

$

--

$

--

$

(9)

 

           Over 24 months (2)

$

(12)

$

(216)

$

(228)

$

(11)

$

(15)

$

(107)

$

(133)

$

(361)

 

   Cumulative write-downs recognized

$

(9)

$

(293)

$

(302)

$

--

$

--

$

--

$

--

$

(302)

 

   Principal payments received during the period

$

4

$

62

$

66

$

18

$

4

$

11

$

33

$

99

 

 

_______________

(1)  Actual cumulative realized principal losses on the below investment grade Subprime securities we own, as reported by the trust servicers, were $27 million as of March 31, 2011.

(2)  As of March 31, 2011, $185 million of unrealized losses on securities with other-than-temporary impairments recognized in earnings and $125 million of unrealized losses on securities without other-than-temporary impairments recognized in earnings have been greater than or equal to 20% of those securities’ amortized cost for a period of more than 24 consecutive months.  As of December 31, 2010, $188 million of unrealized losses on securities with other-than-temporary impairments recognized in earnings and $108 million of unrealized losses on securities without other-than-temporary impairments recognized in earnings have been greater than or equal to 20% of those securities’ amortized cost for a period of more than 24 consecutive months.

 

The above tables include information only about below investment grade Subprime securities with gross unrealized losses that are not reliably insured as of each period presented.  As such, the par value and composition of securities included can vary significantly from period to period due to changes in variables such as credit ratings, principal payments, sales, purchases and realized principal losses.

 

As of March 31, 2011, our Subprime securities that are reliably insured include 10 below investment grade Subprime securities with a total fair value of $97 million and aggregate gross unrealized losses of $42 million, all of which are rated B.  These securities are insured by one bond insurer rated B that we estimate has sufficient claims paying capacity to service its obligations on these securities.  The securitization trusts from which our securities were issued are currently receiving contractual payments from the bond insurer and considering the combination of expected future payments from the bond insurer and cash flows available from the underlying collateral, we expect the trust to have adequate cash flows to make all contractual payments due to the class of securities we own.  As a result, our security-specific estimates of future cash flows indicate that these securities’ estimated recovery values equal or exceed their amortized cost.  Accordingly, no other-than-temporary impairments have been recognized on these securities.  As of December 31, 2010, our Subprime securities that are reliably insured include 10 below investment grade Subprime securities with a total fair value of $76 million and aggregate gross unrealized losses of $68 million.

 

As of March 31, 2011, our below investment grade Subprime securities with gross unrealized losses that are not reliably insured and without other-than-temporary impairments recorded in earnings had incurred actual cumulative collateral losses of 7.6%.  Our impairment evaluation forecasts more severe assumptions than the trusts are actually experiencing, including a projected weighted average underlying default rate of 49.2% and a projected weighted average loss severity of 69.9%, which resulted in projected additional collateral losses of 34.0%.  As the average remaining credit enhancement for these securities of 43.8% exceeds the projected additional collateral losses of 34.0%, these securities have not been impaired.

 

As of March 31, 2011, our below investment grade Subprime securities with gross unrealized losses that are not reliably insured and with other-than-temporary impairments recorded in earnings had incurred actual cumulative collateral losses of 16.8%.  Our impairment evaluation forecasts more severe assumptions than the trusts are actually

 

78



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

experiencing, including a projected weighted average underlying default rate of 56.7% and a projected weighted average loss severity of 76.4%, which resulted in projected additional collateral losses of 42.3%.  As the average remaining credit enhancement for these securities of 20.5% is insufficient to withstand the projected additional collateral losses, we have recognized cumulative write-downs in earnings on the securities as reflected in the table above using our calculated recovery value at the time of impairment.  The current average recovery value of these securities as a percentage of par was 72.3% and exceeded these securities’ current average amortized cost as a percentage of par of 69.3%, which demonstrates our conclusion that the nature of the remaining unrealized loss on these securities is temporary and will reverse over time.  The comparison indicates that recovery value exceeds amortized cost based on a comprehensive evaluation of financial, economic and capital markets assumptions developed for this reporting period.

 

We believe the unrealized losses on our Subprime securities, including those over 24 months, result from the current risk premium on these securities, which should continue to reverse over the securities’ remaining lives, as demonstrated by improved valuations in 2010.  We expect to receive our estimated share of contractual principal and interest collections used to determine the securities’ recovery value.  As of March 31, 2011, we do not have the intent to sell and it is not more likely than not we will be required to sell these securities before the recovery of their amortized cost basis.  We believe that our valuation and impairment processes are comprehensive, employ the most current views about collateral and securitization trust financial positions, and demonstrate our recorded impairments and that the remaining unrealized losses on these positions are temporary.

 

Other-than-temporary impairment assessment for below investment grade CMBS

 

As of March 31, 2011, the fair value of our below investment grade CMBS with gross unrealized losses totaled $156 million compared to $135 million as of December 31, 2010.  As of March 31, 2011, gross unrealized losses for our below investment grade CMBS portfolio totaled $85 million, a decrease of 36.6% compared to $134 million as of December 31, 2010, due to improved valuations resulting from lower risk premiums, sales and principal collections and impairment write-downs, partially offset by downgrades of certain CMBS to below investment grade during the first quarter of 2011.  For our below investment grade CMBS with gross unrealized gains totaling $4 million, we have recognized cumulative write-downs in earnings totaling $9 million as of March 31, 2011.

 

The credit loss evaluation for CMBS with gross unrealized losses is performed in two phases.  The first phase estimates the future cash flows of the entire securitization trust from which our security was issued.  A critical part of this estimate involves forecasting the collateral losses of the commercial mortgage loans that collateralize the securitization trust.  Factors affecting these estimates include, but are not limited to, estimates of current and future commercial property prices, current and projected rental incomes, the propensity of the mortgage loans to default under these assumptions and loss severities in cases of default.  Estimates of future property prices and rental incomes consider specific property-type and geographic economic trends such as employment, property vacancy and rental rates, and forecasts of new supply in the commercial real estate markets.  Estimates of default rates and loss severities consider factors such as borrower payment history, the origination practices of the transaction sponsor, overall collateral quality and diversification, transaction vintage year, maturity date, overall transaction structure and other factors that may influence performance.  Realized losses in the CMBS market have historically been low and, we believe, are not predictive of future losses.  Therefore, our projections of collateral performance rely on probability-weighted scenarios informed by credit opinions obtained from third parties, such as nationally recognized credit rating agencies, industry analysts and CMBS loss modeling advisory services.

 

We then analyze the actual cumulative collateral losses incurred to date by the securitization trust, our projected additional collateral losses expected to be incurred and the position of the class of securities we own in the securitization trust relative to the trust’s other classes to determine whether any of the collateral losses will be applied to our class.  If our class has remaining credit enhancement sufficient to withstand the projected additional collateral losses, no collateral losses will be realized by our class and we expect to collect all contractual principal and interest of the security we own.  Remaining credit enhancement is measured in terms of subordination from other classes of securities in the trust being contractually obligated to absorb losses before the class of security we own.

 

For securities where there is insufficient remaining credit enhancement for the class of securities we own, a recovery value is calculated based on our best estimate of future cash flows specific to that security.  This estimate is based on the contractual principal payments and current interest payments of the securities we own, adjusted for actual cumulative collateral losses incurred to date and the projected additional collateral losses expected to be

 

79



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

incurred.  In instances where the recovery value of the security is less than its amortized cost, a credit loss is recorded in earnings.

 

15.2%, 74.7% and 7.3% of the fair value of our below investment grade CMBS with gross unrealized losses were issued with Aaa, Aa and A original ratings and capital structure classifications, respectively.  As described previously, CMBS with higher original ratings typically have priority in receiving the principal repayments on the underlying collateral compared to those with lower original ratings.  Tight credit markets and conservative underwriting standards continue to stress commercial mortgage borrowers’ ability to refinance obligations.  While the projected cash flow assumptions for our below investment grade CMBS with gross unrealized losses have deteriorated since the securities were originated, as reflected by their current credit ratings, these securities continue to retain the payment priority features that existed at the origination of the securitization trust.

 

The following tables show trust-level, class-level and security-specific detailed information for our below investment grade CMBS with gross unrealized losses, by credit rating.

 

($ in millions)

 

March 31, 2011

 

 

 

With other-than-temporary
impairments recorded in earnings

 

Without other-than-temporary
impairments recorded in earnings

 

 

 

 

 

Ba

 

B

 

Caa or
lower

 

Total

 

Ba

 

B

 

Caa or
lower

 

Total

 

Total

 

Trust-level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Actual cumulative collateral losses incurred to date (1)

 

0.7

%

3.2

%

4.8

%

4.0

%

1.4

%

0.7

%

--

%

1.2

%

n/a

 

   Projected additional collateral losses to be incurred

 

6.1

%

7.0

%

64.5

%

47.6

%

6.9

%

4.4

%

--

%

6.1

%

n/a

 

Class-level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Average remaining credit enhancement

 

11.8

%

7.2

%

26.0

%

21.1

%

9.0

%

7.0

%

--

%

8.3

%

n/a

 

Security-specific

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Number of positions

 

3

 

1

 

4

 

8

 

12

 

6

 

1

 

19

 

27

 

   Par value

$

13

$

16

$

69

$

98

$

118

$

54

$

3

$

175

$

273

 

   Amortized cost

$

12

$

15

$

31

$

58

$

125

$

55

$

3

$

183

$

241

 

   Fair value

$

9

$

11

$

12

$

32

$

87

$

35

$

2

$

124

$

156

 

   Gross unrealized losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

           Total

$

(3)

$

(4)

$

(19)

$

(26)

$

(38)

$

(20)

$

(1)

$

(59)

$

(85)

 

           12-24 months

$

--

$

--

$

--

$

--

$

--

$

--

$

--

$

--

$

--

 

           Over 24 months (2)

$

(3)

$

(4)

$

(19)

$

(26)

$

(38)

$

(20)

$

(1)

$

(59)

$

(85)

 

   Cumulative write-downs recognized

$

(2)

$

(2)

$

(38)

$

(42)

$

--

$

--

$

--

$

--

$

(42)

 

   Principal payments received during the period

$

--

$

--

$

1

$

1

$

--

$

--

$

--

$

--

$

1

 

 

 

 

December 31, 2010

 

 

 

With other-than-temporary
impairments recorded in earnings

 

Without other-than-temporary
impairments recorded in earnings

 

 

 

 

 

Ba

 

B

 

Caa or
lower

 

Total

 

Ba

 

B

 

Caa or
lower

 

Total

 

Total

 

Trust-level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Actual cumulative collateral losses incurred to date

 

0.6

%

3.2

%

2.5

%

2.3

%

1.1

%

0.3

%

0.4

%

0.9

%

n/a

 

   Projected additional collateral losses to be incurred

 

12.2

%

7.0

%

38.1

%

29.2

%

7.0

%

4.4

%

7.2

%

6.4

%

n/a

 

Class-level

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Average remaining credit enhancement

 

12.5

%

7.0

%

25.5

%

20.7

%

9.1

%

7.5

%

9.0

%

8.7

%

n/a

 

Security-specific

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Number of positions

 

2

 

1

 

5

 

8

 

14

 

5

 

2

 

21

 

29

 

   Par value

$

22

$

16

$

79

$

117

$

138

$

46

$

7

$

191

$

308

 

   Amortized cost

$

17

$

15

$

39

$

71

$

143

$

47

$

8

$

198

$

269

 

   Fair value

$

13

$

6

$

13

$

32

$

75

$

25

$

3

$

103

$

135

 

   Gross unrealized losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

           Total

$

(4)

$

(9)

$

(26)

$

(39)

$

(68)

$

(22)

$

(5)

$

(95)

$

(134)

 

           12-24 months

$

--

$

--

$

--

$

--

$

--

$

--

$

--

$

--

$

--

 

           Over 24 months (2)

$

(4)

$

(9)

$

(26)

$

(39)

$

(68)

$

(22)

$

(5)

$

(95)

$

(134)

 

   Cumulative write-downs recognized

$

(5)

$

(2)

$

(41)

$

(48)

$

--

$

--

$

--

$

--

$

(48)

 

   Principal payments received during the period

$

--

$

--

$

1

$

1

$

--

$

1

$

--

$

1

$

2

 

 


(1)  There were no actual cumulative realized principal losses on the below investment grade CMBS we own, as reported by the trust servicers, as of March 31, 2011.

 

80



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

(2)  As of March 31, 2011, $25 million of unrealized losses on securities with other-than-temporary impairments recognized in earnings and $58 million of unrealized losses on securities without other-than-temporary impairments recognized in earnings have been greater than or equal to 20% of those securities’ amortized cost for a period of more than 24 consecutive months.  As of December 31, 2010, $39 million of unrealized losses on securities with other-than-temporary impairments recognized in earnings and $93 million of unrealized losses on securities without other-than-temporary impairments recognized in earnings have been greater than or equal to 20% of those securities’ amortized cost for a period of more than 24 consecutive months.

 

The above tables include information about below investment grade CMBS with gross unrealized losses as of each period presented.  The par value and composition of securities included can vary significantly from period to period due to changes in variables such as credit ratings, principal payments, sales and purchases.

 

Our impairment evaluation for CMBS forecasts more severe assumptions than the trusts are actually experiencing.  We assume that all loans delinquent 60 days or more default and project default rates on otherwise performing loans. Projected loss severities are then applied against the resulting default rates, arriving at our projected additional collateral loss rates.  The projected additional collateral loss rates by vintage year of our CMBS portfolio range from a low of 1.9% for holdings with a vintage year of 2003 to a high of 12.0% for holdings with a vintage year of 2005.

 

As of March 31, 2011, our below investment grade CMBS with gross unrealized losses and without other-than-temporary impairments recorded in earnings had incurred actual cumulative collateral losses of 1.2%, and the projected additional collateral loss rate for these securities as of March 31, 2011 was 6.1%.  As the average remaining credit enhancement for these securities of 8.3% exceeds the projected additional collateral losses of 6.1%, these securities have not been impaired.

 

As of March 31, 2011, our below investment grade CMBS with gross unrealized losses and with other-than-temporary impairments recorded in earnings had incurred actual cumulative collateral losses of 4.0%.  The projected additional collateral loss rate for these securities as of March 31, 2011 was 47.6%.  As the average remaining credit enhancement for these securities of 21.1% is insufficient to withstand the projected additional collateral losses, we have recognized cumulative write-downs in earnings on these securities as reflected in the table above using our calculated recovery value at the time of impairment.  The current average recovery value of these securities as a percentage of par was 59.4% and exceeded these securities’ current average amortized cost as a percentage of par of 58.7%, which demonstrates our conclusion that the nature of the remaining unrealized loss on these securities is temporary and will reverse over time.  The comparison indicates that recovery value is in line with amortized cost as impairment write-downs were recorded in the reporting period based on a comprehensive evaluation of financial, economic and capital markets assumptions developed for this reporting period.

 

We believe the unrealized losses on our CMBS, including those over 24 months, result from the current risk premium on these securities, which should continue to reverse over the securities’ remaining lives, as demonstrated by improved valuations during 2010.  We expect to receive our estimated share of contractual principal and interest collections used to determine the securities’ recovery value.  As of March 31, 2011, we do not have the intent to sell and it is not more likely than not we will be required to sell these securities before the recovery of their amortized cost basis.  We believe that our valuation and impairment processes are comprehensive, employ the most current views about collateral and securitization trust financial positions, and demonstrate our recorded impairments and that the remaining unrealized losses on these positions are temporary.

 

Problem, restructured, or potential problem securities

 

We also monitor the quality of our fixed income and bank loan portfolios by categorizing certain investments as “problem,” “restructured,” or “potential problem.”  Problem fixed income securities and bank loans are in default with respect to principal or interest and/or are investments issued by companies that have gone into bankruptcy subsequent to our acquisition or loan.  Fixed income and bank loan investments are categorized as restructured when the debtor is experiencing financial difficulty and we grant a concession.  Potential problem fixed income or bank loan investments are current with respect to contractual principal and/or interest, but because of other facts and circumstances, we have concerns regarding the borrower’s ability to pay future principal and interest according to the original terms, which causes us to believe these investments may be classified as problem or restructured in the future.

 

81



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

The following table summarizes problem, restructured and potential problem fixed income securities and bank loans, which are reported in other investments.

 

($ in millions)

 

March 31, 2011

 

 

Par

 

Amortized

 

Amortized
cost as a
percent of

 

 

Fair

 

Fair value as a
percent of

 

Percent of
total fixed
income and
bank loan

 

 

 

value  (1)

 

cost  (1)

 

par value

 

 

value  (2)

 

 

par value

 

 

 portfolios

 

Restructured

99

83

 

83.8%

 

79

 

79.8%

 

 

0.1%

 

 

Problem

 

579

 

187

 

32.3

 

 

163

 

28.2

 

 

0.2

 

 

Potential problem

 

2,611

 

1,322

 

50.6

 

 

1,067

 

40.9

 

 

1.3

 

 

Total

3,289

1,592

 

48.4

 

1,309

 

39.8

 

 

1.6%

 

 

Cumulative write-downs recognized (3)

 

 

935

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

Par

 

Amortized

 

Amortized
cost as a
percent of

 

 

Fair

 

Fair value as a
percent of

 

Percent of
total fixed
income and
bank loan

 

 

 

value  (1)

 

cost  (1)

 

par value

 

 

value  (2)

 

 

par value

 

 

 portfolios

 

Restructured

99

83

 

83.8%

 

79

 

79.8%

 

 

0.1%

 

 

Problem

 

665

 

214

 

32.2

 

 

188

 

28.3

 

 

0.2

 

 

Potential problem

 

3,441

 

1,485

 

43.2

 

 

1,171

 

34.0

 

 

1.5

 

 

Total

4,205

1,782

 

42.4

 

1,438

 

34.2

 

 

1.8%

 

 

Cumulative write- downs recognized (3)

 

 

1,005

 

 

 

 

 

 

 

 

 

 

 

 


(1)      The difference between par value and amortized cost of $1.70 billion and $2.42 billion as of March 31, 2011 and December 31, 2010, respectively, is primarily attributable to write-downs and a zero-coupon security.

(2)      Bank loans are reflected at amortized cost.

(3)      Cumulative write-downs recognized only reflect impairment write-downs related to investments within the problem, potential problem and restructured categories.

 

As of March 31, 2011, amortized cost for the problem category was $187 million and comprised $77 million of Subprime, $58 million of municipal bonds, $37 million of Alt-A, $7 million of corporates (primarily privately placed), $5 million of CDO and $3 million of Consumer and other ABS.

 

As of March 31, 2011, amortized cost for the potential problem category was $1.32 billion and comprised $585 million of Subprime, $302 million of Alt-A, $172 million of Prime, $98 million of municipal bonds, $63 million of CMBS, $56 million of CDO, $40 million of corporates (primarily privately placed), $3 million of bank loans and $3 million of Consumer and other ABS.

 

82



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Net investment income    The following table presents net investment income.

 

($ in millions)

 

Three months ended
March 31,

 

 

 

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

 

 

Net investment income decreased 6.5% or $68 million in the first quarter of 2011 compared to the first quarter of 2010, primarily due to lower average investment balances due to decreased Allstate Financial contractholder funds and lower yields resulting from prior risk mitigation actions.  Net investment income was $1.01 billion and $998 million in the third and fourth quarter of 2010, respectively.

 

Realized capital gains and losses   The following table presents the components of realized capital gains and losses and the related tax effect.

 

($ in millions)

 

Three months ended
March 31,

 

 

 

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)

 

EMA limited partnership income

 

63

 

4

 

Realized capital gains and losses, pre-tax

 

96

 

(348)

 

Income tax (expense) benefit

 

(33)

 

122

 

Realized capital gains and losses, after-tax

63

(226)

 

 

Impairment write-downs are presented in the following table.

 

($ in millions)

 

Three months ended
March 31,

 

 

 

2011

 

2010

 

Fixed income securities

(86)

(180)

 

Equity securities

 

(20)

 

(6)

 

Mortgage loans

 

(6)

 

(13)

 

Limited partnership interests

 

(1)

 

(24)

 

Other investments

 

(1)

 

--

 

Impairment write-downs

(114)

(223)

 

 

Impairment write-downs for the three months ended March 31, 2011 were primarily driven by RMBS, which experienced deterioration in expected cash flows and investments with commercial real estate exposure, including CMBS, equity, mortgage loans and certain real estate related municipal bonds, which were impacted by lower real estate valuations or experienced deterioration in expected cash flows.  Impairment write-downs on below investment grade RMBS, CMBS and ABS for the three months ended March 31, 2011 were $46 million, $20 million and $2 million, respectively.

 

Impairment write-downs that were related primarily to securities subsequently disposed were $11 million for the three months ended March 31, 2011.  Of the remaining write-downs for the three months ended March 31, 2011,

 

83



 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

$58 million or 77.3% of the fixed income security write-downs related to impaired securities that were performing in line with anticipated or contractual cash flows but were written down primarily because of expected deterioration in the performance of the underlying collateral or our assessment of the probability of future default.  For these securities, as of March 31, 2011, there were either no defaults or defaults only impacted classes lower than our position in the capital structure.  $17 million of the fixed income security write-downs for the three months ended March 31, 2011 related to securities experiencing a significant departure from anticipated cash flows; however, we believe they retain economic value.

 

Equity securities were written down primarily due to the length of time and extent to which fair value was below cost, considering our assessment of the financial condition and near-term and long-term prospects of the issuer, including relevant industry conditions and trends.

 

Limited partnership impairment write-downs primarily related to Cost limited partnerships, which experienced declines in portfolio valuations and we could not assert the recovery period would be temporary.  To determine if an other-than-temporary impairment has occurred related to a Cost limited partnership, we evaluate whether an impairment indicator has occurred in the period that may have a significant adverse effect on the carrying value of the investment.  Impairment indicators may include: significantly reduced valuations of the investments held by the limited partnerships; actual recent cash flows received being significantly less than expected cash flows; reduced valuations based on financing completed at a lower value; completed sale of a material underlying investment at a price significantly lower than expected; or any other adverse events since the last financial statements received that might affect the fair value of the investee’s capital.

 

Change in intent write-downs are presented in the following table.

 

($ in millions)

 

Three months ended
March 31,

 

 

 

2011

 

2010

 

Fixed income securities

(69)

(26)

 

Mortgage loans

 

--

 

(6)

 

Change in intent write-downs

(69)

(32)

 

 

The change in intent write-downs in the three months ended March 31, 2011 were primarily a result of ongoing comprehensive reviews of our portfolios resulting in write-downs of individually identified investments, primarily lower yielding, floating rate RMBS and municipal bonds.

 

Sales generated $283 million of net realized gains for the three months ended March 31, 2011 primarily due to $65 million of net gains on the sale of our convertible bond portfolio, $81 million of net gains on sales of other corporate, foreign government and ABS securities and $142 million of net gains on sales of equity securities, partially offset by $25 million of net losses on sales of U.S. government securities.

 

Valuation and settlement of derivative instruments net realized capital losses totaling $67 million for the three months ended March 31, 2011 included $22 million of gains on the valuation of derivative instruments and $89 million of losses on the settlement of derivative instruments.

 

Net realized capital gains and losses from our risk management derivative programs are primarily driven by changes in risk-free interest rates, equity market valuations, volatility and credit spreads during a given period.  Net realized capital gains and losses from our income generation derivative programs are primarily driven by changes in the fair value of the reference entities or indices underlying the derivative instruments.

 

A changing interest rate environment will drive changes in our portfolio duration management which is established with an economic view of liabilities relative to a long-term investment portfolio view.  Tactical duration management is accomplished through both cash market transactions, sales and new purchases, and derivative activities that generate realized gains and losses.  As a component of our approach to managing portfolio duration, realized gains and losses on certain derivative instruments are most appropriately considered in conjunction with the unrealized gains and losses on the fixed income portfolio.  This approach mitigates the impacts of general interest rate changes to our overall financial condition.

 

As of March 31, 2011, our securities with embedded derivatives totaled $377 million, a decrease in fair value of $879 million from December 31, 2010, comprising net sales activity of $922 million primarily related to the sale of our convertible bond portfolio, realized capital gains on valuation of $8 million and unrealized net capital gains

 

84



 

Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

reported in OCI of $35 million for the host securities.  Unrealized net capital gains were further decreased by $4 million due to amortization of the host securities.  The change in fair value of embedded derivatives is bifurcated from the host securities, separately valued and reported in realized capital gains and losses, while the change in the difference between the fair value and the amortized cost of the host securities is reported in OCI.  Total fair value exceeded total amortized cost by $8 million as of March 31, 2011.  Valuation gains and losses for securities with embedded derivatives are converted into cash upon our election to sell these securities.  In the event the economic value of the embedded options is not realized, we will recover the par value if held to maturity unless the issuer of the security defaults.  In the event there are defaults by the referenced credit entities of the embedded credit default swap, our loss is limited to the par value of the combined fixed income security, net of applicable recoveries.  Total par value exceeded fair value by $109 million as of March 31, 2011.

 

The table below presents the realized capital gains and losses (pre-tax) on the valuation and settlement of derivative instruments shown by underlying exposure and derivative strategy.

 

($ in millions)

 

Three months ended March 31,

 

 

 

 

 

2011

 

 

2010

 

2011 Explanations

 

 

 

Valuation

 

 

Settlements

 

 

Total

 

 

Total

 

 

 

Risk management

Property-Liability

Portfolio duration management (1)

 

 

 

$

 

 

4     

 

 

 

$

 

 

(6)    

 

 

 

$

 

 

(2)    

 

 

 

$

 

 

(2)    

 

Interest rate swaps, municipal interest rate swaps and short interest rate futures are used to offset the effects of changing interest rates on a portion of the Property-Liability fixed income portfolio that is reported in unrealized net capital gains or losses in OCI.  The futures contracts are exchange traded, daily cash settled and can be exited at any time for minimal additional cost.  The 2011 losses on settlements are primarily due to decreases in interest rates over the life of interest rate swaps acquired in the prior year and are partially offset by valuation gains on interest rate swaps resulting from increasing interest rates in the current year.  The net realized capital loss is offset in unrealized net capital gains and losses in OCI to the extent it relates to changes in risk-free rates.

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate spike exposure (1)

 

13     

 

(62)    

 

(49)    

 

(122)    

 

Interest rate swaption contracts, with terms of less than one year, and exchange traded options on interest rate futures, with three to six month terms, provide an offset to declines in fixed income market values resulting from potential rising interest rates.  As of March 31, 2011, the remaining notional amount of our over-the-counter swaption positions totaled $1.50 billion, which expires by April 2011.  The 2011 losses on swaptions and options on interest rate futures contracts relates to a decrease in interest rates and a decline in volatility.  Volatility represents the measure of variation of average value over a specified time period.  If interest rates do not increase above the strike rate, the maximum loss on swaptions and options on interest rate futures is limited to the amount of the premium paid.

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging unrealized gains on equity securities (1)

 

2     

 

(21)    

 

(19)    

 

(39)    

 

Exchange traded put options and short equity index futures provide an offset to significant declines in our equity portfolio from equity market declines below a targeted level.  Options can expire, terminate early or the option can be exercised.  If the price level of the equity index does not fall below the put’s strike price, the maximum loss on purchased puts is limited to the amount of the premium paid.  The futures contracts are exchange traded, daily cash settled and can be exited at any time for minimal additional cost.  The 2011 losses on futures and options were primarily the result of an increase in the price levels of the equity indices and a decrease in volatility and were partially offset by unrealized net capital gains and losses of our equity portfolio to the degree they reflect the changes in price levels of the equity indices, which is reflected in OCI.

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

--     

 

(5)    

 

(5)    

 

13    

 

Currency forwards are used to protect our foreign bond and equity portfolios from changes in currency rates.  The 2011 losses on foreign currency contracts are primarily driven by the weakening of the U.S. currency versus the foreign currency.

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit risk reduction  (1)

 

(5)    

 

(2)    

 

(7)    

 

2     

 

Losses are the result of tightening credit spreads on referenced credit entities.

 

 

 

 

 

 

 

 

 

 

 

 

 

Allstate Financial

Duration gap management

 

 

(15)    

 

15     

 

--     

 

(43)    

 

Interest rate caps, floors, swaptions, swaps and interest rate futures are used by Allstate Financial to balance interest-rate sensitivities of its assets and liabilities.  The contracts settle based on differences between current market rates and a contractually specified fixed rate through expiration.  The contracts can be terminated and settled at any time with minimal additional cost.  The maximum loss on caps, floors and swaptions is limited to the amount of premiums paid.  The change in valuation reflects the changing value of expected future settlements from changing interest rates, which may vary over the period of the contracts.  The futures contracts are exchange traded, daily cash settled and can be exited at any time for minimal additional cost.  The 2011 valuation losses primarily relate to losses on interest rate swaps resulting from increasing interest rates in the current year and are offset by gains on settlements resulting from decreases in interest rates over the life of the interest rate swaps acquired prior to 2011.  The valuation losses and settlement gains are offset in unrealized capital gains and losses of our fixed income securities in OCI to the extent it relates to changes in risk-free rates.

 

 

85



 

Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

($ in millions)

 

Three months ended March 31,

 

 

 

 

 

2011

 

 

2010

 

2011 Explanations

 

 

 

Valuation

 

 

Settlements

 

 

Total

 

 

Total

 

 

 

Anticipatory hedging

 

--     

 

--     

 

--     

 

20     

 

Futures and interest rate swaps are used to protect investment spread from interest rate changes during mismatches in the timing of cash flows between product sales and the related investment activity.  The futures contracts are exchange traded, daily cash settled and can be exited at any time for minimal additional cost.  If the cash flow mismatches are such that a positive net investment position is being hedged, there is an offset for the related investment’s unrealized loss in OCI. 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging of interest rate exposure in annuity contracts

 

--     

 

--     

 

--     

 

(9)    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedge ineffectiveness

 

3     

 

(11)    

 

(8)    

 

--     

 

The hedge ineffectiveness of $8 million includes $28 million in realized capital losses on swaps that were offset by $20 million in realized capital gains on the hedged risk.

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

--     

 

--     

 

--     

 

4     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit risk reduction  (1)

 

(1)    

 

(1)    

 

(2)    

 

--     

 

Losses are the result of tightening credit spreads on referenced credit entities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Risk management

 

$

1     

 

$

(93)    

 

$

(92)    

 

$

(176)    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income generation

 

 

 

 

 

 

 

 

 

 

 

Asset replication – credit exposure

 

 

 

 

 

 

 

 

 

The 2011 changes in valuation on the Property-Liability segment are due to the tightening of credit spreads on referenced credit entities.  The gains are primarily on single name credit default swaps (“CDS”).  The 2011 changes in valuation on the Allstate Financial segment are due to tightening credit spreads on referenced credit entities.  The gains are primarily on first-to-default CDS and single name CDS.  The changes in valuation would only be converted to cash upon disposition, which can be done at any time, or if the credit event specified in the contract occurs.  For further discussion on CDS, see Note 6 of the condensed consolidated financial statements.

 

Property-Liability

 

$

3     

 

$

1     

 

$

4     

 

$

6     

 

 

Allstate Financial

 

10     

 

3     

 

13     

 

(2)    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Income generation

 

$

13     

 

$

4     

 

$

17     

 

$

4     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounting

 

 

 

 

 

 

 

 

 

 

 

Equity indexed notes –
Allstate Financial

 

 

$

 

3     

 

 

$

 

--     

 

 

$

 

3     

 

 

$

 

(4)    

 

Equity-indexed notes are fixed income securities that contain embedded options.  The changes in valuation of the embedded equity indexed call options are reported in realized capital gains and losses.  The results generally track the performance of underlying equity indices.  Valuation gains and losses are converted into cash upon sale or maturity.  In the event the economic value of the options is not realized, we will recover the par value of the host fixed income security if held to maturity unless the issuer of the note defaults.  Par value exceeded fair value by $13 million as of March 31, 2011.  Equity-indexed notes are subject to our comprehensive portfolio monitoring and watchlist processes to identify and evaluate when the carrying value may be other-than-temporarily impaired.  The following table compares the March 31, 2011 and December 31, 2010 holdings, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

March 31,
2011

 

Change in
fair value

 

Change due
to net sale
activity

 

December 31,
2010

 

 

 

Par value

 

$

300     

 

$

--     

 

$

--     

 

$

300     

 

 

 

Amortized cost of  host contract

 

$

227     

 

$

3     

 

$

--     

 

$

224     

 

 

 

Fair value of equity- indexed call option

 

 

50     

 

 

3     

 

 

--     

 

 

47     

 

 

 

Total amortized cost

 

$

277     

 

$

6     

 

$

--     

 

$

271     

 

 

 

Total fair value

 

$

287     

 

$

8     

 

$

--     

 

$

279     

 

 

 

Unrealized gain/loss

 

$

10     

 

$

2     

 

$

--     

 

$

8     

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion options in fixed income securities

 

 

 

 

 

 

 

 

 

We sold our convertible bond portfolio during the first quarter of 2011.  As of March 31, 2011, the fair value of our holdings was $5 million. 

 

Property-Liability

 

9     

 

--     

 

9     

 

(8)    

 

 

 

Allstate Financial

 

 

(5)    

 

 

--     

 

 

(5)    

 

 

(1)    

 

 

 

Total

 

4     

 

--     

 

4     

 

(9)    

 

 

 

 

86



 

Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

($ in millions)

 

Three months ended March 31,

 

 

 

 

 

2011

 

 

2010

 

2011 Explanations

 

 

 

Valuation

 

 

Settlements

 

 

Total

 

 

Total

 

 

 

CDS in fixed income securities

 

 

 

 

 

 

 

 

 

 

 

Allstate Financial

 

1     

 

--     

 

1     

 

--     

 

Synthetic CDO’s are fixed income securities that contain embedded CDS.  Changes in valuation of the embedded credit default swap are reported in realized capital gains and losses.  The embedded credit default swap increases or decreases in value as referenced credit entities’ credit spreads tighten or widen, respectively.  Credit events, changes in interest rates, correlations of the referenced entities and assumed recovery rates are among some of the other factors affecting the value of the embedded credit default swap.  In the event a referenced credit entity experiences a credit event, our loss is limited to the par value of the fixed income security.  Losses on credit events are net of recovery.  Par value exceeded fair value by $96 million as of March 31, 2011.  Synthetic CDO’s are subject to our comprehensive portfolio monitoring and watchlist processes to identify and evaluate when the carrying value may be other-than-temporarily impaired.  The following table compares the March 31, 2011 and December 31, 2010 holdings, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

March 31, 
2011

 

Change in
fair value

 

Change due
to net sale
activity

 

December 31,
2010

 

 

 

Par value

 

$

181     

 

$

--      

 

$

--      

 

$

181     

 

 

 

Amortized cost of host contract

 

$

174     

 

$

(3)    

 

$

--      

 

$

177     

 

 

 

Fair value of credit default swap

 

 

(87)    

 

 

1     

 

 

--      

 

 

(88)    

 

 

 

Total amortized cost

 

$

87     

 

$

(2)    

 

$

--      

 

$

89     

 

 

 

Total fair value

 

$

85     

 

$

8     

 

$

--      

 

$

77     

 

 

 

Unrealized gain/loss

 

$

(2)    

 

$

10     

 

$

--      

 

$

(12)    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Accounting

 

$

8     

 

$

--     

 

$

8     

 

$

(13)    

 

 

 

Total

 

$

22     

 

$

(89)    

 

$

(67)    

 

$

(185)    

 

 

 

Total Property-Liability

 

$

26     

 

$

(95)    

 

$

(69)    

 

$

(150)    

 

 

 

Total Allstate Financial

 

(4)    

 

6     

 

2     

 

(35)    

 

 

 

Total

 

$

22     

 

$

(89)    

 

$

(67)    

 

$

(185)    

 

 

 

 

_______________

 

(1)  A portion of the risk mitigation (“macro hedge”) program is contained within this line item.

 

Substantially all of the macro hedge program was terminated during the first quarter of 2011.  Terminated derivatives included certain over-the-counter interest rate swaptions, purchased CDS, exchange traded options on interest rate futures, equity options and interest rate futures.  We continue to hold $425 million notional of municipal interest rate swaps and $1.50 billion notional of over-the-counter swaptions that are out of the money and expire in April 2011.  The macro hedge program resulted in $69 million of net realized capital losses in the first quarter of 2011 consisting of $49 million loss in interest rate spike exposure, $15 million loss in hedging unrealized gains on equity securities, $4 million loss in portfolio duration management, which includes $6 million of loss on the open municipal interest rate swaps, and $1 million loss in credit risk reduction.  Of the $69 million of net realized capital losses, $62 million of net realized capital losses related to the derivatives that were terminated during the first quarter of 2011.

 

GOODWILL

 

Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired.  The goodwill balances were $456 million and $418 million as of both March 31, 2011 and December 31, 2010 for the Allstate Protection segment and the Allstate Financial segment, respectively.  The Company’s reporting units are equivalent to its reporting segments, Allstate Protection and Allstate Financial.  Goodwill is allocated to reporting units based on which unit is expected to benefit from the synergies of the business combination.  The Company annually evaluates goodwill for impairment using a trading multiple analysis, which is a widely accepted valuation technique to estimate the fair value of its reporting units.  The trading multiple analysis takes into consideration the quoted market price of the Company’s outstanding common stock and includes a control premium, derived from historical insurance industry acquisition activity, in determining the estimated fair value of the consolidated entity before allocating that fair value to individual reporting units.  If conditions warrant, a discounted cash flow analysis may also be used.  The Company also reviews its goodwill for impairment whenever events or changes in circumstances indicate that it is more likely than not that the carrying amount of goodwill may exceed its implied fair value.  Goodwill impairment evaluations indicated no impairment as of March 31, 2011 or December 31, 2010.  No reporting unit was at risk of having its carrying value including goodwill exceed its fair value as of the most recent annual goodwill impairment test; and there were no subsequent events or other changes in circumstances indicating that it is more likely than not that the fair value of the reporting units was below their carrying amounts.

 

87



 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

CAPITAL RESOURCES AND LIQUIDITY HIGHLIGHTS

 

·                   Shareholders’ equity as of March 31, 2011 was $19.31 billion, an increase of 1.6% from $19.02 billion as of December 31, 2010.

·                   On January 3, 2011 and April 1, 2011, we paid a quarterly shareholder dividend of $0.20 and $0.21, respectively.

·                   During the first quarter of 2011, we repurchased 9.5 million common shares for $300 million.  As of March 31, 2011, our current $1.00 billion share repurchase program had $540 million remaining and is expected to be completed by March 31, 2012.

 

CAPITAL RESOURCES AND LIQUIDITY

 

Capital resources consist of shareholders’ equity and debt, representing funds deployed or available to be deployed to support business operations or for general corporate purposes.  The following table summarizes our capital resources.

 

($ in millions)

 

March 31,
2011

 

December 31,
2010

Common stock, retained income and other shareholders’ equity items

$  

19,327

 

$  

19,200

 

Accumulated other comprehensive loss

 

(15

)

 

(184

)

Total shareholders’ equity

 

19,312

 

 

19,016

 

Debt

 

5,908

 

 

5,908

 

Total capital resources

$  

25,220

 

$  

24,924

 

 

 

 

 

 

 

 

Ratio of debt to shareholders’ equity

 

30.6%

 

 

31.1%

 

Ratio of debt to capital resources

 

23.4%

 

 

23.7%

 

 

Shareholders’ equity increased in the first three months of 2011, primarily due to net income and increased unrealized net capital gains on investments, partially offset by share repurchases and dividends paid to shareholders.

 

Debt Except for $42 million in long-term debt related to the synthetic leases scheduled to mature in 2011, we do not have any required principal payments until 2012 when $350 million of 6.125% Senior Notes are due.

 

Share repurchases During the first quarter of 2011, we repurchased 9.5 million common shares for $300 million.  As of March 31, 2011, $540 million remained on our current $1.00 billion share repurchase program that we commenced in November 2010, and is expected to be completed by March 31, 2012.

 

Financial ratings and strength  Our ratings are influenced by many factors including our operating and financial performance, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage (i.e., debt), exposure to risks such as catastrophes and the current level of operating leverage.  There have been no changes to our debt, commercial paper and insurance financial strength ratings from Moody’s, S&P and A.M. Best since December 31, 2010.

 

Allstate Life Insurance Company (“ALIC”), AIC and The Allstate Corporation are party to the Amended and Restated Intercompany Liquidity Agreement (“Liquidity Agreement”) which allows for short-term advances of funds to be made between parties for liquidity and other general corporate purposes.  The Liquidity Agreement does not establish a commitment to advance funds on the part of any party.  ALIC and AIC each serve as a lender and borrower and the Corporation serves only as a lender.  AIC also has a capital support agreement with ALIC.  Under the capital support agreement, AIC is committed to provide capital to ALIC to maintain an adequate capital level.  The maximum amount of potential funding under each of these agreements is $1.00 billion.

 

In addition to the Liquidity Agreement, the Corporation also has an intercompany loan agreement with certain of its subsidiaries, which include, but are not limited to, AIC and ALIC.  The amount of intercompany loans available to the Corporation’s subsidiaries is at the discretion of the Corporation.  The maximum amount of loans the Corporation will have outstanding to all its eligible subsidiaries at any given point in time is limited to $1.00 billion.  The Corporation may use commercial paper borrowings, bank lines of credit and repurchase agreements to fund intercompany borrowings.

 

Liquidity sources and uses  We actively manage our financial position and liquidity levels in light of changing market, economic, and business conditions.  Liquidity is managed at both the entity and enterprise level across the

 

88



 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Company, and is assessed on both base and stressed level liquidity needs.  We believe we have sufficient liquidity to meet these needs.  Additionally, we have existing intercompany agreements in place that facilitate liquidity management across the Company to enhance flexibility.

 

Parent company capital capacity   At the parent holding company level, we have deployable invested assets totaling $3.65 billion as of March 31, 2011.  These assets include investments that are generally saleable within one quarter totaling $3.21 billion.  This provides funds for the parent company’s relatively low fixed charges.

 

In the first quarter of 2011, dividends totaling $200 million were paid by AIC to its parent, the Corporation.

 

The Corporation has access to additional borrowing to support liquidity as follows:

 

·                A commercial paper facility with a borrowing limit of $1.00 billion to cover short-term cash needs.  As of March 31, 2011, there were no balances outstanding and therefore the remaining borrowing capacity was $1.00 billion; however, the outstanding balance can fluctuate daily.

·                   Our primary credit facility is available for short-term liquidity requirements and backs our commercial paper facility.  Our $1.00 billion unsecured revolving credit facility has an initial term of five years expiring in 2012 with two optional one-year extensions that can be exercised at the end of any of the remaining anniversary years of the facility upon approval of existing or replacement lenders providing more than two-thirds of the commitments to lend.  The program is fully subscribed among 11 lenders with the largest commitment being $185 million.  The commitments of the lenders are several and no lender is responsible for any other lender’s commitment if such lender fails to make a loan under the facility.  This facility contains an increase provision that would allow up to an additional $500 million of borrowing provided the increased portion could be fully syndicated at a later date among existing or new lenders.  This facility has a financial covenant requiring that we not exceed a 37.5% debt to capital resources ratio as defined in the agreement.  This ratio as of March 31, 2011 was 19.2%.  Although the right to borrow under the facility is not subject to a minimum rating requirement, the costs of maintaining the facility and borrowing under it are based on the ratings of our senior, unsecured, nonguaranteed long-term debt.  There were no borrowings under the credit facility during the first three months of 2011.  The total amount outstanding at any point in time under the combination of the commercial paper program and the credit facility cannot exceed the amount that can be borrowed under the credit facility.

·                   A universal shelf registration statement was filed with the Securities and Exchange Commission on May 8, 2009.  We can use this shelf registration to issue an unspecified amount of debt securities, common stock (including 376 million shares of treasury stock as of March 31, 2011), preferred stock, depositary shares, warrants, stock purchase contracts, stock purchase units and securities of trust subsidiaries.  The specific terms of any securities we issue under this registration statement will be provided in the applicable prospectus supplements.

 

Liquidity exposure   Contractholder funds as of March 31, 2011 were $46.83 billion.  The following table summarizes contractholder funds by their contractual withdrawal provisions as of March 31, 2011.

 

($ in millions)

 

 

 

Percent
to total

 

Not subject to discretionary withdrawal

$  

6,489

 

13.9%

 

Subject to discretionary withdrawal with adjustments:

 

 

 

 

 

Specified surrender charges (1)

 

19,127

 

40.8

 

Market value adjustments (2)

 

7,534

 

16.1

 

Subject to discretionary withdrawal without adjustments (3)

 

13,684

 

29.2

 

Total contractholder funds (4)

$  

46,834

 

100.0%

 

______________

 

(1)

Includes $9.54 billion of liabilities with a contractual surrender charge of less than 5% of the account balance.

 

(2)

$6.28 billion of the contracts with market value adjusted surrenders have a 30-45 day period at the end of their initial and subsequent interest rate guarantee periods (which are typically 5 or 6 years) during which there is no surrender charge or market value adjustment.

 

(3)

68% of these contracts have a minimum interest crediting rate guarantee of 3% or higher.

 

(4)

Includes $1.16 billion of contractholder funds on variable annuities reinsured to The Prudential Insurance Company of America, a subsidiary of Prudential Financial Inc., in 2006.

 

 

While we are able to quantify remaining scheduled maturities for our institutional products, anticipating retail product surrenders is less precise.  Retail life and annuity products may be surrendered by customers for a variety of

 

89



 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

reasons.  Reasons unique to individual customers include a current or unexpected need for cash or a change in life insurance coverage needs.  Other key factors that may impact the likelihood of customer surrender include the level of the contract surrender charge, the length of time the contract has been in force, distribution channel, market interest rates, equity market conditions and potential tax implications.  In addition, the propensity for retail life insurance policies to lapse is lower than it is for fixed annuities because of the need for the insured to be re-underwritten upon policy replacement.  Surrenders and partial withdrawals for our retail annuities increased 2.5% in the first three months of 2011 compared to the same period of 2010.  The annualized surrender and partial withdrawal rate on deferred annuities, interest-sensitive life insurance and Allstate Bank products, based on the beginning of year contractholder funds, was 12.8% and 11.7% for the first three months of 2011 and 2010, respectively.  Allstate Financial strives to promptly pay customers who request cash surrenders; however, statutory regulations generally provide up to six months in most states to fulfill surrender requests.

 

Our institutional products are primarily funding agreements sold to unaffiliated trusts used to back medium-term notes.  As of March 31, 2011, total institutional products outstanding were $2.15 billion.  The following table presents the remaining scheduled maturities for our institutional products outstanding as of March 31, 2011.

 

($ in millions) 

 

 

 

 

 

 

 

2011

$   

275

 

2012

 

40

 

2013

 

1,750

 

2016

 

85

 

 

$   

2,150

 

 

Our asset-liability management practices limit the differences between the cash flows generated by our investment portfolio and the expected cash flow requirements of our life insurance, annuity and institutional product obligations.

 

The following table summarizes consolidated cash flow activities by business segment for the first three months ended March 31.

 

($ in millions)

 

Property-Liability  (1)

 

Allstate Financial  (1)

 

Corporate
and Other 
(1)

 

Consolidated

 

 

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

$  

315

$  

(30)

$  

385

$  

925

$  

26

$  

69

$  

726

$  

964

 

Investing activities

 

(211)

 

89

 

1,318

 

844

 

178

 

30

 

1,285

 

963

 

Financing activities

 

(3)

 

(2)

 

(1,526)

 

(1,735)

 

(403)

 

(98)

 

(1,932)

 

(1,835)

 

Net increase in consolidated cash

 

 

 

 

 

 

 

 

 

 

 

 

$  

79

$  

92

 

______________

 

(1)

Business unit cash flows reflect the elimination of intersegment dividends, contributions and borrowings.

 

Property-Liability   Cash provided by operating activities in the first three months of 2011 compared to cash used in operating activities in the first three months of 2010 was primarily due to lower income tax payments.

 

Cash used in investing activities in the first three months of 2011 compared to cash provided by investing activities in the first three months of 2010 was primarily due to higher net purchases of fixed income and equity securities, partially offset by higher net sales of fixed income and equity securities and net change in short-term investments.

 

Allstate Financial   Lower cash provided by operating cash flows in the first three months of 2011 compared to the first three months of 2010 was primarily due to income tax refunds in the first quarter of 2010.

 

Higher cash provided by investing activities in the first three months of 2011 compared to the first three months of 2010 were impacted by higher net sales of fixed income securities used to fund reductions in contractholder fund liabilities, partially offset by investment collections.

 

Lower cash used in financing activities in the first three months of 2011 compared to the first three months of 2010 were primarily due to decreased maturities and retirements of institutional products, partially offset by lower deposits on fixed annuities.

 

90



 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

 

Corporate and Other   Fluctuations in the Corporate and Other operating cash flows were primarily due to the timing of intercompany settlements.  Investing activities primarily relate to investments in the portfolios of Kennett Capital Holdings, LLC.  Financing cash flows of the Corporate and Other segment reflect actions such as fluctuations in short-term debt, repayment of debt, proceeds from the issuance of debt, dividends to shareholders of The Allstate Corporation and share repurchases; therefore, financing cash flows are affected when we increase or decrease the level of these activities.

 

91



 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.  We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based upon this evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission under the Securities Exchange Act is made known to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting.  During the fiscal quarter ended March 31, 2011, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

92



 

PART II.  OTHER INFORMATION

 

Item 1.    Legal Proceedings

 

Information required for Part II, Item 1 is incorporated by reference to the discussion under the heading “Regulation and Compliance” and under the heading “Legal and regulatory proceedings and inquiries” in Note 10 of the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

 

Item 1A. Risk Factors

 

This document contains “forward-looking statements” that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty.  These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.  We assume no obligation to update any forward-looking statements as a result of new information or future events or developments.

 

These forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like “plans,” “seeks,” “expects,” “will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets” and other words with similar meanings.  These statements may address, among other things, our strategy for growth, catastrophe exposure management, product development, investment results, regulatory approvals, market position, expenses, financial results, litigation and reserves.  We believe that these statements are based on reasonable estimates, assumptions and plans.  However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements.  Risk factors which could cause actual results to differ materially from those suggested by such forward-looking statements include but are not limited to those discussed or identified in this document, in our public filings with the Securities and Exchange Commission, and those incorporated by reference in Part I, Item 1A of The Allstate Corporation Annual Report on Form 10-K for 2010.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

 

 

 

Total number of
shares
(or units)

 

Average price
paid per share

 

Total number
of shares
(or units) purchased as
part of publicly
announced plans or

 

Maximum number
(or approximate dollar
value) of shares
(or units) that may yet
be purchased under the

 

Period

 

 

purchased  (1)

 

(or unit)

 

 

programs  (2)

 

 

plans or programs  (3)

 

January 1, 2011 -
January 31, 2011

 

3,169,057

$  

31.3082

 

3,169,057

$  

741 million

 

February 1, 2011 -
February 28, 2011

 

3,303,537

$  

31.4474

 

3,168,600

$  

641 million

 

March 1, 2011 -
March 31, 2011

 

3,212,070

$  

31.5499

 

3,211,369

$  

540 million

 

Total

 

9,684,664

$  

31.4359

 

9,549,026

 

 

 

_____________

 

(1)   In accordance with the terms of its equity compensation plans, Allstate acquired the following shares in connection with stock option exercises by employees and/or directors.  The stock was received in payment of the exercise price of the options and in satisfaction of withholding taxes due upon exercise or vesting.

January:  none

February:  134,937

March:  701

(2)   Repurchases under our programs are, from time to time, executed under the terms of a pre-set trading plan meeting the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934.

(3)    On November 9, 2010, we announced the approval of a new share repurchase program for $1.00 billion.  This program is expected to be completed by March 31, 2012.

 

93



 

Item 6.  Exhibits

 

(a)           Exhibits

 

An Exhibit Index has been filed as part of this report on page E-1.

 

94



 

SIGNATURE

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

The Allstate Corporation

 

(Registrant)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 27, 2011

By

   /s/ Samuel H. Pilch

 

 

Samuel H. Pilch

 

 

(chief accounting officer and duly

 

 

authorized officer of Registrant)

 

95



 

Exhibit No.

 

Description

 

 

 

4

 

Registrant hereby agrees to furnish the Commission, upon request, with the instruments defining the rights of holders of each issue of long-term debt of the Registrant and its consolidated subsidiaries.

 

 

 

10.1

 

Offer Letter dated November 11, 2009 to Joseph P. Lacher, Jr.

 

 

 

10.2

 

Offer Letter dated September 29, 2009 to Matthew E. Winter.

 

 

 

10.3

 

Form of Option Award Agreement for awards granted on or after February 22, 2011 under The Allstate Corporation 2009 Equity Incentive Plan.

 

 

 

10.4

 

Form of Restricted Stock Unit Award Agreement for awards granted on or after February 22, 2011 under The Allstate Corporation 2009 Equity Incentive Plan.

 

 

 

15

 

Acknowledgment of awareness from Deloitte & Touche LLP, dated April 27, 2011, concerning unaudited interim financial information.

 

 

 

31 (i)

 

Rule 13a-14(a) Certification of Principal Executive Officer

 

 

 

31 (i)

 

Rule 13a-14(a) Certification of Principal Financial Officer

 

 

 

32

 

Section 1350 Certifications

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

 

E-1


 

Exhibit 10.1

 

 

November 11, 2009

 

 

 

 

 

Joseph P. Lacher, Jr.

95 Drumlin Road

South Glastonbury, CT  06073

 

 

Dear Joe:

 

We are excited about the prospect of you joining the Allstate team. The purpose of this letter is to officially extend to you an offer to join Allstate as President, Protection effective November 30, 2009. The terms and conditions of this offer are briefly outlined below. We are pleased to offer you this compensation and benefits package, the most important elements of which are outlined below.

 

Base Salary

 

Your annualized base salary will be $650,000 ($54,166.67 per month) and will be paid bi-weekly. Subsequent increases in base salary, generally awarded on an annual basis, will be dependent on your performance and the performance of the company.

 

Annual Incentive Compensation

 

In addition to your base salary, you will be eligible to receive incentive compensation under our annual incentive program. In this program, you will be eligible for an annual cash incentive award targeted at 125% of your base salary. Individual incentive awards are designed to reward results for corporate and personal performance. For 2009, your incentive award will be guaranteed at the target award amount pro-rated based on your hire date and payable in cash by March 15, 2010.

 

Additionally, subject to the terms and conditions of The Allstate Corporation 2009 Equity Incentive Plan, you will be eligible for annual awards of equity equal to 350% of your base salary.  A 350% award value will be guaranteed to you for your 2010 grant subject to the approval of the Compensation & Succession Committee in February 2010. Historically, equity has been granted in the form of stock options and restricted stock units. Using a valuation formula, options are generally awarded annually at the fair market value of the common stock on the date of grant with the approval of the Board. The options generally have a ten year term and vest in equal installments over a four year period starting on the first anniversary date. The restricted stock units, which are based on market value at the time of grant, generally convert in one installment four years from the grant date and pay dividend equivalents in cash.  Management is provided with the opportunity to apply discretion to the annual award amount.

 

 

1

2775 Sanders Rd A1 North Plaza · Northbrook, IL 60062 · 847-402-8209 · ssinc@allstate.com

 

 



 

Exhibit 10.1

 

 

Signing Bonus - Equity

 

 

 

In connection with your hire, you will receive a one time equity signing bonus of $1,500,000 to be granted 65% in stock options and 35% in restricted stock units. The stock options and the restricted stock units will be granted to you on the first business day of the month following your date of hire. The stock options have a ten-year term and vest in four equal installments starting on the first anniversary of the date of grant. The option exercise price will be the closing price of a share of Allstate stock on the date of grant. The restricted stock units convert in two equal installments two and four years respectively from the grant date and pay dividend equivalents in cash.

 

Relocation Assistance

 

You will be eligible for a relocation package if you are employed with Allstate through January 1, 2010. A lump sum payment to cover such items as travel, lodging and meals for home finding, temporary living, and return trips; as well as relocation allowance to help with some of the expenses not covered under the relocation policy will be paid no later than March 15, 2011. You will be eligible for other relocation assistance including certain benefits related to home sale assistance, finding and purchasing a home in the Chicago area, and packing and moving your household goods, pursuant to the terms of the policy that is in effect. An Allstate’s relocation representative will provide complete details on the relocation benefits available to you. During this transition period, you will be responsible for any expenses associated with your living arrangements in Northbrook and your commute to and from your Connecticut home.

 

Vacation and Holidays

 

Allstate provides a Paid Time Off (PTO) bank to employees. Starting in 2010, you will be eligible for up to 25 days of PTO on an annual basis.  The PTO bank can be used for vacation, personal matters, family illness and illness not covered by the short term disability (STD) plan and are intended to provide you with additional flexibility in planning your professional and personal life.  In addition to PTO days, you will receive company holidays and miscellaneous time off for events such as a funerals and jury duty. For 2009, your PTO bank of 19 days will be pro-rated based upon your date of hire.

 

Executive Benefits and Perquisites

 

Benefits:

 

You will have the opportunity to participate, subject to the express terms and conditions of the respective plans, in a comprehensive package of benefit plans.  The following benefit plans are offered:  Medical, Dental, Vision, Employee Life Insurance, Dependant Life Insurance, Accidental Death and Dismemberment Insurance, Long Term Disability Insurance, Health Care

 

2

2775 Sanders Rd A1 North Plaza · Northbrook, IL 60062 · 847-402-8209 · ssinc@allstate.com

 

 



 

Exhibit 10.1

 

 

Flexible Spending Account, Dependent Care Flexible spending Account, Purchase of PTO days, Group Critical Illness, and a Group Legal Plan.

 

 

 

You are eligible to participate in the medical plan on your first day of employment.  Coverage under the medical plan is not subject to pre-existing limitations.

 

Accompanying this letter is an overview of these programs.

 

Car Allowance, Tax Preparation, and Executive Physicals:

 

As a Senior Management Team member, you will be entitled to an annual car allowance of $13,560 ($1,130 per month). Additionally, other perquisites you are entitled to will include financial planning services of up to $10,000 per year, personal tax preparation services and executive physicals through the Allstate Executive Health Management program. Change-in-control benefits are provided pursuant to an agreement to be presented to you upon hire.

 

Retirement Plan and 401(k):

 

You will also have the opportunity to participate in the Allstate Retirement Plan and the Allstate 401(k) Savings Plan subject to the Plan’s terms and conditions.  The Allstate Retirement Plan is a pension plan that is funded by Allstate and provides benefits at your retirement based on compensation and years of service with Allstate under a cash balance formula.

 

The Allstate 401(k) Savings Plan allows eligible employees to make pre- and after-tax deposits to their 401(k) savings accounts.  Participants may be eligible for a company contribution on pre-tax deposits of up to 5% of eligible compensation, based on a two-tiered formula.  The minimum amount the company will contribute annually is 50 cents for each dollar on the first three percent of eligible pre-tax compensation contributed, and 25 cents on the dollar on the next two percent of eligible pre-tax compensation contributed.  The company contributions are made in the form of Allstate stock and the amount of the matching award is based on our Customer Loyalty Index.

 

An overview of many of the benefits provided by our total rewards program is included for your review. Additionally, you can visit our career website at www.allstate.jobs .

All of our compensation and benefit programs are subject to future modifications as appropriate to help us continue to be competitive in the marketplace.

 

Joe, we believe you will make a critical contribution to Allstate and enjoy a challenging and rewarding career in the process. We want you to be a part of our success and share in the rewards.

 

3

2775 Sanders Rd A1 North Plaza · Northbrook, IL 60062 · 847-402-8209 · ssinc@allstate.com

 

 



 

Exhibit 10.1

 

 

We are delighted to extend this offer to you, and we look forward to a favorable reply. To confirm your acceptance of this offer of employment with Allstate subject to its policies, please sign and date this letter and return it in the FedEx envelope provided.

 

 

 

Sincerely,

 

/s/ Suzanne Sinclair

 

Suzanne Sinclair

Director Allstate Talent Acquisition

 

 

 

ACCEPTED AND AGREED:

 

Name:                       Joseph P. Lacher, Jr.

 

Signature:                  /s/ Joseph P. Lacher, Jr.

 

Date:                         11/13/09

 

 

 

4

2775 Sanders Rd A1 North Plaza · Northbrook, IL 60062 · 847-402-8209 · ssinc@allstate.com

 

 


 

Exhibit 10.2

 

Allstate.

You’re in good hands.

 

September 29, 2009

 

 

Matthew E. Winter

9 Farnham Park
Drive Houston, TX
77024

 

 

Dear Matt:

 

We are excited about the prospect of you joining the Allstate team. The purpose of this letter is to officially extend to you an offer to join Allstate as President, Allstate Financial. The terms and conditions of this offer are briefly outlined below and are contingent upon the successful completion of your background check. We are pleased to offer you an excellent compensation and benefits package, the most important elements of which are outlined below.

 

Base Salary

 

Your annualized base salary will be $600,000 ($50,000 per month) and will be paid bi-weekly. Subsequent increases in base salary, generally awarded on an annual basis, will be dependent on your performance and the performance of the company.

 

Annual Incentive Compensation

 

In addition to your base salary, you will be eligible to receive incentive compensation under our annual incentive program. In this program, you will be eligible for an annual cash incentive award targeted at 125% of your base salary. Individual incentive awards are designed to reward results for corporate and personal performance. For 2009, your incentive award will be guaranteed at the target award amount pro-rated based on your hire date and payable in cash by March 15, 2010.

 

Additionally, subject to the terms and conditions of The Allstate Corporation 2009 Equity Incentive Plan, you will be eligible for annual awards of equity equal to 350% of your base salary. A 350% award value is guaranteed for your 2010 grant subject to the approval of the Compensation & Succession Committee in February 2010. Historically, equity has been granted in the form of stock options and restricted stock units. Using a valuation formula, options are generally awarded annually at the fair market value of the common stock on the date of grant with the approval of the Board. The options generally have a ten year term and vest in equal installments over a four year period starting on the first anniversary date. The restricted stock units, which are based on market value at the time of grant, generally convert in one installment four years from the grant date and pay dividend equivalents in cash. Management is provided with the opportunity to apply discretion to the annual award amount.

 

Signing Bonus - Cash

You will be eligible to receive a one-time signing bonus of $700,000, less applicable withholdings, payable on the pay period closest to 30 days after your date of hire. In the event that you voluntarily terminate your employment with Allstate within 24 months of your date of hire, you agree to reimburse Allstate within 30 days of the date of your termination, the entire $700,000 cash signing bonus. Allstate may take such actions as are necessary to collect such amounts, including but not limited to retaining any amounts otherwise payable to you at the time of your termination, to the extent permitted by applicable law.

 

Allstate Insurance Company

2775 Sanders Road, Northbrook, IL 60062 847-402-0683 mprea@allstate.com

 



 

Matt Winter Offer Letter

September 29, 2009

Confidential

 

 

 

Signing Bonus - Equity

 

In connection with your hire, you will receive a one time equity signing bonus equal to $500,000 to be granted 65% in stock options and 35% in restricted stock units. The stock options and the restricted stock units will be granted to you on the first business day of the month following your date of hire. The stock options have a ten-year term and vest in four equal installments starting on the first anniversary of the date of grant. The option exercise price will be the closing price of a share of Allstate stock on the date of grant. The restricted stock units convert in one installment four years from the grant date and pay dividend equivalents in cash.

 

Relocation Assistance

 

You will be eligible for a relocation package if you are employed with Allstate through January 1, 2011. A lump sum payment to cover such items as travel, lodging and meals for home finding, temporary living, and return trips, as well as a relocation allowance to help with some of the expenses not covered under the relocation policy will be paid no later than March 15, 2012. You will be eligible for other relocation assistance including certain benefits related to home sale assistance, finding and purchasing a home in the Chicago area, and the packing and moving of your household goods, pursuant to the term of the policy then in effect. An Allstate relocation representative will contact you to provide complete details on the relocation benefits available to you and who will provide relocation assistance. During the period you are maintaining your home in Texas, you will be responsible for any expenses associated with your living arrangements in Northbrook and your commute to and from Texas.

 

Vacation and Holidays

 

Allstate provides a Paid Time Off (PTO) bank to employees. Starting in 2010, you will be eligible for up to 25 days of PTO on an annual basis. The PTO bank can be used for vacation, personal matters, family illness and illness not covered by the short term disability (STD) plan and is intended to provide you with additional flexibility in planning your professional and personal life. In addition to PTO days, you will receive Company holidays and miscellaneous time off for events such as a funerals and jury duty. For 2009, your PTO bank of 19 days will be pro-rated based upon your date of hire.

 

Employee Benefits

 

You will have the opportunity to participate, subject to the express terms and conditions of the respective plans, in a comprehensive package of benefit plans. The following are offered: Medical, Dental, Vision, Employee Life Insurance, Dependent Life Insurance, Accidental Death and Dismemberment (AD&D) Insurance, Long Term Disability (LTD) Insurance, Health Care Flexible Spending Account, Dependent Care Flexible Spending Account, Buying PTO Days, Group Critical Illness, and a Group Legal Plan. You are eligible to participate in the medical plan on your first day of employment if you enroll for coverage on a timely basis. Coverage under the medical plan is not subject to pre-existing conditions limitations.

 

As a Senior Management Team member, you will be entitled to an annual car allowance of $13,560 ($1,130 per month). Additionally, other perquisites you are entitled to will include financial planning services of up to $10,000 per year, personal tax preparation services and executive physicals through the Allstate Executive Health Management program. Change-incontrol benefits are provided pursuant to an agreement to be presented to you upon hire.

 

 

 

You will also have the opportunity to participate in the Allstate Retirement Plan and the Allstate

 

Page 2 of 3



 

401(k) Savings Plan subject to the Plans’ terms and conditions. The Allstate Retirement Plan is a pension plan that is funded by Allstate and provides benefits at your retirement based on compensation and years of service with Allstate under a cash balance formula. The Allstate 401(k) Savings Plan allows eligible employees to make pre- and after-tax deposits to their 401 (k) savings accounts. Participants may be eligible for a Company contribution on pre-tax deposits of up to 5% of eligible compensation, based on a two-tiered formula. The minimum amount the Company will contribute annually is 50 cents for each dollar on the first three percent of eligible pre-tax compensation contributed and 25 cents on the dollar on the next two percent of eligible pre-tax compensation contributed. All Company contributions are made in the form of Allstate stock and vest at the end of three years following your date of hire.

 

A complete benefits package will be sent to you for your review. Additionally, you can visit our career website at www.allstate.iobs. All of our compensation and benefit programs are subject to future modifications as appropriate to help us continue to be competitive in the marketplace.

 

Matt, we know you will make a critical contribution to Allstate and enjoy a challenging and rewarding career in the process. We want you to be a part of our success and share in the rewards.

 

We are delighted to extend this offer to you, and we look forward to a favorable reply. To confirm your acceptance of this offer of employment with Allstate subject to its policies, please sign and date this letter and return it via fax to Suzanne Sinclair at (847) 326-7639.

 

 

Sincerely,

 

 

Tom Wilson

 

 

ACCEPTED AND AGREED:

 

Name:

Matthew E. Winter

 

 

Signature:

/s/ Matthew E. Winter

 

 

Date:

October 2, 2009

 

 

 

 

 

 

Name:

Suzanne Sinclair

 

 

Signature:

/s/ Suzanne Sinclair, Director

 

 

Date:

September 29, 2009

 


Exhibit 10.3

 

THE ALLSTATE CORPORATION

2009 EQUITY INCENTIVE PLAN

OPTION AWARD AGREEMENT

 

[Addressee]

 

In accordance with the terms of The Allstate Corporation 2009 Equity Incentive Plan (the “Plan”), pursuant to action of the Compensation and Succession Committee of the Board of Directors, The Allstate Corporation (the “Company”) hereby grants to you (the “Participant”), subject to the terms and conditions set forth in this Option Award Agreement (including Annex A hereto and all documents incorporated herein by reference) the right and option (the “Option”) to purchase from the Company the number of shares of its common stock, par value $.01 per share, set forth below:

 

Type of Option Granted:

 

Nonqualified

 

 

 

Number of Shares to

 

 

which Option Pertains:

 

[                    ]

 

 

 

Date of Grant:

 

[                    ]

 

 

 

Option Exercise Price:

 

$                    , which is the Fair Market Value on the Date of Grant

 

 

 

Vesting:

 

[                                                                                                                    ]

 

 

(subject to Sections 2 and 4 of Annex A)

 

 

 

Expiration Date:

 

Close of business on [                    ]

 

 

 

Exercise Period:

 

Date of Vesting through Expiration Date (subject to Section 2 of Annex A)

 

THIS OPTION IS SUBJECT TO FORFEITURE AS PROVIDED IN THIS OPTION AWARD AGREEMENT AND THE PLAN.

 

Further terms and conditions of the Award are set forth in Annex A hereto, which is an integral part of this Option Award Agreement.

 

All terms, provisions and conditions applicable to the Option Award Agreement set forth in the Plan and not set forth herein are hereby incorporated by reference.  To the extent any provision hereof is inconsistent with a provision of the Plan, the provision of the Plan will govern.  By accepting this Award as provided in the following sentence, the Participant hereby acknowledges the receipt of a copy of this Option Award Agreement including Annex A and a copy of the Prospectus and agrees to be bound by all the terms and provisions hereof and thereof.  This Award and all prior Option Awards not previously accepted will be deemed accepted if the participant does not decline this Award by accessing the Fidelity NetBenefits® website at www.NetBenefits.com and selecting the “Decline Grant” option for this Award within 30 days of the Date of Grant.  [Note:  The following language will be added to awards for Allstate Investment Management Limited employees:  Separate conditions apply to employees of Allstate Investment Management Limited.]

 

 

Thomas J. Wilson

 

Chairman, President and

 

Chief Executive Officer

 

THE ALLSTATE CORPORATION

Attachment:  Annex A

Option Award Agreement 2.22.11

 



 

ANNEX A

 

TO

 

THE ALLSTATE CORPORATION

2009 EQUITY INCENTIVE PLAN

OPTION AWARD AGREEMENT

 

Further Terms and Conditions of Award .  It is understood and agreed that the Award of the Option evidenced by this Option Award Agreement to which this is annexed is subject to the following additional terms and conditions:

 

1 .         Exercise of Option .  To the extent vested and subject to Section 2 below, the Option may be exercised in whole or in part from time to time by delivery of written notice (or other method acceptable to the Company) of exercise and payment to Stock Option Record Office, The Allstate Corporation, 2775 Sanders Road, Ste F5, Northbrook, Illinois  60062, unless the Company advises the Participant to send the notice and payment to a different address or a designated representative. Such notice and payment must be received not later than the Expiration Date, specifying the number of shares of Stock to be purchased.  The minimum number of Shares to be purchased in a partial exercise shall be the lesser of 25 shares and the number of shares remaining unexercised under this Award.

 

The Option Exercise Price shall be payable:  (a) in cash or its equivalent, (b) by tendering previously acquired Stock (owned for at least six months) having an aggregate Fair Market Value at the time of exercise equal to the total Option Exercise Price, (c) by broker-assisted cashless exercise, (d) by share withholding or (e) by a combination of (a), (b), (c) and/or (d).

 

With respect to tax withholding required upon exercise of the Option, the Participant may elect to satisfy such withholding requirements in whole or in part, by having Stock with a Fair Market Value equal to the minimum statutory total tax which could be imposed on the transaction withheld from the shares due upon Option exercise.

 

2.         Termination of Employment .  Except as otherwise specifically provided in Section 4 below, upon the Participant’s Termination of Employment, the following provisions of this Section 2 shall apply.

 

(A)       If the Participant’s Termination of Employment is on account of death or Disability, then the Option, to the extent not vested, shall vest, and the Option may be exercised, in whole or in part, by the Participant (or the Participant’s personal representative, Beneficiary, estate or transferee, as the case may be) at any time on or before the earlier to occur of the Expiration Date of the Option and the second anniversary of the date of such Termination of Employment.

 

(B)       If the Participant’s Termination of Employment is on account of Retirement at the Normal Retirement Date or Early Retirement Date, to the extent the Option is vested on the date of Termination of Employment, it may be exercised, in whole or in part, by the Participant at any time on or before the earlier to occur of the Expiration Date of the Option and the fifth anniversary of the date of such Termination of Employment.

 

Option Award Agreement 2.22.11

1

 

 



 

(C)       If the Participant’s Termination of Employment is on account of Retirement at the Normal Retirement Date,

 

(i)         any Option granted more than twelve (12) months prior to the Normal Retirement Date to the extent it is not vested, and

 

(ii)        a prorated portion of any Option granted within twelve (12) months of the Normal Retirement Date to the extent it is not vested (such proration to be determined by multiplying the Number of Shares to which Option Pertains by a fraction, the numerator of which is the number of days the Participant was employed since the Date of Grant and the denominator of which is 365)

 

shall continue to vest in accordance with its terms, and when vested, may be exercised, in whole or in part, by the Participant at any time on or before the earlier to occur of the Expiration Date of the Option and the fifth anniversary of the date of such Termination of Employment.  The remaining portion of the Option that is not vested shall be forfeited.

 

(D)       If the Participant’s Termination of Employment is on account of Retirement at the Early Retirement Date, a prorated portion of the Option (such proration to be determined by multiplying the Number of Shares to which Option Pertains by a fraction, the numerator of which is the number of days the Participant was employed since the Date of Grant and the denominator of which is the number of days during the entire vesting period, and then subtracting the number of shares already vested), shall continue to vest in accordance with its terms, and when vested, may be exercised, in whole or in part, by the Participant at any time on or before the earlier to occur of the Expiration Date of the Option and the fifth anniversary of the date of such Termination of Employment.  The remaining portion of the Option that is not vested shall be forfeited.

 

(E)       If the Participant’s Termination of Employment is for any other reason, any portion of the Option that is not vested shall be forfeited, and the Option, to the extent it is vested on the date of Termination of Employment, may be exercised, in whole or in part, by the Participant at any time on or before the earlier to occur of the Expiration Date of the Option and three months after the date of such Termination of Employment.

 

(F)        If the Participant’s Termination of Employment is on account of Retirement at the Normal Retirement Date or Early Retirement Date and if the Participant dies after such Termination of Employment but before the date the Option must be exercised as set forth in subsections (C) and (D) above, any portion of the Option that is not vested shall vest and the Option may be exercised, in whole or in part, by the Participant’s personal representative, Beneficiary, estate, or transferee, as the case may be at any time on or before the earlier to occur of the Expiration Date of the Option, the second anniversary of the date of death, and the fifth anniversary of the date of such Termination of Employment.   If the Participant’s Termination of Employment is for any reason other than death, Disability, Normal Retirement, or Early Retirement and if the Participant dies after such Termination of Employment but before the date the Option must be exercised as set forth in subsection (E) above, the Option, to the extent it is vested on the date of the Participant’s death, may be exercised, in whole or in part, by the Participant’s personal representative, Beneficiary, estate or transferee, as the case may be, at any time on or before the earliest to occur of the Expiration Date of the Option and three months after the date of Termination of Employment.

 

Option Award Agreement 2.22.11

2

 

 



 

3.         Transferability of Options . Except as set forth in this Section 3, the Option shall be exercisable during the Participant’s lifetime only by the Participant, and may not be assigned or transferred other than by will or the laws of descent and distribution.  The Option, to the extent vested, may be transferred by the Participant during his lifetime to any “Family Member.”  A transfer of the Option pursuant to this Section 3 may only be effected by the Company at the written request of a Participant and shall be effective only when recorded in the Company’s record of outstanding Options. Such transferred Option may not be subsequently transferred by the transferee except by will or the laws of descent and distribution.  A transferred Option shall continue to be governed by and subject to the terms and limitations of the Plan and this Option Award Agreement, and the transferee shall be entitled to the same rights as the Participant, as if no transfer had taken place.  In no event shall an Option be transferred for consideration.

 

4.         Change of Control .  Except as otherwise specifically provided in a written agreement with the Company to which the Participant is a party, the Option, to the extent not vested, shall vest on the date of a Change of Control, as defined in Section 8, and the Option may be exercised in whole or in part, subject to the time periods for exercise set forth in Section 2 of this Annex A.

 

5.         Ratification of Actions .  By accepting the Award or other benefit under the Plan, the Participant and each person claiming under or through him shall be conclusively deemed to have indicated the Participant’s acceptance and ratification of, and consent to, any action taken under the Plan or the Award by the Company, the Board or the Compensation and Succession Committee.

 

6.         Notices .  Any notice hereunder to the Company shall be addressed to its Stock Option Record Office and any notice hereunder to the Participant shall be addressed to him at the address specified on this Option Award Agreement, subject to the right of either party to designate at any time hereafter in writing some other address.

 

7.         Governing Law and Severability .  To the extent not preempted by Federal law, this Option Award Agreement will be governed by and construed in accordance with the laws of the State of Delaware, without regard to conflicts of law provisions.  In the event any provision of the Option Award Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of this Option Award Agreement, and this Option Award Agreement shall be construed and enforced as if the illegal or invalid provision had not been included.

 

8.         Definitions .  In addition to the following definitions, capitalized terms not otherwise defined herein shall have the meanings given them in the Plan.

 

Board Turnover ” – see clause (c) of the definition of “Change of Control.”

 

Change of Control ” means, except as otherwise provided at the end of this definition, the occurrence of any one or more of the following:

 

(a)        ( Voting Power)  any Person or group (as such term is defined in Treasury Regulation Section 1.409A-3(i)(5)(v)(B)), other than a Subsidiary or any employee benefit plan (or any related trust) of the Company or any of its Subsidiaries, acquires or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person or Persons, ownership of stock of the Company possessing 30% or more of the combined voting power of all Voting Securities of the Company (such a Person or group that is not a Similarly Owned Company (as defined below), a “ More than 30% Owner ”), except that no Change of Control shall be deemed to have occurred solely by reason of such ownership by a corporation with respect to which both more than 70% of the common stock of such corporation and Voting

 

Option Award Agreement 2.22.11

3

 

 



 

Securities representing more than 70% of the combined voting power of the Voting Securities of such corporation are then owned, directly or indirectly, by the Persons who were the direct or indirect owners of the common stock and Voting Securities of the Company immediately before such acquisition in substantially the same proportions as their ownership, immediately before such acquisition, of the common stock and Voting Securities of the Company, as the case may be (a “ Similarly Owned Company ”); or

 

(b) ( Majority Ownership) any Person or group (as such term is defined in Treasury Regulation Section 1.409A-3(i)(5)(v)(B)), other than a Subsidiary or any employee benefit plan (or any related trust) of the Company or any of its Subsidiaries, acquires ownership of more than 50% of the voting power of all Voting Securities of the Company or of the total fair market value of the stock of the Company (such a Person or group that is not a Similarly Owned Company, a “ Majority Owner ”), except that no Change of Control shall be deemed to have occurred solely by reason of such ownership by a Similarly Owned Company; or

 

(c)  ( Board Composition) a majority of the members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board before the date of the appointment or election (“ Board Turnover ”); or

 

(d)  (Reorganization) the consummation of a merger, reorganization, consolidation, or similar transaction, or of a plan or agreement for the sale or other disposition of all or substantially all of the consolidated assets of the Company, or a plan of liquidation of the Company (any of the foregoing, a “ Reorganization Transaction ”) that, does not qualify as an Exempt Reorganization Transaction.

 

Notwithstanding anything contained herein to the contrary:  (i) no transaction or event shall constitute a Change of Control for purposes of this Agreement unless the transaction or event constituting the Change of Control also constitutes a change in the ownership of a corporation (as defined in Treasury Regulation Section 1.409A-3(i)(5)(v)), a change in effective control of a corporation (as defined in Treasury Regulation Section 1.409A-3(i)(5)(vi)) or a change in the ownership of a substantial portion of the assets of a corporation (as defined in Treasury Regulation Section 1.409A-3(i)(5)(vii)); and (ii) no sale or disposition of one or more Subsidiaries (“Sale Subsidiary”) or the assets thereof shall constitute a Change of Control for purposes of this Agreement if the investments in and advances by the Company and its Subsidiaries (other than the Sale Subsidiaries) to such Sale Subsidiary as of immediately prior to the sale or disposition determined in accordance with Generally Accepted Accounting Principles (“GAAP”) (but after intercompany eliminations and net of the effect of intercompany reinsurance) are less than 51% of the Consolidated Total Shareholders’ Equity of the Company as of immediately prior to the sale or disposition.  Consolidated Total Shareholders’ Equity means, at any date, the total shareholders’ equity of the Company and its Subsidiaries at such date, as reported in the consolidated financial statements prepared in accordance with GAAP.

 

Exempt Reorganization Transaction ” means a Reorganization Transaction that fails to result in (a) any Person or group (as such term is defined in Treasury Regulation Section 1.409A-3(i)(5)(v)(B)) becoming a More than 30% Owner or a Majority Owner, (b) Board Turnover, or (c) a sale or disposition to any Person or group (as such term is defined in Treasury Regulation Section 1.409A-3(i)(5)(v)(B)) of the assets of the Company that have a total Gross Fair Market Value equal to at least forty percent (40%) of the total Gross Fair Market Value of all of the assets of the Company immediately before such transaction.

 

Option Award Agreement 2.22.11

4

 

 



 

Gross Fair Market Value ” means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

 

Majority Owner ” – see clause (b) of the definition of “Change of Control.”

 

More than 30% Owner ” – see clause (a) of the definition of “Change of Control.”

 

Reorganization Transaction ” -- see clause (d) of the definition of “Change of Control.”

 

“Similarly Owned Company ” -- see clause (a) of the definition of “Change of Control.”

 

Voting Securities ” of a corporation means securities of such corporation that are entitled to vote generally in the election of directors of such corporation.

 

Option Award Agreement 2.22.11

5

 

 


Exhibit 10.4

 

THE ALLSTATE CORPORATION

2009 EQUITY INCENTIVE PLAN

RESTRICTED STOCK UNIT AWARD AGREEMENT

 

[Date]

 

[Name]

[Address]

[City]

 

In accordance with the terms of The Allstate Corporation 2009 Equity Incentive Plan (the “Plan”), pursuant to action of the Compensation and Succession Committee of the Board of Directors, The Allstate Corporation (the “Company”) hereby grants to you (the “Participant”), subject to the terms and conditions set forth in this Restricted Stock Unit Award Agreement (including Annex A hereto and all documents incorporated herein by reference), Restricted Stock Units (“RSUs”), as set forth below.  Each RSU corresponds to one share of Stock. An RSU is an unfunded and unsecured promise to deliver one share of Stock on the Conversion Date or as otherwise provided herein.  Until such delivery, you have only the rights of a general unsecured creditor of the Company and not as a stockholder with respect to the shares of Stock underlying your RSUs.

 

Number of RSUs Granted:

 

 

 

Date of Grant:

 

 

 

Period of Restriction:

[                                                                                                ]

 

(subject to Sections 2 and 3 of Annex A)

 

 

Conversion Date:

Each RSU will convert to one share of Stock on the day following the date the restrictions lapse with respect to that RSU.

 

 

Dividend

 

Equivalent Right:

Each RSU shall include a right to Dividend Equivalents.

 

RSUs ARE SUBJECT TO FORFEITURE AS PROVIDED IN THIS RESTRICTED STOCK UNIT AWARD AGREEMENT AND THE PLAN.

 

Further terms and conditions of the Award are set forth in Annex A hereto, which is an integral part of this RSU Award Agreement.

 

RSU Award Agreement 2 22 11

1

 

 



 

Exhibit 10.4

 

All terms, provisions, and conditions applicable to the Restricted Stock Unit Award set forth in the Plan and not set forth herein are hereby incorporated by reference herein.  To the extent any provision hereof is inconsistent with a provision of the Plan, the provisions of the Plan will govern.  By accepting this Award as provided in the following sentence, the Participant hereby acknowledges the receipt of a copy of this RSU Award Agreement including Annex A and a copy of the Prospectus and agrees to be bound by all the terms and provisions hereof and thereof.  This Award and all prior RSU Awards not previously accepted will be deemed accepted if the participant does not decline this Award by accessing the Fidelity NetBenefits® website at www.NetBenefits.com and selecting the “Decline Grant” option for this Award within 30 days of the Date of Grant.  [Note:  The following language will be added to awards for Allstate Investment Management Limited employees:  Separate conditions apply to employees of Allstate Investment Management Limited.]

 

 

Thomas J. Wilson

 

Chairman, President and

 

Chief Executive Officer

 

THE ALLSTATE CORPORATION

 

 

Attachment:     Annex A

 

 

RSU Award Agreement 2 22 11

2

 

 



 

ANNEX A

 

TO

 

THE ALLSTATE CORPORATION

2009 EQUITY INCENTIVE PLAN

RESTRICTED STOCK UNIT AWARD AGREEMENT

 

Further Terms and Conditions of Award .  It is understood and agreed that the Award of RSUs evidenced by the RSU Award Agreement to which this is annexed is subject to the following additional terms and conditions:

 

1 .         Tax Withholding .  With respect to the minimum statutory tax withholding required upon the lapse of restrictions on the RSUs, the Participant may elect to satisfy such withholding requirements by tender of previously-owned shares of Stock or by having the Company withhold shares of Stock upon the Conversion Date.

 

2.         Termination of Employment .  Except as otherwise specifically provided in Section 3 below, upon the Participant’s Termination of Employment, all unvested RSUs shall be treated as follows:

 

(A)       If the Participant’s Termination of Employment is on account of death or Disability, then all unvested RSUs shall immediately become nonforfeitable and the restrictions with respect to the RSUs shall lapse as of the date of such Termination of Employment.

 

(B)       If the Participant’s Termination of Employment is on account of Retirement at the Normal Retirement Date,

 

(i)         any unvested RSUs granted more than twelve (12) months prior to the Normal Retirement Date, and

 

(ii)        a prorated portion of any unvested RSUs granted within twelve (12) months of the Normal Retirement Date (such proration to be determined by multiplying the Number of RSUs Granted by a fraction, the numerator of which is the number of days the Participant was employed since the Date of Grant and the denominator of which is 365)

 

will remain subject to the restriction period set forth on the first page of this RSU Award Agreement.  The remaining portion of the RSUs that do not remain subject to the restriction period shall be forfeited.

 

(C)       If the Participant’s Termination of Employment is on account of Retirement at the Early Retirement Date, a prorated portion of the RSUs (such proration to be determined by multiplying the Number of RSUs Granted by a fraction, the numerator of which is the number of days the Participant was employed since the Date of Grant and the denominator of which is the number of days during the entire Period of Restriction, and then subtracting the number of RSUs already converted), will remain subject to the restriction period set forth on the first page of this RSU Award Agreement.  The remaining portion of the RSUs that do not remain subject to the restriction period shall be forfeited.

 

(D)       If the Participant’s Termination of Employment is on account of any other reason, then all unvested RSUs shall be forfeited as of the end of the day of such Termination of Employment.

 

RSU Award Agreement 2 22 11

1

 

 



 

(E)       If the Participant’s Termination of Employment is on account of Retirement at the Normal Retirement Date or Early Retirement Date and if the Participant dies after such Termination of Employment but before the end of the restriction period, then all unvested RSUs that remain subject to the restriction period shall immediately become nonforfeitable and the restrictions with respect to the RSUs shall lapse as of the date of death.

 

3.         Change of Control .  Except as otherwise specifically provided in a written agreement with the Company to which the Participant is a party, the unvested RSUs shall become nonforfeitable and the restrictions to which the RSUs are then subject shall immediately lapse on the date of a Change of Control, as defined in Section 9.

 

4.         Conversion Date .  Unless otherwise determined by the Board, a Participant shall be entitled to delivery of shares of Stock that underlie the RSUs then outstanding on the day following the date the restrictions lapse with respect to such RSU.

 

5.         Dividend Equivalent Right .  Each RSU entitles a Participant to receive a cash amount (less applicable withholding) equal to the sum of all regular dividend payments as would have been made in respect of each share of Stock underlying such RSUs if the Participant were the holder of such shares during the Period of Restriction.  The dividend equivalent payments will accrue during the Period of Restriction for the underlying RSUs and will be paid within 30 days of the Conversion Date of such RSUs.

 

Dividend equivalent payments shall be made only with respect to such RSUs that were outstanding on the applicable dividend record date.

 

6.         Ratification of Actions .  By accepting the RSU Award or other benefit under the Plan, the Participant and each person claiming under or through him shall be conclusively deemed to have indicated the Participant’s acceptance and ratification of, and consent to, any action taken under the Plan or the RSU Award by the Company, the Board, or the Compensation and Succession Committee.

 

7.        Notices .  Any notice hereunder to the Company shall be addressed to its Stock Option Record Office and any notice hereunder to the Participant shall be addressed to him or her at the address specified on this RSU Award Agreement, subject to the right of either party to designate at any time hereafter in writing some other address.

 

8.         Governing Law and Severability .  To the extent not preempted by Federal law, the RSU Award Agreement will be governed by and construed in accordance with the laws of the State of Delaware, without regard to conflicts of law provisions.  In the event any provision of this RSU Award Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of this RSU Award Agreement, and this RSU Award Agreement shall be construed and enforced as if the illegal or invalid provision had not been included.

 

9.         Definitions .  In addition to the following definitions, capitalized terms not otherwise defined herein shall have the meanings given them in the Plan.

 

Board Turnover ” – see clause (c) of the definition of “Change of Control.”

 

Change of Control ” means, except as otherwise provided at the end of this definition, the occurrence of any one or more of the following:

 

(a)  ( Voting Power)  any Person or group (as such term is defined in Treasury Regulation Section

 

RSU Award Agreement 2 22 11

2

 

 



 

1.409A-3(i)(5)(v)(B)), other than a Subsidiary or any employee benefit plan (or any related trust) of the Company or any of its Subsidiaries, acquires or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person or Persons, ownership of stock of the Company possessing 30% or more of the combined voting power of all Voting Securities of the Company (such a Person or group that is not a Similarly Owned Company (as defined below), a “ More than 30% Owner ”), except that no Change of Control shall be deemed to have occurred solely by reason of such ownership by a corporation with respect to which both more than 70% of the common stock of such corporation and Voting Securities representing more than 70% of the combined voting power of the Voting Securities of such corporation are then owned, directly or indirectly, by the Persons who were the direct or indirect owners of the common stock and Voting Securities of the Company immediately before such acquisition in substantially the same proportions as their ownership, immediately before such acquisition, of the common stock and Voting Securities of the Company, as the case may be (a “ Similarly Owned Company ”); or

 

(b) ( Majority Ownership) any Person or group (as such term is defined in Treasury Regulation Section 1.409A-3(i)(5)(v)(B)), other than a Subsidiary or any employee benefit plan (or any related trust) of the Company or any of its Subsidiaries, acquires ownership of more than 50% of the voting power of all Voting Securities of the Company or of the total fair market value of the stock of the Company (such a Person or group that is not a Similarly Owned Company, a “ Majority Owner ”), except that no Change of Control shall be deemed to have occurred solely by reason of such ownership by a Similarly Owned Company; or

 

(c)  ( Board Composition) a majority of the members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board before the date of the appointment or election (“ Board Turnover ”); or

 

(d)  ( Reorganization) the consummation of a merger, reorganization, consolidation, or similar transaction, or of a plan or agreement for the sale or other disposition of all or substantially all of the consolidated assets of the Company, or a plan of liquidation of the Company (any of the foregoing, a “ Reorganization Transaction ”) that, does not qualify as an Exempt Reorganization Transaction.

 

Notwithstanding anything contained herein to the contrary:  (i) no transaction or event shall constitute a Change of Control for purposes of this Agreement unless the transaction or event constituting the Change of Control also constitutes a change in the ownership of a corporation (as defined in Treasury Regulation Section 1.409A-3(i)(5)(v)), a change in effective control of a corporation (as defined in Treasury Regulation Section 1.409A-3(i)(5)(vi)) or a change in the ownership of a substantial portion of the assets of a corporation (as defined in Treasury Regulation Section 1.409A-3(i)(5)(vii)); and (ii) no sale or disposition of one or more Subsidiaries (“Sale Subsidiary”) or the assets thereof shall constitute a Change of Control for purposes of this Agreement if the investments in and advances by the Company and its Subsidiaries (other than the Sale Subsidiaries) to such Sale Subsidiary as of immediately prior to the sale or disposition determined in accordance with Generally Accepted Accounting Principles (“GAAP”) (but after intercompany eliminations and net of the effect of intercompany reinsurance) are less than 51% of the Consolidated Total Shareholders’ Equity of the Company as of immediately prior to the sale or disposition.  Consolidated Total Shareholders’ Equity means, at any date, the total shareholders’ equity of the Company and its Subsidiaries at such date, as reported in the consolidated financial statements prepared in accordance with GAAP.

 

“Exempt Reorganization Transaction ” means a Reorganization Transaction that fails to result in (a) any Person or group (as such term is defined in Treasury Regulation Section 1.409A-3(i)(5)(v)(B)) becoming a More than 30% Owner or a Majority Owner, (b) Board Turnover, or (c) a sale or disposition to any Person or group (as such term is defined in Treasury Regulation Section

 

RSU Award Agreement 2 22 11

3

 

 



 

1.409A-3(i)(5)(v)(B)) of the assets of the Company that have a total Gross Fair Market Value (as defined below) equal to at least forty percent (40%) of the total Gross Fair Market Value of all of the assets of the Company immediately before such transaction.

 

Gross Fair Market Value ” means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

 

Majority Owner ” – see clause (b) of the definition of “Change of Control.”

 

More than 30% Owner ” – see clause (a) of the definition of “Change of Control.”

 

Reorganization Transaction ” – see clause (d) of the definition of “Change of Control.”

 

Similarly Owned Company ” – see clause (a) of the definition of “Change of Control.”

 

Voting Securities ” of a corporation means securities of such corporation that are entitled to vote generally in the election of directors of such corporation.

 

RSU Award Agreement 2 22 11

4

 

 


EXHIBIT 15

 

The Allstate Corporation

2775 Sanders Road

Northbrook, IL 60062

 

We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim financial information of The Allstate Corporation and subsidiaries (the “Company”) for the three-month periods ended March 31, 2011 and 2010, as indicated in our report dated April 27, 2011; because we did not perform an audit, we expressed no opinion on that information.

 

We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, is incorporated by reference in the following Registration Statements:

 

Form S-3 Registration Statement Nos.

 

Form S-8 Registration Statement Nos.

333-34583

 

33-77928

333-159071

 

33-93762

 

 

33-99136

 

 

333-04919

 

 

333-16129

 

 

333-40283

 

 

333-60916

 

 

333-120343

 

 

333-120344

 

 

333-134242

 

 

333-134243

 

 

333-144691

 

 

333-144692

 

 

333-158581

 

 

333-159343

 

We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

 

 

/s/ Deloitte & Touche LLP

 

Chicago, Illinois

April 27, 2011

 

E-2


 

CERTIFICATIONS

EXHIBIT 31 (i)

 

I, Thomas J. Wilson, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of The Allstate Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

April 27, 2011

 

 

/s/ Thomas J. Wilson

 

 

 

Thomas J. Wilson

 

Chairman of the Board,

 

President and Chief Executive Officer

 

E-3



 

CERTIFICATIONS

EXHIBIT 31 (i)

 

I, Don Civgin, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of The Allstate Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

April 27, 2011

 

 

/s/ Don Civgin

 

 

 

Don Civgin

 

Executive Vice President and Chief Financial Officer

 

E-4


EXHIBIT 32

 

SECTION 1350 CERTIFICATIONS

 

Each of the undersigned hereby certifies that to his knowledge the quarterly report on Form 10-Q for the fiscal period ended March 31, 2011 of The Allstate Corporation filed with the Securities and Exchange Commission fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and result of operations of The Allstate Corporation.

 

April 27, 2011

 

 

 

/s/ Thomas J. Wilson

 

Thomas J. Wilson

 

Chairman of the Board,

 

President and

 

Chief Executive Officer

 

 

 

 

 

 

 

/s/ Don Civgin

 

Don Civgin

 

Executive Vice President and Chief Financial Officer

 

E-5