Page
Overview 29
2012 Highlights 29
Consolidated Net Income 30
Application of Critical Accounting Estimates 31
Property-Liability 2012 Highlights 43
Property-Liability Operations 43
Allstate Protection Segment 45
Discontinued Lines and Coverages Segment 58
Property-Liability Investment Results 59
Property-Liability Claims and Claims Expense Reserves 60
Allstate Financial 2012 Highlights 69
Allstate Financial Segment 69
Investments 2012 Highlights 78
Investments 78
Market Risk 88
Pension Plans 91
Goodwill 94
Capital Resources and Liquidity 2012 Highlights 95
Capital Resources and Liquidity 95
Enterprise Risk and Return Management 102
Regulation and Legal Proceedings 103
Pending Accounting Standards 103
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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 5-year summary of
selected financial data, consolidated financial statements and related notes
found under Part II. Item 6. and Item 8. contained herein. 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 the following priorities in 2013:
º •
º grow insurance premiums;
º •
º maintain auto profitability;
º •
º raise returns in homeowners and annuity businesses;
º •
º proactively manage investments; and
º •
º reduce our cost structure.
The most important factors we monitor to evaluate the financial condition
and performance of our company include:
º •
º For Allstate Protection: premium written, the number of policies in
force ("PIF"), retention, price changes, claim frequency (rate of
claim occurrence per policy in force) and severity (average cost per
claim), catastrophes, loss ratio, expenses, underwriting results, and
sales of all products and services;
º • º For Allstate Financial: benefit and investment spread, amortization of
deferred policy acquisition costs ("DAC"), expenses, operating income,
net income, invested assets, and premiums and contract charges;
º •
º For Investments: credit quality/experience, total return, investment
income, cash flows, realized capital gains and losses, unrealized
capital gains and losses, stability of long-term returns, and asset
and liability duration; and
º •
º For financial condition: liquidity, parent holding company level of
deployable invested assets, financial strength ratings, operating leverage, debt leverage, book value per share, and return on equity.
Summary of Results:
º •
º Consolidated net income was $2.31 billion in 2012 compared to
$787 million in 2011 and $911 million in 2010. The increase in 2012
compared to 2011 was primarily due to higher net income from
Property-Liability, partially offset by lower net income from Allstate
Financial. The decrease in 2011 compared to 2010 was primarily due to
lower net income from Property-Liability, partially offset by higher
net income from Allstate Financial. Net income per diluted share was
$4.68, $1.50 and $1.68 in 2012, 2011 and 2010, respectively.
º •
º Allstate Protection had underwriting income of $1.25 billion in 2012
compared to an underwriting loss of $857 million in 2011 and
underwriting income of $525 million in 2010. The underwriting income
in 2012 compared to the underwriting loss in 2011 was primarily due to
underwriting income in homeowners and other personal lines in 2012
compared to underwriting losses in 2011, partially offset by a
decrease in standard auto underwriting income. The decrease in 2011
compared to 2010 was primarily due to increases in homeowners
underwriting losses and decreases in other personal lines and standard
auto underwriting income. The Allstate Protection combined ratio was
95.3, 103.3 and 98.0 in 2012, 2011 and 2010, respectively.
Underwriting income (loss), a measure not based on accounting
principles generally accepted in the United States of America
("GAAP"), is defined in the Property-Liability Operations section of
the MD&A.
º •
º Allstate Financial net income was $541 million in 2012 compared to
$590 million in 2011 and $42 million in 2010. The decrease in 2012
compared to 2011 was primarily due to net realized capital losses in
2012 compared to net realized capital gains in 2011, lower net
investment income and higher life and annuity contract benefits,
partially offset by decreased interest credited to contractholder funds and lower amortization of DAC. The increase in 2011 compared to
2010 was primarily due to net realized capital gains in 2011 compared
to net realized capital losses in 2010 and decreased interest credited
to contractholder funds, partially offset by higher amortization of
DAC and lower net investment income.
2012 HIGHLIGHTS
º •
º Consolidated net income was $2.31 billion in 2012 compared to $787 million
in 2011. Net income per diluted share was $4.68 in 2012 compared to $1.50
in 2011.
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º •
º Property-Liability net income was $1.97 billion in 2012 compared to
$403 million in 2011.
º •
º The Property-Liability combined ratio was 95.5 in 2012 compared to 103.4 in
2011.
º •
º Allstate Financial net income was $541 million in 2012 compared to
$590 million in 2011.
º •
º Total revenues were $33.32 billion in 2012 compared to $32.65 billion in
2011.
º •
º Property-Liability premiums earned totaled $26.74 billion in 2012 compared
to $25.94 billion in 2011.
º •
º Investments totaled $97.28 billion as of December 31, 2012, an increase of
1.7% from $95.62 billion as of December 31, 2011. Net investment income was
$4.01 billion in 2012, an increase of 1.0% from $3.97 billion in 2011.
º •
º Net realized capital gains were $327 million in 2012 compared to
$503 million in 2011.
º •
º Book value per diluted share (ratio of shareholders' equity to total shares
outstanding and dilutive potential shares outstanding) was $42.39 as of
December 31, 2012, an increase of 17.2% from $36.18 as of December 31,
2011.
º •
º For the twelve months ended December 31, 2012, return on the average of
beginning and ending period shareholders' equity was 11.9%, an increase of
7.6 points from 4.3% for the twelve months ended December 31, 2011.
º •
º As of December 31, 2012, shareholders' equity was $20.58 billion. This
total included $2.06 billion in deployable invested assets at the parent
holding company level.
CONSOLIDATED NET INCOME
($ in millions) For the years ended December 31,
2012 2011 2010
Revenues
Property-liability insurance premiums $ 26,737 $ 25,942 $ 25,957
Life and annuity premiums and contract
charges 2,241 2,238 2,168
Net investment income 4,010 3,971 4,102
Realized capital gains and losses:
Total other-than-temporary impairment losses (239 ) (563 ) (937 )
Portion of loss recognized in other
comprehensive income 6 (33 ) (64 )
Net other-than-temporary impairment losses
recognized in earnings (233 ) (596 ) (1,001 )
Sales and other realized capital gains and
losses 560
1,099 174
Total realized capital gains and losses 327 503 (827 )
Total revenues 33,315 32,654 31,400
Costs and expenses
Property-liability insurance claims and
claims expense (18,484 ) (20,161 ) (18,951 )
Life and annuity contract benefits (1,818 ) (1,761 ) (1,815 )
Interest credited to contractholder funds (1,316 ) (1,645 ) (1,807 )
Amortization of deferred policy acquisition
costs (3,884 ) (3,971 ) (3,807 )
Operating costs and expenses (4,118 ) (3,739 ) (3,542 )
Restructuring and related charges (34 ) (44 ) (30 )
Interest expense (373 ) (367 ) (367 )
Total costs and expenses (30,027 ) (31,688 ) (30,319 )
Gain (loss) on disposition of operations 18 (7 ) 19
Income tax expense (1,000 ) (172 ) (189 )
Net income $ 2,306 $ 787 $ 911
Property-Liability $ 1,968 $ 403 $ 1,053
Allstate Financial 541 590 42
Corporate and Other (203 ) (206 ) (184 )
Net income $ 2,306 $ 787 $ 911
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APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to adopt accounting policies and make estimates and assumptions that
affect amounts reported in the consolidated financial statements. The most
critical estimates include those used in determining:
º •
º Fair value of financial assets
º •
º Impairment of fixed income and equity securities
º •
º Deferred policy acquisition costs amortization
º • º Reserve for property-liability insurance claims and claims expense
estimation
º •
º Reserve for life-contingent contract benefits estimation
In making these determinations, management makes subjective and complex
judgments that frequently require estimates about matters that are inherently
uncertain. Many of these policies, estimates and related judgments are common in
the insurance and financial services industries; others are specific to our
businesses and operations. It is reasonably likely that changes in these
estimates could occur from period to period and result in a material impact on
our consolidated financial statements.
A brief summary of each of these critical accounting estimates follows. For
a more detailed discussion of the effect of these estimates on our consolidated
financial statements, and the judgments and assumptions related to these
estimates, see the referenced sections of this document. For a complete summary
of our significant accounting policies, see the notes to the consolidated
financial statements.
Fair value of financial assets 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. We are
responsible for the determination of fair value of financial assets and the
supporting assumptions and methodologies. We use independent third-party
valuation service providers, broker quotes and internal pricing methods to
determine fair values. We obtain or calculate only one single quote or price for
each financial instrument.
Valuation service providers typically obtain data about market transactions
and other key valuation model inputs from multiple sources and, through the use
of proprietary models, produce valuation information in the form of a single
fair value for individual fixed income and other securities for which a fair
value has been requested under the terms of our agreements. The inputs used by
the valuation service providers include, but are not limited to, market prices
from recently completed transactions and transactions of comparable securities,
interest rate yield curves, credit spreads, liquidity spreads, currency rates,
and other information, as applicable. Credit and liquidity spreads are typically
implied from completed transactions and transactions of comparable securities.
Valuation service providers also use proprietary discounted cash flow models
that are widely accepted in the financial services industry and similar to those
used by other market participants to value the same financial instruments. The
valuation models take into account, among other things, market observable
information as of the measurement date, as described above, as well as the
specific attributes of the security being valued including its term, interest
rate, credit rating, industry sector, and where applicable, collateral quality
and other issue or issuer specific information. Executing valuation models
effectively requires seasoned professional judgment and experience. For certain
equity securities, valuation service providers provide market quotations for
completed transactions on the measurement date. In cases where market
transactions or other market observable data is limited, the extent to which
judgment is applied varies inversely with the availability of market observable
information.
For certain of our financial assets measured at fair value, where our
valuation service providers cannot provide fair value determinations, we obtain
a single non-binding price quote from a broker familiar with the security who,
similar to our valuation service providers, may consider transactions or
activity in similar securities among other information. The brokers providing
price quotes are generally from the brokerage divisions of leading financial
institutions with market making, underwriting and distribution expertise
regarding the security subject to valuation.
The fair value of certain financial assets, including privately placed
corporate fixed income securities, auction rate securities ("ARS") backed by
student loans, equity-indexed notes, and certain free-standing derivatives, for
which our valuation service providers or brokers do not provide fair value
determinations, is determined using valuation methods and models widely accepted
in the financial services industry. Our internal pricing methods are primarily
based on models using discounted cash flow methodologies that develop a single
best estimate of fair value. Our models generally incorporate inputs that we
believe are representative of inputs other market participants would use to
determine fair value of the same instruments, including yield curves, quoted
market prices of comparable securities, published credit spreads, and other
applicable market data as well as instrument-specific characteristics that
include, but are not limited to, coupon rates, expected cash flows, sector of
the issuer, and call provisions. Judgment is required
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in developing these fair values. As a result, the fair value of these financial
assets may differ from the amount actually received to sell an asset in an
orderly transaction between market participants at the measurement date.
Moreover, the use of different valuation assumptions may have a material effect
on the financial assets' fair values.
For most of our financial assets measured at fair value, all significant
inputs are based on or corroborated by market observable data and significant
management judgment does not affect the periodic determination of fair value.
The determination of fair value using discounted cash flow models involves
management judgment when significant model inputs are not based on or
corroborated by market observable data. However, where market observable data is
available, it takes precedence, and as a result, no range of reasonably likely
inputs exists from which the basis of a sensitivity analysis could be
constructed.
There is one primary situation where a discounted cash flow model utilizes a
significant input that is not market observable, and it relates to the
determination of fair value for our ARS backed by student loans. The significant
input utilized is the anticipated date liquidity will return to this market
(that is, when auction failures will cease). Determination of this assumption
allows for matching to market observable inputs when performing these
valuations.
The fair value of our ARS backed by student loans is $394 million as of
December 31, 2012. We performed a sensitivity analysis of reasonably likely
changes in the anticipated date liquidity will return to the student loan ARS
market as of December 31, 2012. If the anticipated date liquidity will return to
this market increased or decreased by six months, the fair value of our ARS
backed by student loans would decrease or increase by 1.5%, respectively. The
selection of these hypothetical scenarios represents an illustration of the
estimated potential proportional effect of alternate assumptions and should not
be construed as either a prediction of future events or an indication that it
would be reasonably likely that all securities would be similarly affected.
We gain assurance that our financial assets are appropriately valued through
the execution of various processes and controls designed to ensure the overall
reasonableness and consistent application of valuation methodologies, including
inputs and assumptions, and compliance with accounting standards. For fair
values received from third parties or internally estimated, our processes and
controls are designed to ensure that the valuation methodologies are appropriate
and consistently applied, the inputs and assumptions are reasonable and
consistent with the objective of determining fair value, and the fair values are
accurately recorded. For example, on a continuing basis, we assess the
reasonableness of individual fair values that have stale security prices or that
exceed certain thresholds as compared to previous fair values received from
valuation service providers or brokers or derived from internal models. We
perform procedures to understand and assess the methodologies, processes and
controls of valuation service providers. In addition, we may validate the
reasonableness of fair values by comparing information obtained from valuation
service providers or brokers to other third party valuation sources for selected
securities. We perform ongoing price validation procedures such as back-testing
of actual sales, which corroborate the various inputs used in internal models to
market observable data. When fair value determinations are expected to be more
variable, we validate them through reviews by members of management who have
relevant expertise and who are independent of those charged with executing
investment transactions.
We also perform an analysis to determine whether there has been a
significant decrease in the volume and level of activity for the asset when
compared to normal market activity, and if so, whether transactions may not be
orderly. Among the indicators we consider in determining whether a significant
decrease in the volume and level of market activity for a specific asset has
occurred include the level of new issuances in the primary market, trading
volume in the secondary market, level of credit spreads over historical levels,
bid-ask spread, and price consensuses among market participants and sources. If
evidence indicates that prices are based on transactions that are not orderly,
we place little, if any, weight on the transaction price and will estimate fair
value using an internal model. As of December 31, 2012 and 2011, we did not
alter fair values provided by our valuation service providers or brokers or
substitute them with an internal model for such securities.
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The following table identifies fixed income and equity securities and
short-term investments as of December 31, 2012 by source of fair value
determination:
Fair Percent
($ in millions) value to total
Fair value based on internal sources $ 6,277 7.5 %
Fair value based on external sources (1) 77,113 92.5
Total $ 83,390 100.0 %
--------------------------------------------------------------------------------
º (1)
º Includes $3.78 billion that are valued using broker quotes.
For additional detail on fair value measurements, see Note 6 of the
consolidated financial statements.
Impairment of fixed income and equity securities For investments classified
as available for sale, the difference between fair value and amortized cost for
fixed income securities and cost for equity securities, net of certain other
items and deferred income taxes (as disclosed in Note 5), is reported as a
component of accumulated other comprehensive income on the Consolidated
Statements of Financial Position and is not reflected in the operating results
of any period until reclassified to net income upon the consummation of a
transaction with an unrelated third party or when a write-down is recorded due
to an other-than-temporary decline in fair value. We have 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, we assess
whether management with the appropriate authority has made the decision to sell
or whether it is more likely than not we 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 we have not made the decision to sell the fixed income security and it is
not more likely than not we will be required to sell the fixed income security
before recovery of its amortized cost basis, we evaluate whether we expect to
receive cash flows sufficient to recover the entire amortized cost basis of the
security. We use our 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 we determine 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 we determine that the
fixed income security does not have sufficient cash flow or other information to
estimate a recovery value for the security, we may conclude that the entire
decline in fair value is deemed to be credit related and the loss is recorded in
earnings.
There are a number of assumptions and estimates inherent in evaluating
impairments of equity securities and determining if they are other than
temporary, including: 1) our ability and intent to hold the investment for a
period of time sufficient to allow for an anticipated recovery in value; 2) the
length of time and extent to which the fair value has been less than cost;
3) 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; and 4) the specific reasons that a security is in an unrealized loss
position, including overall market conditions which could affect liquidity.
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Once assumptions and estimates are made, any number of changes in facts and
circumstances could cause us to subsequently determine that a fixed income or
equity security is other-than-temporarily impaired, including: 1) general
economic conditions that are worse than previously forecasted or that have a
greater adverse effect on a particular issuer or industry sector than originally
estimated; 2) changes in the facts and circumstances related to a particular
issue or issuer's ability to meet all of its contractual obligations; and
3) changes in facts and circumstances that result in changes to management's
intent to sell or result in our assessment that it is more likely than not we
will be required to sell before recovery of the amortized cost basis of a fixed
income security or causes a change in our ability or intent to hold an equity
security until it recovers in value. Changes in assumptions, facts and
circumstances could result in additional charges to earnings in future periods
to the extent that losses are realized. The charge to earnings, while
potentially significant to net income, would not have a significant effect on
shareholders' equity, since our securities are designated as available for sale
and carried at fair value and as a result, any related unrealized loss, net of
deferred income taxes and related DAC, deferred sales inducement costs and
reserves for life-contingent contract benefits, would already be reflected as a
component of accumulated other comprehensive income in shareholders' equity.
The determination of the amount of other-than-temporary impairment is an
inherently subjective process based on periodic evaluations of the factors
described above. Such evaluations and assessments are revised as conditions
change and new information becomes available. We update our evaluations
regularly and reflect changes in other-than-temporary impairments in results of
operations as such evaluations are revised. The use of different methodologies
and assumptions in the determination of the amount of other-than-temporary
impairments may have a material effect on the amounts presented within the
consolidated financial statements.
For additional detail on investment impairments, see Note 5 of the
consolidated financial statements.
Deferred policy acquisition costs amortization We incur significant costs
in connection with acquiring insurance policies and investment contracts. In
accordance with GAAP, costs that are related directly to the successful
acquisition of new or renewal insurance policies and investment contracts are
deferred and recorded as an asset on the Consolidated Statements of Financial
Position.
DAC related to property-liability contracts is amortized into income as
premiums are earned, typically over periods of six or twelve months. The
amortization methodology for DAC related to Allstate Financial policies and
contracts includes significant assumptions and estimates.
DAC related to traditional life insurance is amortized over the premium
paying period of the related policies in proportion to the estimated revenues on
such business. Significant assumptions relating to estimated premiums,
investment returns, as well as mortality, persistency and expenses to administer
the business are established at the time the policy is issued and are generally
not revised during the life of the policy. The assumptions for determining the
timing and amount of DAC amortization are consistent with the assumptions used
to calculate the reserve for life-contingent contract benefits. Any deviations
from projected business in force resulting from actual policy terminations
differing from expected levels and any estimated premium deficiencies may result
in a change to the rate of amortization in the period such events occur.
Generally, the amortization periods for these policies approximates the
estimated lives of the policies. The recovery of DAC is dependent upon the
future profitability of the business. We periodically review the adequacy of
reserves and recoverability of DAC for these policies on an aggregate basis
using actual experience. We aggregate all traditional life insurance products
and immediate annuities with life contingencies in the analysis. In the event
actual experience is significantly adverse compared to the original assumptions
and a premium deficiency is determined to exist, any remaining unamortized DAC
balance must be expensed to the extent not recoverable and a premium deficiency
reserve may be required if the remaining DAC balance is insufficient to absorb
the deficiency. In 2012, 2011 and 2010, our reviews concluded that no premium
deficiency adjustments were necessary, primarily due to projected profit from
traditional life insurance more than offsetting the projected losses in
immediate annuities with life contingencies.
DAC related to interest-sensitive life, fixed annuities and other investment
contracts is amortized in proportion to the incidence of the total present value
of gross profits, which includes both actual historical gross profits ("AGP")
and estimated future gross profits ("EGP") expected to be earned over the
estimated lives of the contracts. The amortization is net of interest on the
prior period DAC balance using rates established at the inception of the
contracts. Actual amortization periods generally range from 15-30 years;
however, incorporating estimates of the rate of customer surrenders, partial
withdrawals and deaths generally results in the majority of the DAC being
amortized during the surrender charge period, which is typically 10-20 years for
interest-sensitive life and 5-10 years for fixed annuities. The cumulative DAC
amortization is reestimated and adjusted by a cumulative charge or credit to
income when there is a difference between the incidence of actual versus
expected gross profits in a reporting period or when there is a change in total
EGP.
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AGP and EGP primarily consist of the following components: contract charges
for the cost of insurance less mortality costs and other benefits (benefit
margin); investment income and realized capital gains and losses less interest
credited (investment margin); and surrender and other contract charges less
maintenance expenses (expense margin). The principal assumptions for determining
the amount of EGP are persistency, mortality, expenses, investment returns,
including capital gains and losses on assets supporting contract liabilities,
interest crediting rates to contractholders, and the effects of any hedges, and
these assumptions are reasonably likely to have the greatest impact on the
amount of DAC amortization. Changes in these assumptions can be offsetting and
we are unable to reasonably predict their future movements or offsetting impacts
over time.
Each reporting period, DAC amortization is recognized in proportion to AGP
for that period adjusted for interest on the prior period DAC balance. This
amortization process includes an assessment of AGP compared to EGP, the actual
amount of business remaining in force and realized capital gains and losses on
investments supporting the product liability. The impact of realized capital
gains and losses on amortization of DAC depends upon which product liability is
supported by the assets that give rise to the gain or loss. If the AGP is
greater than EGP in the period, but the total EGP is unchanged, the amount of
DAC amortization will generally increase, resulting in a current period decrease
to earnings. The opposite result generally occurs when the AGP is less than the
EGP in the period, but the total EGP is unchanged. However, when DAC
amortization or a component of gross profits for a quarterly period is
potentially negative (which would result in an increase of the DAC balance) as a
result of negative AGP, the specific facts and circumstances surrounding the
potential negative amortization are considered to determine whether it is
appropriate for recognition in the consolidated financial statements. Negative
amortization is only recorded when the increased DAC balance is determined to be
recoverable based on facts and circumstances. Negative amortization was not
recorded for certain fixed annuities during 2012, 2011 and 2010 periods in which
capital losses were realized on their related investment portfolio. For products
whose supporting investments are exposed to capital losses in excess of our
expectations which may cause periodic AGP to become temporarily negative, EGP
and AGP utilized in DAC amortization may be modified to exclude the excess
capital losses.
Annually, we review and update all assumptions underlying the projections of
EGP, including persistency, mortality, expenses, investment returns, comprising
investment income and realized capital gains and losses, interest crediting
rates and the effect of any hedges. At each reporting period, we assess whether
any revisions to assumptions used to determine DAC amortization are required.
These reviews and updates may result in amortization acceleration or
deceleration, which are commonly referred to as "DAC unlocking". If the update
of assumptions causes total EGP to increase, the rate of DAC amortization will
generally decrease, resulting in a current period increase to earnings. A
decrease to earnings generally occurs when the assumption update causes the
total EGP to decrease.
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 during the years ended December 31.
($ in millions) 2012 2011 2010
Investment margin $ 3 $ (3 ) $ (9 )
Benefit margin 33 (6 ) 22
Expense margin (2 ) 16 (29 )
Net acceleration (deceleration) $ 34 $ 7 $ (16 )
In 2012, DAC amortization acceleration for changes in the investment margin
component of EGP primarily related to fixed annuities and was due to lower
projected investment returns. The acceleration related to benefit margin was
primarily due to increased projected mortality on variable life insurance,
partially offset by increased projected persistency on interest-sensitive life
insurance. The deceleration related to expense margin related to
interest-sensitive life insurance and fixed annuities and was due to a decrease
in projected expenses. In 2011, DAC amortization deceleration related to changes
in the investment margin component of EGP primarily related to equity-indexed
annuities and was due to an increase in projected investment margins. The
deceleration related to benefit margin was primarily due to increased projected
persistency on interest-sensitive life insurance. The acceleration related to
expense margin primarily related to interest-sensitive life insurance and was
due to an increase in projected expenses. In 2010, DAC amortization deceleration
related to changes in the investment margin component of EGP primarily related
to interest-sensitive life insurance and was due to higher than previously
projected investment income and lower interest credited, partially offset by
higher projected realized capital losses. The acceleration related to benefit
margin was primarily due to lower projected renewal premium (which is also
expected to reduce persistency) on interest-sensitive life insurance, partially
offset by higher than previously projected revenues associated with variable
life insurance due to
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appreciation in the underlying separate account valuations. The deceleration
related to expense margin resulted from current and expected expense levels
lower than previously projected.
The following table displays the sensitivity of reasonably likely changes in
assumptions included in the gross profit components of investment margin or
benefit margin to amortization of the DAC balance as of December 31, 2012.
($ in millions) Increase/(reduction) in DAC
Increase in future investment margins of 25 basis
points $
68
Decrease in future investment margins of 25 basis
points $ (76 )
Decrease in future life mortality by 1% $
15
Increase in future life mortality by 1% $
(16 )
Any potential changes in assumptions discussed above are measured without
consideration of correlation among assumptions. Therefore, it would be
inappropriate to add them together in an attempt to estimate overall variability
in amortization.
For additional detail related to DAC, see the Allstate Financial Segment
section of this document.
Reserve for property-liability insurance claims and claims expense
estimation Reserves are established to provide for the estimated costs of
paying claims and claims expenses under insurance policies we have issued.
Property-Liability underwriting results are significantly influenced by
estimates of property-liability insurance claims and claims expense reserves.
These reserves are an estimate of amounts necessary to settle all outstanding
claims, including claims that have been incurred but not reported ("IBNR"), as
of the financial statement date.
Characteristics of reserves Reserves are established independently of
business segment management for each business segment and line of business based
on estimates of the ultimate cost to settle claims, less losses that have been
paid. The significant lines of business are auto, homeowners, and other lines
for Allstate Protection, and asbestos, environmental, and other discontinued
lines for Discontinued Lines and Coverages. Allstate Protection's claims are
typically reported promptly with relatively little reporting lag between the
date of occurrence and the date the loss is reported. Auto and homeowners
liability losses generally take an average of about two years to settle, while
auto physical damage, homeowners property and other personal lines have an
average settlement time of less than one year. Discontinued Lines and Coverages
involve long-tail losses, such as those related to asbestos and environmental
claims, which often involve substantial reporting lags and extended times to
settle.
Reserves are the difference between the estimated ultimate cost of losses
incurred and the amount of paid losses as of the reporting date. Reserves are
estimated for both reported and unreported claims, and include estimates of all
expenses associated with processing and settling all incurred claims. We update
most of our reserve estimates quarterly and as new information becomes available
or as events emerge that may affect the resolution of unsettled claims. Changes
in prior year reserve estimates (reserve reestimates), which may be material,
are determined by comparing updated estimates of ultimate losses to prior
estimates, and the differences are recorded as property-liability insurance
claims and claims expense in the Consolidated Statements of Operations in the
period such changes are determined. Estimating the ultimate cost of claims and
claims expenses is an inherently uncertain and complex process involving a high
degree of judgment and is subject to the evaluation of numerous variables.
The actuarial methods used to develop reserve estimates Reserve estimates
are derived by using several different actuarial estimation methods that are
variations on one primary actuarial technique. The actuarial technique is known
as a "chain ladder" estimation process in which historical loss patterns are
applied to actual paid losses and reported losses (paid losses plus individual
case reserves established by claim adjusters) for an accident year or a report
year to create an estimate of how losses are likely to develop over time. An
accident year refers to classifying claims based on the year in which the claims
occurred. A report year refers to classifying claims based on the year in which
the claims are reported. Both classifications are used to prepare estimates of
required reserves for payments to be made in the future. The key assumptions
affecting our reserve estimates comprise data elements including claim counts,
paid losses, case reserves, and development factors calculated with this data.
In the chain ladder estimation technique, a ratio (development factor) is
calculated which compares current period results to results in the prior period
for each accident year. A three-year or two-year average development factor,
based on historical results, is usually multiplied by the current period
experience to estimate the development of losses of each accident year into the
next time period. The development factors for the future time periods for each
accident year are compounded over the remaining future periods to calculate an
estimate of ultimate losses for each accident year. The implicit assumption of
this technique is that an average of historical development factors is
predictive of future loss
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development, as the significant size of our experience database achieves a high
degree of statistical credibility in actuarial projections of this type. The
effects of inflation are implicitly considered in the reserving process, the
implicit assumption being that a multi-year average development factor includes
an adequate provision. Occasionally, unusual aberrations in loss patterns are
caused by external and internal factors such as changes in claim reporting,
settlement patterns, unusually large losses, process changes, legal or
regulatory changes, and other influences. In these instances, analyses of
alternate development factor selections are performed to evaluate the effect of
these factors and actuarial judgment is applied to make appropriate development
factor assumptions needed to develop a best estimate of ultimate losses.
How reserve estimates are established and updated Reserve estimates are
developed at a very detailed level, and the results of these numerous
micro-level best estimates are aggregated to form a consolidated reserve
estimate. For example, over one thousand actuarial estimates of the types
described above are prepared each quarter to estimate losses for each line of
insurance, major components of losses (such as coverages and perils), major
states or groups of states and for reported losses and IBNR. The actuarial
methods described above are used to analyze the settlement patterns of claims by
determining the development factors for specific data elements that are
necessary components of a reserve estimation process. Development factors are
calculated quarterly and periodically throughout the year for data elements such
as claim counts reported and settled, paid losses, and paid losses combined with
case reserves. The calculation of development factors from changes in these data
elements also impacts claim severity trends, which is a common industry
reference used to explain changes in reserve estimates. The historical
development patterns for these data elements are used as the assumptions to
calculate reserve estimates.
Often, several different estimates are prepared for each detailed component,
incorporating alternative analyses of changing claim settlement patterns and
other influences on losses, from which we select our best estimate for each
component, occasionally incorporating additional analyses and actuarial
judgment, as described above. These micro-level estimates are not based on a
single set of assumptions. Actuarial judgments that may be applied to these
components of certain micro-level estimates generally do not have a material
impact on the consolidated level of reserves. Moreover, this detailed
micro-level process does not permit or result in a compilation of a company-wide
roll up to generate a range of needed loss reserves that would be meaningful.
Based on our review of these estimates, our best estimate of required reserves
for each state/line/coverage component is recorded for each accident year, and
the required reserves for each component are summed to create the reserve
balance carried on our Consolidated Statements of Financial Position.
Reserves are reestimated quarterly and periodically throughout the year, by
combining historical results with current actual results to calculate new
development factors. This process incorporates the historic and latest actual
trends, and other underlying changes in the data elements used to calculate
reserve estimates. New development factors are likely to differ from previous
development factors used in prior reserve estimates because actual results
(claims reported or settled, losses paid, or changes to case reserves) occur
differently than the implied assumptions contained in the previous development
factor calculations. If claims reported, paid losses, or case reserve changes
are greater or less than the levels estimated by previous development factors,
reserve reestimates increase or decrease. When actual development of these data
elements is different than the historical development pattern used in a prior
period reserve estimate, a new reserve is determined. The difference between
indicated reserves based on new reserve estimates and recorded reserves (the
previous estimate) is the amount of reserve reestimate and is recognized as an
increase or decrease in property-liability insurance claims and claims expense
in the Consolidated Statements of Operations. Total Property-Liability reserve
reestimates, after-tax, as a percent of net income were favorable 18.7%, 27.7%
and 11.3% in 2012, 2011 and 2010, respectively. The 3-year average of reserve
reestimates as a percentage of total reserves was a favorable 2.2% for
Property-Liability, a favorable 2.7% for Allstate Protection and an unfavorable
1.9% for Discontinued Lines and Coverages, each of these results being
consistent within a reasonable actuarial tolerance for our respective
businesses. A more detailed discussion of reserve reestimates is presented in
the Property-Liability Claims and Claims Expense Reserves section of this
document.
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The following table shows net claims and claims expense reserves by segment
and line of business as of December 31:
($ in millions) 2012 2011 2010
Allstate Protection
Auto $ 11,383 $ 11,404 $ 11,034
Homeowners 2,008 2,439 2,442
Other lines 2,250 2,237 2,141
Total Allstate Protection 15,641 16,080 15,617
Discontinued Lines and Coverages
Asbestos 1,026 1,078 1,100
Environmental 193 185 201
Other discontinued lines 418 444 478
Total Discontinued Lines and Coverages 1,637 1,707 1,779
Total Property-Liability $ 17,278 $ 17,787 $ 17,396
Allstate Protection reserve estimates
Factors affecting reserve estimates Reserve estimates are developed based
on the processes and historical development trends described above. These
estimates are considered in conjunction with known facts and interpretations of
circumstances and factors including our 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. When we experience changes of the type previously mentioned, we may
need to apply actuarial judgment in the determination and selection of
development factors considered more reflective of the new trends, such as
combining shorter or longer periods of historical results with current actual
results to produce development factors based on two-year, three-year, or longer
development periods to reestimate our reserves. For example, if a legal change
is expected to have a significant impact on the development of claim severity
for a coverage which is part of a particular line of insurance in a specific
state, actuarial judgment is applied to determine appropriate development
factors that will most accurately reflect the expected impact on that specific
estimate. Another example would be when a change in economic conditions is
expected to affect the cost of repairs to damaged autos or property for a
particular line, coverage, or state, actuarial judgment is applied to determine
appropriate development factors to use in the reserve estimate that will most
accurately reflect the expected impacts on severity development.
As claims are reported, for certain liability claims of sufficient size and
complexity, the field adjusting staff establishes case reserve estimates of
ultimate cost, based on their assessment of facts and circumstances related to
each individual claim. For other claims which occur in large volumes and settle
in a relatively short time frame, it is not practical or efficient to set case
reserves for each claim, and a statistical case reserve is set for these claims
based on estimation techniques described above. In the normal course of
business, we may also supplement our 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.
Historically, the case reserves set by the field adjusting staff have not
proven to be an entirely accurate estimate of the ultimate cost of claims. To
provide for this, a development reserve is estimated using the processes
described above, and allocated to pending claims as a supplement to case
reserves. Typically, the case and supplemental development reserves comprise
about 90% of total reserves.
Another major component of reserves is IBNR. Typically, IBNR comprises about
10% of total reserves.
Generally, the initial reserves for a new accident year are established
based on severity assumptions for different business segments, lines and
coverages based on historical relationships to relevant inflation indicators,
and reserves for prior accident years are statistically determined using
processes described above. Changes in auto current year claim severity are
generally influenced by inflation in the medical and auto repair sectors of the
economy. We mitigate these effects through various loss management programs.
Injury claims are affected largely by medical cost inflation while physical
damage claims are affected largely by auto repair cost inflation and used car
prices. For auto physical damage coverages, we monitor our rate of increase in
average cost per claim against a weighted average of the Maintenance and Repair
price index and the Parts and Equipment price index. We believe our claim
settlement initiatives, such as improvements to the claim review and settlement
process, the use of special investigative units to detect fraud and
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handle suspect claims, litigation management and defense strategies, as well as
various other loss management initiatives underway, contribute to the mitigation
of injury and physical damage severity trends.
Changes in homeowners current year claim severity are generally influenced
by inflation in the cost of building materials, the cost of construction and
property repair services, the cost of replacing home furnishings and other
contents, the types of claims that qualify for coverage, deductibles and other
economic and environmental factors. We employ various loss management programs
to mitigate the effect of these factors.
As loss experience for the current year develops for each type of loss, it
is monitored relative to initial assumptions until it is judged to have
sufficient statistical credibility. From that point in time and forward,
reserves are reestimated using statistical actuarial processes to reflect the
impact actual loss trends have on development factors incorporated into the
actuarial estimation processes. Statistical credibility is usually achieved by
the end of the first calendar year; however, when trends for the current
accident year exceed initial assumptions sooner, they are usually determined to
be credible, and reserves are increased accordingly.
The very detailed processes for developing reserve estimates, and the lack
of a need and existence of a common set of assumptions or development factors,
limits aggregate reserve level testing for variability of data elements.
However, by applying standard actuarial methods to consolidated historic
accident year loss data for major loss types, comprising auto injury losses,
auto physical damage losses and homeowner losses, we develop variability
analyses consistent with the way we develop reserves by measuring the potential
variability of development factors, as described in the section titled
"Potential Reserve Estimate Variability" below.
Causes of reserve estimate uncertainty Since reserves are estimates of
unpaid portions of claims and claims expenses that have occurred, including IBNR
losses, the establishment of appropriate reserves, including reserves for
catastrophe losses, requires regular reevaluation and refinement of estimates to
determine our ultimate loss estimate.
At each reporting date, the highest degree of uncertainty in estimates of
losses arises from claims remaining to be settled for the current accident year
and the most recent preceding accident year. The greatest degree of uncertainty
exists in the current accident year because the current accident year contains
the greatest proportion of losses that have not been reported or settled but
must be estimated as of the current reporting date. Most of these losses relate
to damaged property such as automobiles and homes, and medical care for injuries
from accidents. During the first year after the end of an accident year, a large
portion of the total losses for that accident year are settled. When accident
year losses paid through the end of the first year following the initial
accident year are incorporated into updated actuarial estimates, the trends
inherent in the settlement of claims emerge more clearly. Consequently, this is
the point in time at which we tend to make our largest reestimates of losses for
an accident year. After the second year, the losses that we pay for an accident
year typically relate to claims that are more difficult to settle, such as those
involving serious injuries or litigation. Private passenger auto insurance
provides a good illustration of the uncertainty of future loss estimates: our
typical annual percentage payout of reserves for an accident year is
approximately 45% in the first year after the end of the accident year, 20% in
the second year, 15% in the third year, 10% in the fourth year, and the
remaining 10% thereafter.
Reserves for catastrophe losses Property-Liability claims and claims
expense reserves also include reserves for catastrophe losses. Catastrophe
losses are an inherent risk of the property-liability insurance industry that
have contributed, and will continue to contribute, to potentially material
year-to-year fluctuations in our results of operations and financial position.
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 types of
terrorism or industrial accidents. The nature and level of catastrophes in any
period cannot be predicted.
The estimation of claims and claims expense reserves for catastrophe losses
also comprises estimates of losses from reported claims and IBNR, primarily for
damage to property. In general, our estimates for catastrophe reserves are based
on claim adjuster inspections and the application of historical loss development
factors as described above. However, depending on the nature of the catastrophe,
as noted above, the estimation process can be further complicated. For example,
for hurricanes, complications could include the inability of insureds to
promptly report losses, limitations placed on claims adjusting staff affecting
their ability to inspect losses, determining whether losses are covered by our
homeowners policy (generally for damage caused by wind or wind driven rain) or
specifically excluded coverage caused by flood, estimating additional living
expenses, and assessing the impact of demand surge, exposure to
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mold damage, and the effects of numerous other considerations, including the
timing of a catastrophe in relation to other events, such as at or near the end
of a financial reporting period, which can affect the availability of
information needed to estimate reserves for that reporting period. In these
situations, we may need to adapt our practices to accommodate these
circumstances in order to determine a best estimate of our losses from a
catastrophe. As an example, in 2005 to complete an estimate for certain areas
affected by Hurricane Katrina and not yet inspected by our claims adjusting
staff, or where we believed our historical loss development factors were not
predictive, we relied on analysis of actual claim notices received compared to
total PIF, as well as visual, governmental and third party information,
including aerial photos, area observations, and data on wind speed and flood
depth to the extent available.
Potential reserve estimate variability The aggregation of numerous
micro-level estimates for each business segment, line of insurance, major
components of losses (such as coverages and perils), and major states or groups
of states for reported losses and IBNR forms the reserve liability recorded in
the Consolidated Statements of Financial Position. Because of this detailed
approach to developing our reserve estimates, there is not a single set of
assumptions that determine our reserve estimates at the consolidated level.
Given the numerous micro-level estimates for reported losses and IBNR,
management does not believe the processes that we follow will produce a
statistically credible or reliable actuarial reserve range that would be
meaningful. Reserve estimates, by their very nature, are very complex to
determine and subject to significant judgment, and do not represent an exact
determination for each outstanding claim. Accordingly, as actual claims, and/or
paid losses, and/or case reserve results emerge, our estimate of the ultimate
cost to settle will be different than previously estimated.
To develop a statistical indication of potential reserve variability within
reasonably likely possible outcomes, an actuarial technique (stochastic
modeling) is applied to the countrywide consolidated data elements for paid
losses and paid losses combined with case reserves separately for injury losses,
auto physical damage losses, and homeowners losses excluding catastrophe losses.
Based on the combined historical variability of the development factors
calculated for these data elements, an estimate of the standard error or
standard deviation around these reserve estimates is calculated within each
accident year for the last twenty years for each type of loss. The variability
of these reserve estimates within one standard deviation of the mean (a measure
of frequency of dispersion often viewed to be an acceptable level of accuracy)
is believed by management to represent a reasonable and statistically probable
measure of potential variability. Based on our products and coverages,
historical experience, the statistical credibility of our extensive data and
stochastic modeling of actuarial chain ladder methodologies used to develop
reserve estimates, we estimate that the potential variability of our Allstate
Protection reserves, excluding reserves for catastrophe losses, within a
reasonable probability of other possible outcomes, may be approximately plus or
minus 4%, or plus or minus $470 million in net income. A lower level of
variability exists for auto injury losses, which comprise approximately 80% of
reserves, due to their relatively stable development patterns over a longer
duration of time required to settle claims. Other types of losses, such as auto
physical damage, homeowners losses and other losses, which comprise about 20% of
reserves, tend to have greater variability but are settled in a much shorter
period of time. Although this evaluation reflects most reasonably likely
outcomes, it is possible the final outcome may fall below or above these
amounts. Historical variability of reserve estimates is reported in the
Property-Liability Claims and Claims Expense Reserves section of this document.
Adequacy of reserve estimates We believe our net claims and claims expense
reserves are appropriately established based on available methodology, facts,
technology, laws and regulations. We calculate and record a single best reserve
estimate, in conformance with generally accepted actuarial standards, for each
line of insurance, its components (coverages and perils) and state, for reported
losses and for IBNR losses, and as a result we believe that no other estimate is
better than our recorded amount. Due to the uncertainties involved, the ultimate
cost of losses may vary materially from recorded amounts, which are based on our
best estimates.
Discontinued Lines and Coverages reserve estimates
Characteristics of Discontinued Lines exposure Our exposure to asbestos,
environmental and other discontinued lines claims arises principally from
assumed reinsurance coverage written during the 1960s through the mid-1980s,
including reinsurance on primary insurance written on large U.S. companies, and
from direct excess insurance written from 1972 through 1985, including
substantial excess general liability coverages on large U.S. companies.
Additional exposure stems from direct primary commercial insurance written
during the 1960s through the mid-1980s. Asbestos claims relate primarily to
bodily injuries asserted by people who were exposed to asbestos or products
containing asbestos. Environmental claims relate primarily to pollution and
related clean-up costs. Other discontinued lines exposures primarily relate to
general liability and product liability mass tort claims, such as those for
medical devices and other products, workers' compensation claims and claims for
various other coverage exposures other than asbestos and environmental.
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In 1986, the general liability policy form used by us and others in the
property-liability industry was amended to introduce an "absolute pollution
exclusion," which excluded coverage for environmental damage claims, and to add
an asbestos exclusion. Most general liability policies issued prior to 1987
contain annual aggregate limits for product liability coverage. General
liability policies issued in 1987 and thereafter contain annual aggregate limits
for product liability coverage and annual aggregate limits for all coverages.
Our experience to date is that these policy form changes have limited the extent
of our exposure to environmental and asbestos claim risks.
Our exposure to liability for asbestos, environmental and other discontinued
lines losses manifests differently depending on whether it arises from assumed
reinsurance coverage, direct excess insurance or direct primary commercial
insurance. The direct insurance coverage we provided that covered asbestos,
environmental and other discontinued lines was substantially "excess" in nature.
Direct excess insurance and reinsurance involve coverage written by us for
specific layers of protection above retentions and other insurance plans. The
nature of excess coverage and reinsurance provided to other insurers limits our
exposure to loss to specific layers of protection in excess of policyholder
retention on primary insurance plans. Our exposure is further limited by the
significant reinsurance that we had purchased on our direct excess business.
Our assumed reinsurance business involved writing generally small
participations in other insurers' reinsurance programs. The reinsured losses in
which we participate may be a proportion of all eligible losses or eligible
losses in excess of defined retentions. The majority of our assumed reinsurance
exposure, approximately 85%, is for excess of loss coverage, while the remaining
15% is for pro-rata coverage.
Our direct primary commercial insurance business did not include coverage to
large asbestos manufacturers. This business comprises a cross section of
policyholders engaged in many diverse business sectors located throughout the
country.
How reserve estimates are established and updated We conduct an annual
review in the third quarter to evaluate and establish asbestos, environmental
and other discontinued lines reserves. Changes to reserves are recorded in the
reporting period in which they are determined. Using established industry and
actuarial best practices and assuming no change in the regulatory or economic
environment, this detailed and comprehensive methodology determines asbestos
reserves based on assessments of the characteristics of exposure (i.e. claim
activity, potential liability, jurisdiction, products versus non-products
exposure) presented by individual policyholders, and determines environmental
reserves based on assessments of the characteristics of exposure
(i.e. environmental damages, respective shares of liability of potentially
responsible parties, appropriateness and cost of remediation) to pollution and
related clean-up costs. The number and cost of these claims is affected by
intense advertising by trial lawyers seeking asbestos plaintiffs, and entities
with asbestos exposure seeking bankruptcy protection as a result of asbestos
liabilities, initially causing a delay in the reporting of claims, often
followed by an acceleration and an increase in claims and claims expenses as
settlements occur.
After evaluating our insureds' probable liabilities for asbestos and/or
environmental claims, we evaluate our insureds' coverage programs for such
claims. We consider our insureds' total available insurance coverage, including
the coverage we issued. We also consider relevant judicial interpretations of
policy language and applicable coverage defenses or determinations, if any.
Evaluation of both the insureds' estimated liabilities and our exposure to
the insureds depends heavily on an analysis of the relevant legal issues and
litigation environment. This analysis is conducted by our specialized claims
adjusting staff and legal counsel. Based on these evaluations, case reserves are
established by claims adjusting staff and actuarial analysis is employed to
develop an IBNR reserve, which includes estimated potential reserve development
and claims that have occurred but have not been reported. As of December 31,
2012 and 2011, IBNR was 57.8% and 59.0%, respectively, of combined net asbestos
and environmental reserves.
For both asbestos and environmental reserves, we also evaluate our
historical direct net loss and expense paid and incurred experience to assess
any emerging trends, fluctuations or characteristics suggested by the aggregate
paid and incurred activity.
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Other Discontinued Lines and Coverages The following table shows reserves
for other discontinued lines which provide for remaining loss and loss expense
liabilities related to business no longer written by us, other than asbestos and
environmental, as of December 31.
($ in millions) 2012 2011 2010
Other mass torts $ 166 $ 169 $ 188
Workers' compensation 112 117 116
Commercial and other 140 158 174
Other discontinued lines $ 418 $ 444 $ 478
Other mass torts describes direct excess and reinsurance general liability
coverage provided for cumulative injury losses other than asbestos and
environmental. Workers' compensation and commercial and other include run-off
from discontinued direct primary, direct excess and reinsurance commercial
insurance operations of various coverage exposures other than asbestos and
environmental. Reserves are based on considerations similar to those described
above, as they relate to the characteristics of specific individual coverage
exposures.
Potential reserve estimate variability Establishing Discontinued Lines and
Coverages 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. 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 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. Our reserves for asbestos and environmental exposures
could be affected by tort reform, class action litigation, and other potential
legislation and judicial decisions. Environmental exposures could also be
affected by a change in the existing federal Superfund law and similar state
statutes. There can be no assurance that any reform legislation will be enacted
or that any such legislation will provide for a fair, effective and
cost-efficient system for settlement of asbestos or environmental claims. We
believe 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. Historical variability of reserve
estimates is demonstrated in the Property-Liability Claims and Claims Expense
Reserves section of this document.
Adequacy of reserve estimates Management believes its net loss reserves for
environmental, asbestos and other discontinued lines exposures are appropriately
established based on available facts, technology, laws, regulations, and
assessments of other pertinent factors and characteristics of exposure
(i.e. claim activity, potential liability, jurisdiction, products versus
non-products exposure) presented by individual policyholders, assuming no change
in the legal, legislative or economic environment. 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.
Further discussion of reserve estimates For further discussion of these
estimates and quantification of the impact of reserve estimates, reserve
reestimates and assumptions, see Notes 8 and 14 to the consolidated financial
statements and the Property-Liability Claims and Claims Expense Reserves section
of this document.
Reserve for life-contingent contract benefits estimation Due to the long
term nature of traditional life insurance, life-contingent immediate annuities
and voluntary accident and health insurance products, benefits are payable over
many years; accordingly, the reserves are calculated as the present value of
future expected benefits to be paid, reduced by the present value of future
expected net premiums. Long-term actuarial assumptions of future investment
yields, mortality, morbidity, policy terminations and expenses are used when
establishing the reserve for life-contingent contract benefits payable under
these insurance policies. These assumptions, which for traditional life
insurance are applied using the net level premium method, include provisions for
adverse deviation and generally vary by characteristics such as type of
coverage, year of issue and policy duration. Future investment yield assumptions
are determined based upon prevailing investment yields as well as estimated
reinvestment yields. Mortality, morbidity and
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policy termination assumptions are based on our experience and industry
experience. Expense assumptions include the estimated effects of inflation and
expenses to be incurred beyond the premium-paying period. These assumptions are
established at the time the policy is issued, are consistent with assumptions
for determining DAC amortization for these policies, and are generally not
changed during the policy coverage period. However, if actual experience emerges
in a manner that is significantly adverse relative to the original assumptions,
adjustments to DAC or reserves may be required resulting in a charge to earnings
which could have a material effect on our operating results and financial
condition. We periodically review the adequacy of reserves and recoverability of
DAC for these policies on an aggregate basis using actual experience. In the
event actual experience is significantly adverse compared to the original
assumptions and a premium deficiency is determined to exist, any remaining
unamortized DAC balance must be expensed to the extent not recoverable and the
establishment of a premium deficiency reserve may be required. In 2012, 2011 and
2010, our reviews concluded that no premium deficiency adjustments were
necessary, primarily due to profit from traditional life insurance more than
offsetting the projected losses in immediate annuities with life contingencies.
We will continue to monitor the experience of our traditional life insurance and
immediate annuities. We anticipate that mortality, investment and reinvestment
yields, and policy terminations are the factors that would be most likely to
require premium deficiency adjustments to these reserves or related DAC.
For further detail on the reserve for life-contingent contract benefits, see
Note 9 of the consolidated financial statements.
PROPERTY-LIABILITY 2012 HIGHLIGHTS
º •
º Property-Liability net income was $1.97 billion in 2012 compared to
$403 million in 2011.
º •
º Property-Liability premiums written totaled $27.03 billion in 2012, an
increase of 4.0% from $25.98 billion in 2011.
º •
º The Property-Liability loss ratio was 69.1 in 2012 compared to 77.7 in
2011.
º •
º Catastrophe losses were $2.35 billion in 2012 compared to $3.82 billion
2011.
º •
º Prior year reserve reestimates totaled $665 million favorable in 2012
compared to $335 million favorable in 2011.
º •
º Property-Liability underwriting income was $1.20 billion in 2012 compared
to an underwriting loss of $882 million in 2011. Underwriting income
(loss), a measure not based on GAAP, is defined below.
º •
º Property-Liability investments were $38.22 billion as of December 31, 2012,
an increase of 6.2% from $36.00 billion as of December 31, 2011. Net
investment income was $1.33 billion in 2012, an increase of 10.4% from
$1.20 billion in 2011.
º •
º Net realized capital gains were $335 million in 2012 compared to
$85 million in 2011.
PROPERTY-LIABILITY OPERATIONS
Overview Our Property-Liability operations consist of two reporting
segments: Allstate Protection and Discontinued Lines and Coverages. Allstate
Protection comprises three brands: Allstate, Encompass and Esurance. 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 (loss), a measure that is not based on GAAP and is
reconciled to net income (loss) below, is calculated as premiums earned, less
claims and claims expense ("losses"), amortization of 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 (loss) is the GAAP
measure most directly comparable to underwriting income (loss). Underwriting
income (loss) 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:
º •
º Claims and claims expense ("loss") ratio - the ratio of claims and claims
expense to premiums earned. Loss ratios include the impact of catastrophe
losses.
º •
º Expense ratio - the ratio of amortization of DAC, operating costs and
expenses, and restructuring and related charges to premiums earned.
º • º 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
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expense ratio. The difference between 100% and the combined ratio
represents underwriting income (loss) 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.
º •
º 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.
º •
º 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.
º •
º Effect of business combination expenses and the amortization of purchased
intangible assets on combined and expense ratio - the percentage of
business combination expenses and the amortization of purchased intangible
assets to premiums earned.
º •
º Effect of restructuring and related charges on combined ratio - the
percentage of restructuring and related charges to premiums earned.
º • º Effect of Discontinued Lines and Coverages on combined ratio - the ratio of
claims and claims expense and operating 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.
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Summarized financial data, a reconciliation of underwriting income (loss) to
net income, and GAAP operating ratios for our Property-Liability operations are
presented in the following table.
($ in millions, except ratios) 2012 2011 2010
Premiums written $ 27,027 $ 25,980 $ 25,907
Revenues
Premiums earned $ 26,737 $ 25,942 $ 25,957
Net investment income 1,326 1,201 1,189
Realized capital gains and losses 335 85 (321 )
Total revenues 28,398 27,228 26,825
Costs and expenses
Claims and claims expense (18,484 ) (20,161 ) (18,951 )
Amortization of DAC (3,483 ) (3,477 ) (3,517 )
Operating costs and expenses (3,536 ) (3,143 ) (2,962 )
Restructuring and related charges (34 ) (43 ) (33 )
Total costs and expenses (25,537 ) (26,824 ) (25,463 )
Gain on disposition of operations - - 5
Income tax expense (893 ) (1 ) (314 )
Net income $ 1,968 $ 403 $ 1,053
Underwriting income (loss) $ 1,200 $ (882 ) $ 494
Net investment income 1,326 1,201 1,189
Income tax (expense) benefit on operations (779 ) 30 (426 )
Realized capital gains and losses, after-tax 221 54 (207 )
Gain on disposition of operations, after-tax - - 3
Net income $ 1,968 $ 403 $ 1,053
Catastrophe losses (1) $ 2,345 $ 3,815 $ 2,207
GAAP operating ratios
Claims and claims expense ratio 69.1 77.7 73.0
Expense ratio 26.4 25.7 25.1
Combined ratio 95.5 103.4 98.1
Effect of catastrophe losses on combined ratio (1) 8.8
14.7 8.5
Effect of prior year reserve reestimates on combined
ratio (1)
(2.5 )
(1.3 ) (0.6 )
Effect of business combination expenses and the
amortization of purchased intangible assets on
combined ratio 0.5 0.2 -
Effect of restructuring and related charges on
combined ratio 0.1
0.2 0.1
Effect of Discontinued Lines and Coverages on
combined ratio 0.2 0.1 0.1
--------------------------------------------------------------------------------
º (1)
º Prior year reserve reestimates included in catastrophe losses totaled
$410 million favorable in 2012, $130 million favorable in 2011 and
$163 million favorable in 2010.
ALLSTATE PROTECTION SEGMENT
Overview and strategy The Allstate Protection segment primarily sells
private passenger auto and homeowners insurance to individuals through Allstate
exclusive agencies supported by call centers and the internet under the Allstate
brand. We sell auto and homeowners insurance through independent agencies under
both the Allstate brand and the Encompass brand. We also sell auto insurance
direct to consumers online, through call centers and through select agents,
including Answer Financial, under the Esurance brand.
Our strategy is to position our products and distribution systems to meet
the changing needs of the customer in managing the risks they face. This
includes customers who want advice and assistance and those who are
self-directed. In addition, there are customers who are brand-sensitive and
those who are brand-neutral. Our strategy is to serve all four of these consumer
segments with unique products and in unique and innovative ways while leveraging
our claims,
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pricing and operational capabilities. When we do not offer a product our
customers need, we may make available non-proprietary products that meet their
needs.
Allstate is executing a multi-year effort to drive the customer experience.
We utilize specific customer value propositions for each brand to improve our
competitive position and performance. Over time, delivering on these customer
value propositions may include investments in resources and require significant
changes to our products and capabilities.
Our operating priorities for the Protection segment include achieving
profitable market share growth for our auto business as well as earning
acceptable returns on our homeowners business. Key goals include:
º •
º Improving customer loyalty and retention;
º •
º Deepening customer product relationships;
º • º Improving auto competitive position for a greater share of consumers;
º •
º Improving the profitability of our homeowners business;
º •
º Investing in the effectiveness and reach of our multiple distribution
channels including self-directed consumers through our Esurance brand;
and
º •
º Maintaining a strong capital foundation through risk management and
effective resource allocation.
Our strategy for the Allstate brand focuses on customers who prefer local
personal advice and service and are brand-sensitive. Our customer-focused
strategy for the Allstate brand aligns targeted marketing, product innovation,
distribution effectiveness, and pricing toward acquiring and retaining an
increased share of our target customers, which generally refers to consumers who
want to purchase multiple products from one insurance provider including auto,
homeowners and financial products, who have better retention and potentially
present more favorable prospects for profitability over the course of their
relationships with us. As a result of this strategy, the majority of the
Allstate brand's policies are owned by customers with multiple products.
The Allstate brand utilizes marketing delivered to target customers to
promote our strategic priorities, with messaging that continues to communicate
ease of doing business with Allstate and Allstate agencies, good value, as well
as the importance of having proper coverage by highlighting our comprehensive
product and coverage options.
The Allstate brand differentiates itself from competitors by offering a
comprehensive range of innovative product options and features as well as
product customization, including Allstate Your Choice Auto® with options such as
accident forgiveness, safe driving deductible rewards and a safe driving bonus,
and Allstate House and Home® that provides options of coverage for roof damage
including graduated coverage and pricing based on roof type and age. In
addition, we offer a Claim Satisfaction Guaranteesm that promises a return of
premium to Allstate brand standard auto insurance customers dissatisfied with
their claims experience. Our DRIVEWISE® program enables participating customers
to be eligible for discounts based on driving performance as measured by a
device installed in the vehicle. We will continue to focus on developing and
introducing products and services that benefit today's consumers and further
differentiate Allstate and enhance the customer experience. We will deepen
customer relationships through value-added customer interactions and expanding
our presence in households with multiple products by providing financial
protection for customer needs. In certain areas with higher risk of
catastrophes, we offer a homeowners product from North Light Specialty Insurance
Company ("North Light"), our excess and surplus lines carrier. When an Allstate
product is not available, we make available non-proprietary products for
customers through brokering arrangements. For example, in hurricane exposed
areas, Allstate agencies sell non-proprietary property insurance products to
customers who prefer to use a single agent for all their insurance needs.
We are undergoing a focused effort to enhance our capabilities by
implementing uniform processes and standards to elevate the level and
consistency of our customer experience. We continue to enhance technology to
integrate our distribution channels, improve customer service, facilitate the
introduction of new products and services and reduce infrastructure costs
related to supporting agencies and handling claims. These actions and others are
designed to optimize the effectiveness of our distribution and service channels
by increasing the productivity of the Allstate brand's exclusive agencies. Since
Allstate brand customers prefer personal advice and assistance, beginning in
2013 all Allstate brand customers who purchased their policies directly through
call centers and the internet will be assigned an Allstate exclusive agency
relationship.
Our pricing and underwriting strategies and decisions are designed to
enhance both our competitive position and our profit potential. Sophisticated
pricing uses a number of risk evaluation factors including insurance scoring, to
the extent permissible by regulations, based on information that is obtained
from credit reports. Our updated auto risk evaluation pricing model was
implemented for 9 states in 2012. Our pricing strategy involves marketplace
pricing and underwriting decisions that are based on these risk evaluation
models and an evaluation of competitors. We will utilize
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sophisticated pricing to increase our price competiveness to a greater share of
target customers. A combination of underwriting information, pricing and
discounts are used to achieve a higher close rate on quotes. We will also use
these factors on our non-standard business to offer competitive prices to
customers with risk profiles indicating greater likelihood of renewal.
We also continue to enhance our pricing to attract a larger share of
customers. For the Allstate brand auto and homeowners business, we continue to
shift our mix towards customers that have better retention and thus potentially
present more favorable prospects for profitability over the course of their
relationship with us. For homeowners, we continue to address rate adequacy and
improve underwriting and claim effectiveness. We also consider various strategic
options to improve our homeowners insurance business returns.
Allstate brand also includes Emerging Businesses which comprises Consumer
Household (specialty auto products including motorcycle, trailer, motor home and
off-road vehicle insurance policies and specialty property products including
renter, landlord, boat, umbrella, manufactured home and condominium insurance
policies), Allstate Roadside Services (roadside assistance products), Allstate
Dealer Services (guaranteed automobile protection and vehicle service products
sold primarily through auto dealers), Ivantage (insurance agency) and Commercial
Lines (commercial products for small business owners). Premiums written by
Emerging Businesses were $2.56 billion in 2012 compared to $2.49 billion in
2011.
Our strategy for the Encompass brand centers around our highly
differentiated product that simplifies the insurance experience through an
expanded coverage single annual policy with one premium, one bill, one policy
deductible and one renewal date. It appeals to customers with broad personal
lines coverage needs who prefer an independent agent. As part of its package
policy strategy, Encompass is focused on increased agency engagement through
ease of doing business initiatives and increased package commissions, and
de-emphasizing mono-line auto and property products.
Our strategy for the Esurance brand focuses on self-directed and web-savvy
consumers. To best serve these customers, Esurance develops its technology and
website to continuously improve its hassle-free purchase and claims experience.
Esurance began offering renters insurance in 2012 and plans to continue to
broaden its product offerings. Esurance is also focused on increasing its
preferred driver mix, while raising advertising investment and marketing
effectiveness to support growth.
We continue to manage our property catastrophe exposure with the goal of
providing shareholders an acceptable return on the risks assumed in our property
business and to reduce the variability of our earnings. Our property business
includes personal homeowners, commercial property and other property insurance
lines. As of December 31, 2012, we are below our goal to have no more than a 1%
likelihood of exceeding average annual aggregate catastrophe losses by
$2 billion, net of reinsurance, from hurricanes and earthquakes, based on
modeled assumptions and applications currently available. The use of different
assumptions and updates to industry models could materially change the projected
loss. Our growth strategies include areas previously restricted where we believe
we can earn an appropriate return for the risk and as a result we may move
closer to our goal in the future. In addition, we have exposure to severe
weather events which impact catastrophe losses.
Property catastrophe exposure management includes purchasing reinsurance to
provide coverage for known exposure to hurricanes, earthquakes, wildfires, fires
following earthquakes and other catastrophes. We are also working for changes in
the regulatory environment, including recognizing the need for better
catastrophe preparedness, improving appropriate risk-based pricing and promoting
the creation of government sponsored, privately funded solutions for
mega-catastrophes that will make insurance more available and affordable.
Pricing of property products is typically intended to establish returns that
we deem acceptable over a long-term period. Losses, including losses from
catastrophic events and weather-related losses (such as wind, hail, lightning
and freeze losses not meeting our criteria to be declared a catastrophe), are
accrued on an occurrence basis within the policy period. Therefore, in any
reporting period, loss experience from catastrophic events and weather-related
losses may contribute to negative or positive underwriting performance relative
to the expectations we incorporated into the products' pricing. We pursue rate
increases where indicated, taking into consideration potential customer
disruption, the impact on our ability to market our auto lines, regulatory
limitations, our competitive position and profitability, using a methodology
that appropriately addresses the changing costs of losses from catastrophes such
as severe weather and the net cost of reinsurance.
Allstate Protection outlook
º •
º Allstate Protection will continue to focus on its strategy of offering
differentiated products and services to our target customers while
maintaining pricing discipline.
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º •
º We expect that volatility in the level of catastrophes we experience
will contribute to variation in our underwriting results; however,
this volatility will be mitigated due to our catastrophe management
actions, including the purchase of reinsurance.
º •
º We will continue to study the efficiencies of our operations and cost
structure for additional areas where costs may be reduced.
Premiums written is the amount of premiums charged for policies issued
during a fiscal period. 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 Consolidated Statements of Financial Position.
The following table shows the unearned premium balance as of December 31 and
the timeframe in which we expect to recognize these premiums as earned.
($ in millions) % earned after
Three Six Nine Twelve
2012 2011 months months months months
Allstate brand:
Standard auto $ 4,188 $ 4,120 71.6 % 96.8 % 99.2 % 100.0 %
Non-standard auto 200 216 67.1 % 93.6 % 98.5 % 100.0 %
Homeowners 3,396 3,314 43.5 % 75.6 % 94.2 % 100.0 %
Other personal lines (1) 1,370 1,293 39.4 % 67.1 % 84.0 % 90.6 %
Total Allstate brand 9,154 8,943 56.3 % 84.5 % 95.1 % 98.6 %
Encompass brand:
Standard auto 321 311 43.5 % 75.2 % 94.0 % 100.0 %
Homeowners 222 202 43.3 % 75.2 % 94.1 % 100.0 %
Other personal lines (1) 50 47 43.8 % 75.6 % 94.2 % 100.0 %
Total Encompass brand 593 560 43.4 % 75.2 % 94.0 % 100.0 %
Esurance brand
Standard auto 265 208 74.2 % 98.8 % 99.7 % 100.0 %
Allstate Protection unearned
premiums $ 10,012 $ 9,711 56.0 % 84.3 % 95.1 % 98.7 %
--------------------------------------------------------------------------------
º (1)
º Other personal lines include commercial, renters, condominium, involuntary
auto and other personal lines.
A reconciliation of premiums written to premiums earned is shown in the
following table.
($ in millions) 2012 2011 2010
Premiums written:
Allstate Protection $ 27,026 $ 25,981 $ 25,906
Discontinued Lines and Coverages 1 (1 ) 1
Property-Liability premiums written 27,027 25,980 25,907
(Increase) decrease in unearned premiums (322 ) (33 ) 19
Other 32 (5 ) 31
Property-Liability premiums earned $ 26,737 $ 25,942 $ 25,957
Premiums earned:
Allstate Protection $ 26,737 $ 25,942 $ 25,955
Discontinued Lines and Coverages - - 2
Property-Liability $ 26,737 $ 25,942 $ 25,957
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Premiums written by brand are shown in the following table.
($ in
millions) Allstate brand Encompass brand Esurance brand Allstate Protection
2012 2011 2010 2012 2011 2010 2012 2011 (1) 2012 2011 2010
Standard
auto $ 15,700 $ 15,703 $ 15,842 $ 618 $ 604 $ 644 $ 1,024 $ 181 $ 17,342 $ 16,488 $ 16,486
Non-standard
auto 698 775 883 - 1 6 - - 698 776 889
Homeowners 6,060 5,893 5,753 398 362 357 - - 6,458 6,255 6,110
Other
personal
lines 2,431 2,372 2,331 97 90 90 - - 2,528 2,462 2,421
Total $ 24,889 $ 24,743 $ 24,809 $ 1,113 $ 1,057 $ 1,097 $ 1,024 $ 181 $ 27,026 $ 25,981 $ 25,906
--------------------------------------------------------------------------------
º (1)
º Represents period from October 7, 2011 to December 31, 2011.
Premiums earned by brand are shown in the following table.
Allstate brand Encompass brand Esurance brand Allstate Protection
($ in
millions) 2012 2011 2010 2012 2011 2010 2012 2011 2012 2011 2010
Standard
auto $ 15,637 $ 15,679 $ 15,814 $ 609 $ 620 $ 716 $ 967 $ 201 $ 17,213 $ 16,500 $ 16,530
Non-standard
auto 715 797 896 - 2 9 - - 715 799 905
Homeowners 5,980 5,835 5,693 379 365 385 - - 6,359 6,200 6,078
Other
personal
lines 2,357 2,352 2,348 93 91 94 - - 2,450 2,443 2,442
Total $ 24,689 $ 24,663 $ 24,751 $ 1,081 $ 1,078 $ 1,204 $ 967 $ 201 $ 26,737 $ 25,942 $ 25,955
Premium measures and statistics that are used to analyze the business are
calculated and described below. Measures and statistics presented exclude
Allstate Canada and specialty auto.
º •
º 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.
º •
º Average premium-gross written: Gross premiums written divided by
issued item count. Gross premiums written include the impacts from
discounts, surcharges and ceded reinsurance premiums and exclude the impacts from mid-term premium adjustments 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. Esurance brand average gross premiums represent the
appropriate policy term, which is 6 months for standard auto.
º •
º 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.
º •
º New issued applications: Item counts of automobiles or homeowners
insurance applications for insurance policies that were issued during
the period, regardless of whether the customer was previously insured
by another Allstate Protection market segment. Does not include
automobiles that are added by existing customers.
Standard auto premiums written totaled $17.34 billion in 2012, a 5.2%
increase from $16.49 billion in 2011, following a comparable $16.49 billion in
both 2011 and 2010.
Allstate brand Encompass brand Esurance brand
Standard Auto 2012 2011 2010 2012 2011 2010 2012 2011
PIF
(thousands) 16,929 17,213 17,484 708 673 689 1,029 786
Average
premium-gross
written (1) $ 450 $ 444 $ 443 $ 912 $ 935 $ 979 $ 493 N/A
Renewal ratio
(%) 88.9 89.0 88.7 75.8 69.5 69.2 80.5 78.5 (8)
Approved rate
changes (2):
# of states 39 33 45 (6) 31 19 24 29 N/A
Countrywide
(%) (3) 3.1 4.7 1.4 4.1 3.5 1.4 4.4 N/A
State
specific
(%) (4)(5) 5.0 8.1 (7) 2.2 5.2 6.1 2.7 5.6 N/A
--------------------------------------------------------------------------------
º (1)
º Policy term is six months for Allstate and Esurance brands and twelve
months for Encompass brand.
º (2)
º Rate changes that are indicated based on loss trend analysis to achieve a
targeted return will continue to be pursued. Rate changes do 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. Rate changes exclude
Allstate Canada and specialty auto.
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º (3)
º Represents the impact in the states where rate changes were approved during
the period as a percentage of total countrywide prior year-end premiums
written.
º (4)
º Represents the impact in the states where rate changes were approved during
the period as a percentage of its respective total prior year-end premiums
written in those states.
º (5)
º Based on historical premiums written in those states, rate changes approved
for standard auto totaled $530 million, $731 million and $218 million in
2012, 2011 and 2010, respectively.
º (6)
º Includes Washington D.C.
º (7)
º 2011 includes the impact of Florida rate increases averaging 18.5% and New
York rate increases averaging 11.2% taken across multiple companies.
º (8)
º The Esurance brand renewal ratio for 2011 was restated to conform to the
computation methodology used for Allstate and Encompass brand.
N/A reflects not available.
Allstate brand standard auto premiums written total of $15.70 billion in
2012 was comparable to 2011. Excluding Florida and New York, Allstate brand
standard auto premiums written totaled $12.67 billion in 2012, a 1.5% increase
from $12.49 billion in 2011. Factors impacting premiums written were the
following:
º -
º 1.6% decrease in PIF as of December 31, 2012 compared to December 31,
2011 due to fewer new issued applications and fewer policies available
to renew. Excluding Florida and New York, PIF decreased 1.0% as of
December 31, 2012 compared to December 31, 2011.
º -
º 4.3% decrease in new issued applications to 1,826 thousand in 2012
from 1,908 thousand in 2011. Excluding Florida and New York, new
issued applications decreased 4.9% to 1,614 thousand in 2012 from
1,697 thousand in 2011. New issued applications increased in 11 states
in 2012 compared to 2011.
º -
º increase in average gross premium in 2012 compared to 2011
º -
º 0.1 point decrease in the renewal ratio in 2012 compared to 2011. In
2012, 27 states had favorable comparisons to 2011.
Allstate brand standard auto premiums written totaled $15.70 billion in
2011, a 0.9% decrease from $15.84 billion in 2010. Factors impacting premiums
written were the following:
º -
º 1.5% decrease in PIF as of December 31, 2011 compared to December 31,
2010 due to fewer new issued applications and fewer policies available
to renew. Excluding Florida and New York, PIF as of December 31, 2011
were comparable to December 31, 2010.
º -
º 5.8% decrease in new issued applications to 1,908 thousand in 2011
from 2,025 thousand in 2010. Excluding Florida and New York, new
issued applications decreased 0.1% to 1,697 thousand in 2011 from
1,699 thousand in 2010. New issued applications increased in 17 states
in 2011 compared to 2010.
º -
º increase in average gross premium in 2011 compared to 2010
º -
º 0.3 point increase in the renewal ratio in 2011 compared to 2010. In
2011, 39 states had favorable comparisons to 2010.
Encompass brand standard auto premiums written totaled $618 million in 2012,
a 2.3% increase from $604 million in 2011. Excluding Florida, Encompass brand
standard auto premiums written totaled $599 million in 2012, a 3.1% increase
from $581 million in 2011. The increase was primarily due to a 5.2% increase in
PIF as of December 31, 2012 compared to December 31, 2011 and actions taken to
enhance our highly differentiated package policy. New issued applications
increased 25.7% in 2012 compared to 2011 primarily due to increases in efforts
to improve agency engagement. The renewal ratio increased 6.3 points in 2012
compared to 2011 driven primarily by retaining more package business as a result
of our package-focused strategy. Encompass discontinued writing new auto
business in Florida as of September 2012 and non-renewals will begin in 2013.
Encompass previously withdrew from the Florida property insurance market in
2009.
Encompass brand standard auto premiums written totaled $604 million in 2011,
a 6.2% decrease from $644 million in 2010. The decrease was primarily due to the
following actions taken: aligned pricing and underwriting with strategic
direction, terminated relationships with certain independent agencies,
non-renewal of underperforming business, discontinued writing the Special Value
product (middle market auto product focused on segment auto) and Deerbrook
(non-standard auto) in certain states, and non-renewal of property in Florida.
Esurance brand standard auto premiums written totaled $1.02 billion in 2012.
Esurance brand standard auto premiums written totaled $181 million in 2011 for
the period from the October 7, 2011 acquisition date to December 31, 2011. PIF
increased 30.9% as of December 31, 2012 compared to December 31, 2011.
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Non-standard auto premiums written totaled $698 million in 2012, a 10.1%
decrease from $776 million in 2011, following a 12.7% decrease in 2011 from
$889 million in 2010.
Allstate brand
Non-Standard Auto 2012 2011 2010
PIF (thousands) 508 571 640
Average premium-gross written (6 months) $ 600 $ 606 $ 624
Renewal ratio (%) (6 months) 70.2 70.4 71.4
Approved rate changes:
# of states 12 13 (2) 11 (2)
Countrywide (%) 1.2 6.0 4.6
State specific (%) (1) 4.3 12.8 9.6
---------------------------------------------------------------------------
º (1)
º Based on historical premiums written in those states, rate
changes approved for non-standard auto totaled $8 million,
$49 million and $41 million in 2012, 2011 and 2010,respectively.
º (2)
º Includes Washington D.C.
Allstate brand non-standard auto premiums written totaled $698 million in
2012, a 9.9% decrease from $775 million in 2011. The decrease was primarily due
to a decrease in PIF due to fewer number of policies available to renew; a 3.9%
decrease in new issued applications to 246 thousand in 2012 from 256 thousand in
2011; and decreases in average gross premium and the renewal ratio.
Allstate brand non-standard auto premiums written totaled $775 million in
2011, a 12.2% decrease from $883 million in 2010. The decrease was primarily due
to a decrease in PIF due to a decline in the number of policies available to
renew, a lower retention rate and fewer new issued applications; a 17.2%
decrease in new issued applications to 256 thousand in 2011 from 309 thousand in
2010, driven in large part by management actions in Florida through October
2011; and decreases in average gross premium and the renewal ratio.
Homeowners premiums written totaled $6.46 billion in 2012, a 3.2% increase
from $6.26 billion in 2011, following a 2.4% increase in 2011 from $6.11 billion
in 2010. Excluding the cost of catastrophe reinsurance, premiums written
increased 2.8% in 2012 compared to 2011. For a more detailed discussion on
reinsurance, see the Property-Liability Claims and Claims Expense Reserves
section of the MD&A and Note 10 of the consolidated financial statements.
Allstate brand Encompass brand
Homeowners 2012 2011 2010 2012 2011 2010
PIF (thousands) (1) 5,974 6,369 6,690 327 306 314
Average premium-gross
written (12 months) $ 1,087 $ 999 $ 943 $ 1,311 $ 1,297 $ 1,298
Renewal ratio (%)
(12 months) 87.3 88.3 88.4 83.3 79.8 78.1
Approved rate
changes (2):
# of states 42 41 (4) 32 (4) 33 (4) 27 (4) 23 (4)
Countrywide (%) 6.3 8.6 7.0 6.0 3.1 0.7
State specific
(%) (3) 8.6 11.0 10.0 6.4 4.1 1.4
--------------------------------------------------------------------------------
º (1)
º Beginning in 2012, excess and surplus lines PIF are not included in the
homeowners PIF totals. Previously, these policy counts were included in the
homeowners totals. Excess and surplus lines represent policies written by
North Light. All other total homeowners measures and statistics include
excess and surplus lines except for new issued applications.
º (2)
º Includes rate changes approved based on our net cost of reinsurance. Rate
changes exclude excess and surplus lines.
º (3)
º Based on historical premiums written in those states, rate changes approved
for homeowners totaled $412 million, $533 million and $424 million in the
2012, 2011 and 2010, respectively.
º (4)
º Includes Washington D.C.
Allstate brand homeowners premiums written totaled $6.06 billion in 2012, a
2.8% increase from $5.89 billion in 2011. Factors impacting premiums written
were the following:
º -
º 6.2% decrease in PIF as of December 31, 2012 compared to December 31,
2011 due to fewer policies available to renew and fewer new issued
applications
º -
º 3.1% decrease in new issued applications to 442 thousand in 2012 from 456 thousand in 2011. We have new business underwriting restrictions
in certain states. We also continue to take actions to maintain an
appropriate level of exposure to catastrophic events while continuing
to meet the needs of our customers, including selectively not offering
continuing coverage in coastal areas of certain states.
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º -
º increase in average gross premium in 2012 compared to 2011 primarily
due to rate changes
º -
º 1.0 point decrease in the renewal ratio in 2012 compared to 2011
º -
º $14 million decrease in the cost of our catastrophe reinsurance
program to $481 million in 2012 from $495 million in 2011
Actions taken to manage our catastrophe exposure in areas with known
exposure to hurricanes, earthquakes, wildfires, fires following earthquakes and
other catastrophes have had an impact on our new business writings and retention
for homeowners insurance. Allstate brand homeowners PIF has declined
1,281 thousand or 17.7% in the five years ended December 31, 2012. This impact
will continue in 2013, although to a lesser degree. For a more detailed
discussion on exposure management actions, see the Catastrophe Management
section of the MD&A.
We have different plans across the country to improve the growth and
profitability of our homeowners business. In states that do not have severe
weather issues and that have acceptable returns, we are seeking to grow. We are
also seeking to selectively grow homeowners in some currently restricted areas
where we believe we will earn an appropriate return for the risk. We will
continue to pursue profit actions in states that are not at targeted returns. In
states with severe weather and risk, North Light and non-proprietary products
will remain a critical component to our overall homeowners strategy to
profitably grow and serve our customers.
Our Allstate House and Home product provides options of coverage for roof
damage including graduated coverage and pricing based on roof type and age and
uses a number of factors to determine the pricing, some of which relate to
underwriting information normally obtained to evaluate auto insurance risks. The
Allstate House and Home product has been rolled out to 17 states as of
December 31, 2012 and we expect a continued countrywide roll out for new
business over the next two years.
Allstate brand homeowners premiums written totaled $5.89 billion in 2011, a
2.4% increase from $5.75 billion in 2010. Factors impacting premiums written
were the following:
º -
º 4.8% decrease in PIF as of December 31, 2011 compared to December 31,
2010, due to fewer policies available to renew and fewer new issued
applications
º - º 14.9% decrease in new issued applications to 456 thousand in 2011 from
536 thousand in 2010. During the second quarter of 2011, our Castle
Key Indemnity Company subsidiary completed a 2008 regulatory consent
decree to sell 50,000 new homeowners policies in Florida by November
2011.
º -
º increase in average gross premium in 2011 compared to 2010, primarily
due to rate changes
º -
º 0.1 point decrease in the renewal ratio in 2011 compared to 2010
º -
º decrease in the cost of our catastrophe reinsurance program in 2011
compared to 2010
Encompass brand homeowners premiums written totaled $398 million in 2012, a
9.9% increase from $362 million in 2011, following a 1.4% increase in 2011 from
$357 million in 2010. The increase in 2012 compared to 2011 was primarily due to
a 6.9% increase in PIF as of December 31, 2012 compared to December 31, 2011 and
actions taken to enhance our highly differentiated package policy. New issued
applications increased 40.0% in 2012 compared to 2011. The renewal ratio
increased 3.5 points in 2012 compared to 2011 driven primarily by retaining more
package business.
Other personal lines Allstate brand other personal lines premiums written
totaled $2.43 billion in 2012, a 2.5% increase from $2.37 billion in 2011,
following a 1.8% increase in 2011 from $2.33 billion in 2010. Allstate brand
other personal lines includes Emerging Businesses other personal lines (renters,
condominium, other property, Allstate Roadside Services and Allstate Dealer
Services) for which premiums written increased 4.3% to $1.86 billion in 2012
from $1.79 billion in 2011, following a 5.4% increase in 2011 from $1.70 billion
in 2010.
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Underwriting results are shown in the following table.
($ in millions) 2012 2011 2010
Premiums written $ 27,026 $ 25,981 $ 25,906
Premiums earned $ 26,737 $ 25,942 $ 25,955
Claims and claims expense (18,433 ) (20,140 ) (18,923 )
Amortization of DAC (3,483 ) (3,477 ) (3,517 )
Other costs and expenses (3,534 ) (3,139 ) (2,957 )
Restructuring and related charges (34 ) (43 )
(33 )
Underwriting income (loss) $ 1,253 $ (857 ) $ 525
Catastrophe losses $ 2,345 $ 3,815 $ 2,207
Underwriting income (loss) by line of business
Standard auto $ 367 $ 561 $ 692
Non-standard auto 102 102 74
Homeowners 690 (1,331 ) (336 )
Other personal lines 94 (189 ) 95
Underwriting income (loss) $ 1,253 $ (857 )
$ 525
Underwriting income (loss) by brand
Allstate brand $ 1,515 $ (667 ) $ 568
Encompass brand (70 ) (146 ) (43 )
Esurance brand (192 ) (44 ) -
Underwriting income (loss) $ 1,253 $ (857 )
$ 525
Allstate Protection had underwriting income of $1.25 billion in 2012
compared to an underwriting loss of $857 million in 2011, primarily due to
underwriting income in homeowners and other personal lines in 2012 compared to
underwriting losses in 2011, partially offset by a decrease in standard auto
underwriting income. Homeowners underwriting income was $690 million in the 2012
compared to an underwriting loss of $1.33 billion in 2011, primarily due to
decreases in catastrophe losses and average earned premiums increasing faster
than loss costs, partially offset by higher expenses. Other personal lines
underwriting income was $94 million in 2012 compared to an underwriting loss of
$189 million in 2011, primarily due to decreases in catastrophe losses including
favorable reserve reestimates. Standard auto underwriting income decreased
$194 million to $367 million in 2012 from $561 million in 2011 primarily due to
the inclusion of a full year of Esurance brand's underwriting losses in 2012 and
increases in catastrophe losses.
Allstate Protection experienced an underwriting loss of $857 million in 2011
compared to underwriting income of $525 million in 2010, primarily due to an
increase in homeowners underwriting loss, an underwriting loss for other
personal lines in 2011 compared to an underwriting gain in 2010, and a decrease
in standard auto underwriting income. Homeowners underwriting loss increased
$995 million to $1.33 billion in 2011 from $336 million in 2010, primarily due
to increases in catastrophe losses and higher expenses partially offset by
average earned premiums increasing faster than loss costs. Other personal lines
underwriting income decreased $284 million to an underwriting loss of
$189 million in 2011 from underwriting income of $95 million in 2010, primarily
due to increases in catastrophe losses, unfavorable reserve reestimates and
higher expenses. Standard auto underwriting income decreased $131 million to
$561 million in 2011 from $692 million in 2010, primarily due to increases in
catastrophe losses and higher expenses, partially offset by favorable reserve
reestimates.
Catastrophe losses were $2.35 billion in 2012 compared to $3.82 billion in
2011 and $2.21 billion in 2010. $1.12 billion of the 2012 catastrophe losses
related to Sandy, comprising approximately 179,000 expected claims of which
approximately 170,000 claims have been reported. Through February 4, 2013,
approximately 98% of the property and auto claim counts related to Sandy are
closed and approximately 95% of our expected net losses have been paid. We
expect substantially all of our remaining estimated net losses related to Sandy
to be paid during 2013. 2012 catastrophe losses also include $8 million of
accelerated and reinstatement catastrophe reinsurance premiums incurred as a
result of Sandy.
We define a "catastrophe" as an event that produces pre-tax losses before
reinsurance in excess of $1 million and involves multiple first party
policyholders, or an event that produces a number of claims in excess of a
preset, per-event threshold of average claims in a specific area, occurring
within a certain amount of time following the event.
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Catastrophes are caused by various natural events including high winds, winter
storms, tornadoes, hailstorms, wildfires, tropical storms, hurricanes,
earthquakes and volcanoes. We are also exposed to man-made catastrophic events,
such as certain types of terrorism or industrial accidents. The nature and level
of catastrophes in any period cannot be reliably predicted.
Catastrophe losses by the size of event are shown in the following table.
($ in millions) 2012
Claims Combined Average
Number and claims ratio catastrophe
of events expense impact loss per event
Size of
catastrophe loss
Greater than
$250 million 1 1.2 % $ 1,117 47.6 % 4.2 $ 1,117
$101 million to
$250 million 5 5.9 690 29.4 2.6 138
$50 million to
$100 million 4 4.8 301 12.9 1.1 75
Less than
$50 million 74 88.1 647 27.6 2.4 9
Total 84 100.0 % 2,755 117.5 10.3 33
Prior year
reserve
reestimates (410 ) (17.5 ) (1.5 )
Total
catastrophe
losses $ 2,345 100.0 % 8.8
Catastrophe losses by the type of event are shown in the following table.
($ in millions) 2012 2011 2010
Number Number Number
of events of events of events
Hurricanes/Tropical storms $ 1,200 3 $ 619 3 $ 15 1
Tornadoes 297 5 1,234 7 174 7
Wind/Hail 1,198 64 1,775 68 1,908 74
Wildfires 53 11 67 9 15 1
Other events 7 1 250 4 258 7
Prior year reserve
reestimates (410 ) (130 ) (163 )
Total catastrophe losses $ 2,345 84 $ 3,815 91 $ 2,207 90
Catastrophe losses, including prior year reserve reestimates, excluding
hurricanes named or numbered by the National Weather Service, fires following
earthquakes and earthquakes totaled $1.32 billion, $3.30 billion and
$2.27 billion in 2012, 2011 and 2010, respectively.
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Combined ratio Loss ratios by product, and expense and combined ratios by
brand, are shown in the following table.
Effect of business
combination
expenses and
the amortization
Effect of of purchased
Effect of prior year reserve intangible
catastrophe losses on reestimates assets on
Loss ratio (1) combined ratio on combined ratio combined ratio
2012 2011 2010 2012 2011 2010 2012 2011 2010 2012 2011
Allstate
brand loss
ratio:
Standard
auto 70.7 70.6 70.7 3.9 2.6 1.0 (2.0 ) (2.3 ) (0.9 )
Non-standard
auto 61.8 62.8 67.2 0.8 1.1 0.3 (3.2 ) (4.9 ) (3.6 )
Homeowners 64.1 98.0 82.1 23.2 50.0 31.3 (5.2 ) (1.2 ) (0.3 )
Other
personal
lines 64.8 76.0 66.4 8.0 13.6 7.2 (0.9 ) 4.0 0.7
Total
Allstate
brand loss
ratio 68.3 77.3 72.8 8.9 14.8 8.5 (2.7 ) (1.5 ) (0.7 )
Allstate
brand
expense
ratio 25.6 25.4 24.9 - - - - - - 0.1 -
Allstate
brand
combined
ratio 93.9 102.7 97.7 8.9 14.8 8.5 (2.7 ) (1.5 ) (0.7 ) 0.1 -
Encompass
brand loss
ratio:
Standard
auto 79.1 81.8 75.4 3.6 1.8 0.8 (3.3 ) 2.4 -
Non-standard
auto - 150.0 100.0 - - - - (50.0 ) -
Homeowners 76.5 88.5 74.3 28.8 39.7 23.1 (3.2 ) 0.3 (1.3 )
Other
personal
lines 67.7 83.5 73.4 5.4 9.9 4.3 (9.7 ) - (1.1 )
Total
Encompass
brand loss
ratio 76.9 84.3 75.1 12.6 15.3 8.2 (4.2 ) 1.4 (0.5 )
Encompass
brand
expense
ratio 29.6 29.2 28.5 - - - - - - - -
Encompass
brand
combined
ratio 106.5 113.5 103.6 12.6 15.3 8.2 (4.2 ) 1.4 (0.5 ) - -
Esurance
brand loss
ratio:
Standard
auto 77.2 78.1 - 1.6 - - - - -
Total
Esurance
brand loss
ratio 77.2 78.1 - 1.6 - - - - -
Esurance
brand
expense
ratio 42.7 43.8 - - - - - - - 10.1 20.9
Esurance
brand
combined
ratio 119.9 121.9 - 1.6 - - - - - 10.1 20.9
Allstate
Protection
loss ratio 68.9 77.6 72.9 8.8 14.7 8.5 (2.7 ) (1.4 ) (0.7 )
Allstate
Protection
expense
ratio 26.4 25.7 25.1 - - - - - - 0.5 0.2
Allstate
Protection
combined
ratio 95.3 103.3 98.0 8.8 14.7 8.5 (2.7 ) (1.4 ) (0.7 ) 0.5 0.2
--------------------------------------------------------------------------------
º (1)
º Ratios are calculated using the premiums earned for the respective line of
business.
Standard auto loss ratio for the Allstate brand increased 0.1 points in 2012
compared to 2011 primarily due to higher catastrophe losses and lower favorable
reserve reestimates. Excluding the impact of catastrophe losses, the Allstate
brand standard auto loss ratio improved 1.2 points in 2012 compared to 2011.
Florida results have shown improvement with loss ratios, including prior year
reserve reestimates, of 69.0 in 2012 compared to 72.6 in 2011. For New York, the
trend was also favorable through September 2012, but higher catastrophe losses
in the fourth quarter of 2012 caused the year-end ratio to deteriorate to 83.6
in 2012 compared to 77.6 in 2011. Excluding the impact of Sandy, the loss ratio
in New York was 67.9 in 2012. Excluding the impact of catastrophe losses, both
states have experienced improvement from prior year as a result of management
actions, including rate increases, underwriting restrictions, increased claims
staffing and review, and on-going efforts to combat fraud and abuse. However, we
continue to focus on profitability given ongoing developments in these two
states. Claim frequencies in the bodily injury and property damage coverages
decreased 0.9% and 1.9%, respectively, in 2012 compared to 2011. Bodily injury
and property damage coverage paid claim severities increased 4.1% and 3.0%,
respectively, in 2012 compared to 2011. In 2012, severity increased in line with
historical Consumer Price Index ("CPI") trends. Standard auto loss ratio for the
Allstate brand decreased 0.1 points in 2011 compared to 2010 primarily due to
favorable reserve reestimates, partially offset by higher catastrophe losses.
Excluding the impact of catastrophe losses, the Allstate brand standard auto
loss ratio improved 1.7 points in 2011 compared to 2010. In 2011, claim
frequencies in the bodily injury and physical damage coverages have decreased
compared to 2010. Bodily injury and physical damage coverages severity results
in 2011 increased in line with historical CPI trends.
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Encompass brand standard auto loss ratio decreased 2.7 points in 2012
compared to 2011 primarily due to favorable reserve reestimates, partially
offset by higher catastrophe losses. Standard auto loss ratio for the Encompass
brand increased 6.4 points in 2011 compared to 2010 primarily due to unfavorable
reserve reestimates and higher catastrophe losses.
Esurance brand standard auto loss ratio decreased 0.9 points in 2012
compared to 2011. In 2012, Esurance implemented a number of profitability
management actions, including rate increases in 23 out of 30 states, and
underwriting actions in Florida and Michigan.
Homeowners loss ratio for the Allstate brand decreased 33.9 points to 64.1
in 2012 from 98.0 in 2011 primarily due to lower catastrophe losses and average
earned premiums increasing faster than loss costs. Claim frequency excluding
catastrophe losses decreased 8.4% in 2012 compared to 2011. Paid claim severity
excluding catastrophe losses increased 3.3% in 2012 compared to 2011. Homeowners
loss ratio for the Allstate brand increased 15.9 points to 98.0 in 2011 from
82.1 in 2010 due to higher catastrophe losses. Excluding the impact of
catastrophe losses, the Allstate brand homeowners loss ratio improved 2.8 points
in 2011 compared to 2010 due to average earned premiums increasing faster than
loss costs.
Encompass brand homeowners loss ratio decreased 12.0 points in 2012 compared
to 2011 primarily due to lower catastrophe losses and favorable reserve
reestimates. Homeowners loss ratio for the Encompass brand increased 14.2 points
in 2011 compared to 2010 primarily due to higher catastrophe losses.
Expense ratio for Allstate Protection increased 0.7 points in 2012 compared
to 2011 primarily due to additional marketing costs and higher amortization of
purchased intangible assets related to Esurance. The expense ratio for Allstate
Protection increased 0.6 points in 2011 compared to 2010 driven by additional
marketing, including $78 million spent on the Grow to Win initiative, and other
growth initiative costs, and reduced guaranty fund accrual levels in 2010.
The impact of specific costs and expenses on the expense ratio are shown in
the following table.
Allstate brand Encompass brand Esurance brand Allstate Protection
2012 2011 2010 2012 2011 2010 2012 2011 2012 2011 2010
Amortization
of DAC 13.2 13.3 13.3 17.5 17.4 17.8 2.5 0.5 12.9 13.3 13.6
Advertising
expenses 2.7 3.0 2.6 0.5 0.1 0.1 15.4 10.9 3.1 2.9 2.5
Business
combination
expenses and
amortization
of purchased
intangible
assets 0.1 - - - - - 10.1 20.9 0.5 0.2 -
Other costs
and expenses 9.5 8.9 8.9 11.6 11.7 10.0 14.7 11.5 9.8 9.1 8.9
Restructuring
and related
charges 0.1 0.2 0.1 - - 0.6 - - 0.1 0.2 0.1
Total expense
ratio 25.6 25.4 24.9 29.6 29.2 28.5 42.7 43.8 26.4 25.7 25.1
The Encompass brand DAC amortization is higher on average than Allstate
brand DAC amortization due to higher commission rates. The Esurance brand
expense ratio is higher than Allstate and Encompass brands due to business
combination expenses and amortization of purchased intangible assets. Purchased
intangible assets will be amortized on an accelerated basis with over 80% of the
amortization taking place by 2016. Since Esurance uses a direct distribution
model, its primary acquisition-related costs are advertising as opposed to
commissions for the Allstate and Encompass brands. Advertising costs are not
capitalized as DAC while commission costs are capitalized as DAC. As a result,
the Esurance expense and combined ratios will be higher during periods of growth
since the expenses will be recognized prior to the premium earned. Based on our
analysis, Esurance's acquisition costs, primarily advertising, are in line with
other distribution channels when considering the cumulative earned premiums of
policies sold.
DAC We establish a DAC asset for costs that are related directly to the
successful acquisition of new or renewal insurance policies, principally agents'
remuneration and premium taxes. For the Allstate Protection business, DAC is
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amortized to income over the period in which premiums are earned. The DAC
balance as of December 31 by brand and product type are shown in the following
table.
($ in
millions) Allstate brand Encompass brand Esurance brand
Allstate Protection
2012 2011 2012 2011 2012 2011 2012 2011
Standard
auto $ 508 $ 506 $ 54 $ 50 $ 7 $ 25 (1) $ 569 $ 581
Non-standard
auto 23 25 - - - - 23 25
Homeowners 436 422 36 34 - - 472 456
Other
personal
lines 325 280 7 6 - - 332 286
Total DAC $ 1,292 $ 1,233 $ 97 $ 90 $ 7 $ 25 $ 1,396 $ 1,348
--------------------------------------------------------------------------------
º (1)
º Includes $21 million of present value of future profits, which was fully
amortized in the first quarter of 2012.
Catastrophe management
Historical catastrophe experience For the last ten years, the average
annual impact of catastrophes on our Property-Liability loss ratio was 9.7
points. The average annual impact of catastrophes on the homeowners loss ratio
for the last ten years was 32.4 points.
Over time, we have limited our aggregate insurance exposure to catastrophe
losses in certain regions of the country that are subject to high levels of
natural catastrophes. Limitations include our participation in various state
facilities, such as the California Earthquake Authority ("CEA"), which provides
insurance for California earthquake losses; the Florida Hurricane Catastrophe
Fund ("FHCF"), which provides reimbursements to participating insurers for
certain qualifying Florida hurricane losses; and other state facilities, such as
wind pools. However, the impact of these actions may be diminished by the growth
in insured values, and the effect of state insurance laws and regulations. In
addition, in various states we are required to participate in assigned risk
plans, reinsurance facilities and joint underwriting associations that provide
insurance coverage to individuals or entities that otherwise are unable to
purchase such coverage from private insurers. Because of our participation in
these and other state facilities such as wind pools, we may be exposed to losses
that surpass the capitalization of these facilities and to assessments from
these facilities.
We have continued to take actions to maintain an appropriate level of
exposure to catastrophic events while continuing to meet the needs of our
customers, including the following:
º •
º Selectively not offering continuing coverage of homeowners policies in
coastal areas of certain states. This includes New York and New Jersey
where our homeowners PIF decreased 29.4% and 32.6%, respectively,
since 2006.
º •
º Increased capacity in our brokerage platform for customers not offered
a renewal.
º •
º North Light expanded to 5 new states in 2012, bringing the total
number of active states to 31.
º • º In Texas we have been ceding wind exposure related to insured property
located in wind pool eligible areas along the coast including the
Galveston Islands.
º •
º We ceased writing new homeowners business in California in 2007. We
continue to renew current policyholders.
º •
º We ceased writing new homeowners business in Florida in 2011 beyond a
modest stance for existing customers who replace their
currently-insured home with an acceptable property. The Encompass
companies operating in Florida withdrew from the property lines in
2009.
º •
º Tropical cyclone deductibles are in place for a large portion of
coastal insured properties though contract language varies across
states and companies, allowing for these higher deductibles to be
triggered differently across our customer base.
º • º We have additional catastrophe exposure, beyond the property lines,
for auto customers who have purchased physical damage coverage. Auto
physical damage coverage generally includes coverage for flood-related
loss. We manage this additional exposure through inclusion of auto
losses in our nationwide reinsurance program (which excludes New
Jersey and Florida).
Hurricanes
We consider the greatest areas of potential catastrophe losses due to
hurricanes generally to be major metropolitan centers in counties along the
eastern and gulf coasts of the United States. Usually, the average premium on a
property policy near these coasts is greater than in other areas. However,
average premiums are often not considered commensurate with the inherent risk of
loss. In addition and as explained in Note 14 of the consolidated financial
statements, in various states Allstate is subject to assessments from assigned
risk plans, reinsurance facilities and joint underwriting associations providing
insurance for wind related property losses.
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We have addressed our risk of hurricane loss by, among other actions,
purchasing reinsurance for specific states and on a countrywide basis for our
personal lines property insurance in areas most exposed to hurricanes, limiting
personal homeowners new business writings in coastal areas in southern and
eastern states, implementing tropical cyclone deductibles where appropriate, and
not offering continuing coverage on certain policies in coastal counties in
certain states. We continue to seek appropriate returns for the risks we write.
This may require further actions, similar to those already taken, in geographies
where we are not getting appropriate returns. However, we may maintain or
opportunistically increase our presence in areas where we achieve adequate
returns and do not materially increase our hurricane risk.
Earthquakes
Actions taken to reduce our exposure from earthquake coverage are
substantially complete. These actions included purchasing reinsurance on a
countrywide basis and in the state of Kentucky, no longer offering new optional
earthquake coverage in most states, removing optional earthquake coverage upon
renewal in most states, and entering into arrangements in many states to make
earthquake coverage available through other insurers for new and renewal
business.
We expect to retain approximately 30,000 PIF with earthquake coverage due to
regulatory and other reasons. We also will continue to have exposure to
earthquake risk on certain policies that do not specifically exclude coverage
for earthquake losses, including our auto policies, and to fires following
earthquakes. Allstate policyholders in the state of California are offered
coverage through the CEA, a privately-financed, publicly-managed state agency
created to provide insurance coverage for earthquake damage. Allstate is subject
to assessments from the CEA under certain circumstances as explained in Note 14
of the consolidated financial statements.
Fires Following Earthquakes
Actions taken related to our risk of loss from fires following earthquakes
include changing homeowners underwriting requirements in California, purchasing
reinsurance for Kentucky personal lines property risks, and purchasing
nationwide occurrence reinsurance, excluding Florida and New Jersey.
Wildfires
Actions we are taking to reduce our risk of loss from wildfires include
changing homeowners underwriting requirements in certain states and purchasing
nationwide occurrence reinsurance.
Reinsurance
A description of our current catastrophe reinsurance program appears in
Note 10 of the consolidated financial statements.
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 may at times
be engaged in policy buybacks, settlements and reinsurance assumed and ceded
commutations.
Summarized underwriting results for the years ended December 31 are
presented in the following table.
($ in millions) 2012 2011 2010
Premiums written $ 1 $ (1 ) $ 1
Premiums earned $ - $ - $ 2
Claims and claims expense (51 ) (21 ) (28 )
Operating costs and expenses (2 ) (4 ) (5 )
Underwriting loss $ (53 ) $ (25 ) $ (31 )
The underwriting loss of $53 million in 2012 related to a $26 million
unfavorable reestimate of asbestos reserves, a $22 million unfavorable
reestimate of environmental reserves and a $5 million unfavorable reestimate of
other reserves, primarily as a result of our annual review using established
industry and actuarial best practices, partially offset by a $14 million
decrease in our allowance for future uncollectable reinsurance. The cost of
administering claims settlements totaled $11 million for each of 2012 and 2011
and $13 million in 2010.
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The underwriting loss of $25 million in 2011 related to a $26 million
unfavorable reestimate of asbestos reserves and a $5 million unfavorable
reestimate of other reserves, primarily as a result of our annual review using
established industry and actuarial best practices, partially offset by a
$26 million decrease in our allowance for future uncollectable reinsurance.
Environmental reserves were essentially unchanged.
The underwriting loss of $31 million in 2010 related to an $18 million
unfavorable reestimate of environmental reserves and a $5 million unfavorable
reestimate of asbestos reserves, partially offset by a $4 million favorable
reestimate of other reserves, primarily as a result of our annual review using
established industry and actuarial best practices.
See the Property-Liability Claims and Claims Expense Reserves section of the
MD&A for a more detailed discussion.
Discontinued Lines and Coverages outlook
º •
º We may continue to experience asbestos and/or environmental losses in
the future. These losses could be due to the potential adverse impact
of new information relating to new and additional claims or the impact
of resolving unsettled claims based on unanticipated events such as
litigation or legislative, judicial and regulatory actions. Environmental losses may also increase as the result of additional
funding for environmental site cleanup. Because of our annual review,
we believe that our reserves are appropriately established based on
available information, technology, laws and regulations.
º •
º We continue to be encouraged that the pace of industry asbestos claim
activity has slowed, perhaps reflecting various state legislative and
judicial actions with respect to medical criteria and increased legal
scrutiny of the legitimacy of claims.
PROPERTY-LIABILITY INVESTMENT RESULTS
Net investment income increased 10.4% to $1.33 billion in 2012 from
$1.20 billion in 2011, after increasing 1.0% in 2011 compared to 2010. The 2012
increase was primarily due to income from limited partnerships and higher
average investment balances, partially offset by lower fixed income yields. We
continue to reduce interest rate risk by selling longer term fixed income
securities and investing the proceeds in securities with shorter maturities,
resulting in realized capital gains and lower net investment income, and
positioning for reinvestment when interest rates rise. The 2011 increase was
primarily due to higher yields, partially offset by lower average investment
balances.
The following table presents the average pre-tax investment yields for the
years ended December 31. Pre-tax yield is calculated as investment income
(including dividend income in the case of equity securities) divided by the
average of the investment balances at the beginning and end of the year and
interim quarters. Investment balances, for purposes of the pre-tax yield
calculation, exclude unrealized capital gains and losses. Limited partnerships
accounted for under the equity method of accounting ("EMA") are included in the
2012 yields since their income is reported in net investment income.
2012 2011 2010
Fixed income securities: tax-exempt 4.3 % 4.8 % 4.9 %
Fixed income securities: tax-exempt equivalent 6.3 7.0 7.1
Fixed income securities: taxable 3.7 3.8 3.5
Equity securities 3.5 2.8 2.3
Mortgage loans 4.3 4.0 5.7
Limited partnership interests 6.3 5.6 3.1
Total portfolio 3.9 3.9 3.8
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Net realized capital gains and losses are presented in the following table.
($ in millions) 2012 2011 2010
Impairment write-downs $ (134 ) $ (250 ) $ (295 )
Change in intent write-downs (31 ) (49 ) (62 )
Net other-than-temporary impairment losses recognized in
earnings
(165 ) (299 ) (357 )
Sales 511 469 455
Valuation of derivative instruments 5 (54 ) (331 )
Settlements of derivative instruments (16 ) (127 ) (143 )
EMA limited partnership income (1) -
96 55
Realized capital gains and losses, pre-tax 335 85 (321 )
Income tax (expense) benefit (114 )
(31 ) 114
Realized capital gains and losses, after-tax $ 221 $
54 $ (207 )
--------------------------------------------------------------------------------
º (1)
º Income from EMA limited partnerships is reported in net investment income
in 2012 and realized capital gains and losses in 2011 and 2010.
For a further discussion of net realized capital gains and losses, see the
Investments section of the MD&A.
PROPERTY-LIABILITY CLAIMS AND CLAIMS EXPENSE RESERVES
Property-Liability underwriting results are significantly influenced by
estimates of property-liability claims and claims expense reserves. For a
description of our reserve process, see Note 8 of the consolidated financial
statements and for a further description of our reserving policies and the
potential variability in our reserve estimates, see the Application of Critical
Accounting Estimates section of the MD&A. These reserves are an estimate of
amounts necessary to settle all outstanding claims, including IBNR claims, as of
the reporting date.
The facts and circumstances leading to our reestimates of reserves relate to
revisions to the development factors used to predict how losses are likely to
develop from the end of a reporting period until all claims have been paid.
Reestimates occur because actual losses are likely different than those
predicted by the estimated development factors used in prior reserve estimates.
As of December 31, 2012, the impact of a reserve reestimation corresponding to a
one percent increase or decrease in net reserves would be a decrease or increase
of approximately $112 million in net income.
We believe the net loss reserves for Allstate Protection exposures are
appropriately established based on available facts, technology, laws and
regulations.
The table below shows total net reserves as of December 31 by line of
business.
($ in millions) 2012 2011 2010
Allstate brand $ 14,364 $ 14,792 $ 14,696
Encompass brand 807 859 921
Esurance brand 470 429 -
Total Allstate Protection 15,641 16,080 15,617
Discontinued Lines and Coverages 1,637 1,707 1,779
Total Property-Liability $ 17,278 $ 17,787 $ 17,396
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The tables below show reserves, net of reinsurance, representing the
estimated cost of outstanding claims as they were recorded at the beginning of
years 2012, 2011 and 2010, and the effect of reestimates in each year.
($ in millions) January 1 reserves
2012 2011 2010
Allstate brand $ 14,792 $ 14,696 $ 14,123
Encompass brand 859 921 1,027
Esurance brand 429 - -
Total Allstate Protection 16,080 15,617 15,150
Discontinued Lines and Coverages 1,707 1,779 1,878
Total Property-Liability $ 17,787 $ 17,396 $ 17,028
($ in millions, except
ratios) 2012 2011 2010
Effect on Effect on Effect on
Reserve combined Reserve combined Reserve combined
reestimate (1) ratio (2) reestimate (1) ratio (2) reestimate (1) ratio (2)Allstate brand $ (671 ) (2.5 ) $ (371 ) (1.4 ) $ (181 ) (0.7 )
Encompass brand (45 ) (0.2 ) 15 - (6 ) -
Esurance brand - - - - - -
Total Allstate
Protection (716 ) (2.7 ) (356 ) (1.4 ) (187 ) (0.7 )
Discontinued Lines and
Coverages 51 0.2 21 0.1 28 0.1
Total
Property-Liability (3) $ (665 ) (2.5 ) $ (335 ) (1.3 ) $ (159 ) (0.6 )
Reserve reestimates,
after-tax $ (432 ) $ (218 ) $ (103 )
Consolidated net
income $ 2,306 $ 787 $ 911
Reserve reestimates as
a % of net income 18.7 % 27.7 % 11.3 %
--------------------------------------------------------------------------------
º (1)
º Favorable reserve reestimates are shown in parentheses.
º (2)
º Ratios are calculated using Property-Liability premiums earned.
º (3)
º Prior year reserve reestimates included in catastrophe losses totaled
$410 million favorable in 2012, $130 million favorable in 2011 and$163 million favorable in 2010. The effect of catastrophe losses included
in prior year reserve reestimates on the combined ratio totaled 1.5
favorable, 0.5 favorable and 0.6 favorable in 2012, 2011 and 2010,
respectively.
Allstate Protection
The tables below show Allstate Protection net reserves representing the
estimated cost of outstanding claims as they were recorded at the beginning of
years 2012, 2011 and 2010, and the effect of reestimates in each year.
($ in millions) January 1 reserves
2012 2011 2010
Auto $ 11,404 $ 11,034 $ 10,606
Homeowners 2,439 2,442 2,399
Other personal lines 2,237 2,141 2,145
Total Allstate Protection $ 16,080 $ 15,617 $ 15,150
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($ in millions, except
ratios)
2012 2011 2010
Effect on Effect on Effect on
Reserve combined Reserve combined Reserve combined reestimate ratio reestimate ratio reestimate ratio
Auto $ (365 ) (1.4 ) $ (381 ) (1.5 ) $ (179 ) (0.7 )
Homeowners (321 ) (1.2 ) (69 ) (0.3 ) (23 ) (0.1 )
Other
personal
lines (30 ) (0.1 ) 94 0.4 15 0.1
Total
Allstate
Protection $ (716 ) (2.7 ) $ (356 ) (1.4 ) $ (187 ) (0.7 )
Underwriting
income
(loss) $ 1,253 $ (857 ) $ 525
Reserve
reestimates
as a % of
underwriting
income
(loss) 57.1 % 41.5 % 35.6 %
Auto reserve reestimates in 2012, 2011 and 2010 were primarily due to claim
severity development that was better than expected. 2010 was also impacted by a
litigation settlement.
Favorable homeowners reserve reestimates in 2012, 2011 and 2010 were
primarily due to favorable catastrophe reserve reestimates. 2010 was also
impacted by a litigation settlement.
Other personal lines reserve reestimates in 2012 were primarily due to
favorable catastrophe reserve reestimates. Other personal lines reserve
reestimates in 2011 and 2010 were primarily the result of loss development
higher than anticipated in previous estimates.
Pending, new and closed claims for Allstate Protection are summarized in the
following table for the years ended December 31. The increase in pending claims
as of December 31, 2012 compared to December 31, 2011 relates to catastrophes,
primarily Sandy, for all lines as well as the inclusion of Esurance claims for
auto.
Number of claims 2012 2011 (1) 2010
Auto
Pending, beginning of year 436,972 490,459 540,424
New 5,807,557 5,656,687 5,571,199
Total closed (5,772,451 ) (5,710,174 ) (5,621,164 )
Pending, end of year 472,078 436,972
490,459
Homeowners
Pending, beginning of year 44,134 51,031 59,685
New 1,003,493 1,214,792 991,962
Total closed (999,209 ) (1,221,689 ) (1,000,616 )
Pending, end of year 48,418 44,134
51,031
Other personal lines
Pending, beginning of year 31,871 33,388 36,537
New 337,257 333,209 282,137
Total closed (315,917 ) (334,726 ) (285,286 )
Pending, end of year 53,211 31,871
33,388
Total Allstate Protection
Pending, beginning of year 512,977 574,878 636,646
New 7,148,307 7,204,688 6,845,298
Total closed (7,087,577 ) (7,266,589 ) (6,907,066 )
Pending, end of year 573,707 512,977
574,878
--------------------------------------------------------------------------------
º (1)
º Excludes Esurance brand number of claims since not available.
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The following tables reflect the accident years to which the reestimates
shown above are applicable by line of business. Favorable reserve reestimates
are shown in parentheses.
2012 Prior year reserve reestimates
2002 &
($ in millions) prior 2003 2004 2005 2006 2007 2008
2009 2010 2011 Total
Allstate brand $ 102 $ (9 ) $ (10 ) $ (36 ) $ 11 $ (11 ) $ (36 ) $ (33 ) $ (147 ) $ (502 ) $ (671 )
Encompass brand - (1 ) - (12 ) (1 ) - (5 ) (4 ) (14 ) (8 ) (45 )
Esurance brand - - - - - -
- - - - -
Total Allstate
Protection 102 (10 ) (10 ) (48 ) 10 (11 ) (41 ) (37 ) (161 ) (510 ) (716 )
Discontinued
Lines and
Coverages 51 - - - - - - - - - 51
Total Property-
Liability $ 153 $ (10 ) $ (10 ) $ (48 ) $ 10 $ (11 ) $
(41 ) $ (37 ) $ (161 ) $ (510 ) $ (665 )
2011 Prior year reserve reestimates
2001 &
($ in millions) prior 2002 2003 2004 2005 2006 2007
2008 2009 2010 Total
Allstate brand $ 123 $ 16 $ 26 $ 8 $ 5 $ 7 $ - $ (28 ) $ (150 ) $ (378 ) $ (371 )
Encompass brand 2 - (1 ) - 1 1 (1 ) 2 2 9 15
Total Allstate
Protection 125 16 25 8 6 8 (1 ) (26 ) (148 ) (369 ) (356 )
Discontinued
Lines and
Coverages 21 - - - - - - - - - 21
Total Property-
Liability $ 146 $ 16 $ 25 $ 8 $ 6 $ 8 $
(1 ) $ (26 ) $ (148 ) $ (369 ) $ (335 )
2010 Prior year reserve reestimates
($ in
millions) 2000 & prior 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total
Allstate
brand $ 262 $ (1 ) $ (7 ) $ (18 ) $ (15 ) $ (51 ) $ (106 ) $ (86 ) $ (45 ) $ (114 ) $ (181 )
Encompass
brand 1 - 1 1 2 6
- (6 ) (1 ) (10 ) (6 )
Total
Allstate
Protection 263 (1 ) (6 ) (17 ) (13 ) (45 ) (106 ) (92 ) (46 ) (124 ) (187 )
Discontinued
Lines and
Coverages 28 - - - - - - - - - 28
Total
Property-
Liability $ 291 $ (1 ) $ (6 ) $ (17 ) $ (13 ) $ (45 ) $ (106 ) $ (92 ) $ (46 ) $ (124 ) $ (159 )
Allstate brand prior year reserve reestimates were $671 million favorable in
2012, $371 million favorable in 2011 and $181 million favorable in 2010. In
2012, this was primarily due to favorable catastrophe reserve reestimates and
severity development that was better than expected. The increased reserves in
accident years 2002 & prior is due to a reclassification of injury reserves to
older years and reserve strengthening. In 2011, this was primarily due to
severity development that was better than expected and favorable catastrophe
reserve reestimates. The increased reserves in accident years 2001 & prior is
due to a reclassification of injury reserves to older years and reserve
strengthening. In 2010, this was primarily due to favorable catastrophe reserve
reestimates and severity development that was better than expected, partially
offset by litigation settlements. The increased reserves in accident years
2000 & prior is due to the litigation settlements of $100 million, a
reclassification of injury reserves to older years and reserve strengthening.
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These trends are primarily responsible for revisions to loss development
factors, as described above, used to predict how losses are likely to develop
from the end of a reporting period until all claims have been paid. Because
these trends cause actual losses to differ from those predicted by the estimated
development factors used in prior reserve estimates, reserves are revised as
actuarial studies validate new trends based on the indications of updated
development factor calculations.
The impact of these reestimates on the Allstate brand underwriting income
(loss) is shown in the table below.
($ in millions) 2012
2011 2010
Reserve reestimates $ (671 ) $
(371 ) $ (181 )
Allstate brand underwriting income (loss) 1,515
(667 ) 568
Reserve reestimates as a % of underwriting income (loss) 44.3 % 55.6 % 31.9 %
Encompass brand prior year reserve reestimates in 2012 were related to lower
than anticipated claim settlement costs and favorable catastrophe reserve
reestimates. Reserve reestimates in 2011 were related to higher than anticipated
claim settlement costs. 2010 Encompass brand reserve reestimates were related to
lower than anticipated claim settlement costs.
The impact of these reestimates on the Encompass brand underwriting loss is
shown in the table below.
($ in millions) 2012 2011 2010
Reserve reestimates $ (45 ) $ 15 $ (6 ) Encompass brand underwriting loss (70 ) (146 )
(43 )
Reserve reestimates as a % of underwriting loss 64.3 % (10.3 )%
14.0 %
Esurance brand There were no prior year reserve reestimates for Esurance in
2012. However, the Esurance opening balance sheet reserves were reestimated in
2012 resulting in a $13 million reduction in reserves due to lower severity. The
adjustment was recorded as a reduction in goodwill and an increase in payables
to the seller under the terms of the purchase agreement and therefore had no
impact on claims expense or the loss ratio.
Discontinued Lines and Coverages We conduct an annual review in the third
quarter of each year to evaluate and establish asbestos, environmental and other
discontinued lines reserves. Reserves are recorded in the reporting period in
which they are determined. Using established industry and actuarial best
practices and assuming no change in the regulatory or economic environment, this
detailed and comprehensive methodology determines reserves based on assessments
of the characteristics of exposure (e.g. claim activity, potential liability,
jurisdiction, products versus non-products exposure) presented by policyholders.
Reserve reestimates for the Discontinued Lines and Coverages, as shown in
the table below, were increased primarily for asbestos and environmental in
2012, asbestos in 2011 and environmental in 2010.
($ in
millions) 2012 2011 2010
January 1 Reserve January 1 Reserve January 1 Reserve
reserves reestimate reserves reestimate reserves reestimate
Asbestos
claims $ 1,078 $ 26 $ 1,100 $ 26 $ 1,180 $ 5
Environmental
claims 185 22 201 - 198 18
Other
discontinued
lines 444 3 478 (5 ) 500 5
Total
Discontinued
Lines and
Coverages $ 1,707 $ 51 $ 1,779 $ 21 $ 1,878 $ 28
Underwriting
loss $ (53 ) $ (25 ) $ (31 )
Reserve
reestimates
as a % of
underwriting
loss (96.2 )% (84.0 )% (90.3 )%
Reserve additions for asbestos in 2012 and 2011 were primarily for products
related coverage due to increases for the assumed reinsurance portion of
discontinued lines where we are reliant on our ceding companies to report
claims. Reserve additions for asbestos in 2010 were primarily for products
related coverage.
The reserve additions for environmental in 2012 were primarily related to
site-specific remediations where the clean-up cost estimates and responsibility
for the clean-up were more fully determined. Normal environmental claim activity
resulted in essentially no change in estimated reserves for 2011. The reserve
additions for environmental in 2010
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were primarily related to site-specific remediations where the clean-up cost
estimates and responsibility for the clean-up were more fully determined.
The table below summarizes reserves and claim activity for asbestos and
environmental claims before (Gross) and after (Net) the effects of reinsurance
for the past three years.
($ in millions, except ratios) 2012 2011 2010
Gross Net Gross Net Gross Net
Asbestos claims
Beginning reserves $ 1,607 $ 1,078 $ 1,655 $ 1,100 $ 1,780 $ 1,180
Incurred claims and claims expense 34 26 38 26 (7 ) 5
Claims and claims expense paid (119 ) (78 ) (86 ) (48 ) (118 ) (85 )
Ending reserves $ 1,522 $ 1,026 $ 1,607 $ 1,078 $ 1,655 $ 1,100
Annual survival ratio 12.8 13.2 18.7 22.5 14.0 12.9
3-year survival ratio 14.1 14.7 13.6 13.6 12.6 12.2
Environmental claims
Beginning reserves $ 225 $ 185 $ 248 $ 201 $ 247 $ 198
Incurred claims and claims expense 32 22 (2 ) - 19 18
Claims and claims expense paid (16 ) (14 ) (21 ) (16 ) (18 ) (15 )
Ending reserves $ 241 $ 193 $ 225 $ 185 $ 248 $ 201
Annual survival ratio 15.1 13.8 10.7 11.6 13.8 13.4
3-year survival ratio 13.4 12.9 11.8 11.6 8.0 8.7
Combined environmental and asbestos
claims
Annual survival ratio 13.1 13.3 17.1 19.7 14.0 13.0
3-year survival ratio 14.0 14.3 13.4 13.3 11.7 11.6
Percentage of IBNR in ending
reserves 57.8 % 59.0 % 60.1 %
The survival ratio is calculated by taking our ending reserves divided by
payments made during the year. This is a commonly used but extremely simplistic
and imprecise approach to measuring the adequacy of asbestos and environmental
reserve levels. Many factors, such as mix of business, level of coverage
provided and settlement procedures have significant impacts on the amount of
environmental and asbestos claims and claims expense reserves, claim payments
and the resultant ratio. As payments result in corresponding reserve reductions,
survival ratios can be expected to vary over time.
In both 2012 and 2011, the asbestos net 3-year survival ratio increased due
to lower average annual payments. The environmental net 3-year survival ratio
increased in both 2012 and 2011 due to lower average annual payments.
Our net asbestos reserves by type of exposure and total reserve additions
are shown in the following table.
($ in
millions) December 31, 2012 December 31, 2011 December 31, 2010
Active Active Active
policy- Net % of policy- Net % of policy- Net % of
holders reserves reserves holders reserves reserves holders reserves reserves
Direct
policyholders:
Primary 54 $ 12 1 % 52 $ 17 2 % 51 $ 17 1 %
Excess 299 276 27 314 263 24 319 261 24
Total 353 288 28 366 280 26 370 278 25
Assumed
reinsurance 150 15 171 16 165 15
IBNR 588 57 627 58 657 60
Total net
reserves $ 1,026 100 % $ 1,078 100 % $ 1,100 100 %
Total reserve
additions $ 26 $ 26 $ 5
During the last three years, 52 direct primary and excess policyholders
reported new claims, and claims of 68 policyholders were closed, decreasing the
number of active policyholders by 16 during the period. The 16 decrease
comprised (13) from 2012, (4) from 2011 and 1 from 2010. The decrease of 13 in
2012 included 15 new policyholders reporting new claims and the closing of 28
policyholders' claims.
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IBNR net reserves decreased $39 million as of December 31, 2012 compared to
December 31, 2011. As of December 31, 2012 IBNR represented 57% of total net
asbestos reserves, compared to 58% as of December 31, 2011. IBNR provides for
reserve development of known claims and future reporting of additional unknown
claims from current and new policyholders and ceding companies.
Pending, new, total closed and closed without payment claims for asbestos
and environmental exposures for the years ended December 31 are summarized in
the following table.
Number of claims 2012 2011 2010
Asbestos
Pending, beginning of year 8,072 8,421 8,252
New 492 507 788
Total closed (1,117 ) (856 ) (619 )
Pending, end of year 7,447 8,072 8,421
Closed without payment 728 664 336
Environmental
Pending, beginning of year 4,176 4,297 4,114
New 402 351 498
Total closed (902 ) (472 ) (315 )
Pending, end of year 3,676 4,176 4,297
Closed without payment 511 334 181
Property-Liability reinsurance ceded For Allstate Protection, we utilize
reinsurance to reduce exposure to catastrophe risk and manage capital, and to
support the required statutory surplus and the insurance financial strength
ratings of certain subsidiaries such as Castle Key Insurance Company and
Allstate New Jersey Insurance Company. We purchase significant reinsurance to
manage our aggregate countrywide exposure to an acceptable level. The price and
terms of reinsurance and the credit quality of the reinsurer are considered in
the purchase process, along with whether the price can be appropriately
reflected in the costs that are considered in setting future rates charged to
policyholders. We also participate in various reinsurance mechanisms, including
industry pools and facilities, which are backed by the financial resources of
the property-liability insurance company market participants, and have
historically purchased reinsurance to mitigate long-tail liability lines,
including environmental, asbestos and other discontinued lines exposures. We
retain primary liability as a direct insurer for all risks ceded to reinsurers.
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Our reinsurance recoverable balances are shown in the following table as of
December 31, net of the allowance we have established for uncollectible amounts.
Standard
& Poor's
financial Reinsurance
($ in millions) strength recoverable on paid
rating (1) and unpaid claims, net
2012 2011
Industry pools and facilities
Michigan Catastrophic Claim Association
("MCCA") N/A $ 2,590 $ 1,709
National Flood Insurance Program N/A 428 33
North Carolina Reinsurance Facility N/A 64
70
New Jersey Unsatisfied Claim and Judgment
Fund N/A 38 50
Other 3 3
Subtotal 3,123 1,865
Lloyd's of London ("Lloyd's") A+ 190 193
Westport Insurance Corporation (formerly
Employers Reinsurance Corporation) AA- 95
98
Swiss Reinsurance America Corporation AA- 41
16
New England Reinsurance Corporation N/A 35
36
R&Q Reinsurance Company N/A 30
31
Renaissance Reinsurance Limited AA- 28
2
Other, including allowance for future
uncollectible reinsurance recoverables 537 433
Subtotal 956 809
Total Property-Liability $ 4,079 $ 2,674
--------------------------------------------------------------------------------
º (1)
º N/A reflects no rating available.
Reinsurance recoverables include an estimate of the amount of
property-liability insurance claims and claims expense reserves that may be
ceded under the terms of the reinsurance agreements, including incurred but not
reported unpaid losses. We calculate our ceded reinsurance estimate based on the
terms of each applicable reinsurance agreement, including an estimate of how
IBNR losses will ultimately be ceded under the agreement. We also consider other
limitations and coverage exclusions under our reinsurance agreements.
Accordingly, our estimate of reinsurance recoverables is subject to similar
risks and uncertainties as our estimate of reserves for property-liability
claims and claims expense. We believe the recoverables are appropriately
established; however, as our underlying reserves continue to develop, the amount
ultimately recoverable may vary from amounts currently recorded. We regularly
evaluate the reinsurers and the respective amounts recoverable, and a provision
for uncollectible reinsurance is recorded if needed. The establishment of
reinsurance recoverables and the related allowance for uncollectible reinsurance
is also an inherently uncertain process involving estimates. Changes in
estimates could result in additional changes to the Consolidated Statements of
Operations.
The allowance for uncollectible reinsurance relates to Discontinued Lines
and Coverages reinsurance recoverables and was $87 million and $103 million as
of December 31, 2012 and 2011, respectively. This amount represents 12.4% and
13.4% of the related reinsurance recoverable balances as of December 31, 2012
and 2011, respectively. The allowance is based upon our ongoing review of
amounts outstanding, length of collection periods, changes in reinsurer credit
standing, and other relevant factors. In addition, in the ordinary course of
business, we may become involved in coverage disputes with certain of our
reinsurers which may ultimately result in lawsuits and arbitrations brought by
or against such reinsurers to determine the parties' rights and obligations
under the various reinsurance agreements. We employ dedicated specialists to
manage reinsurance collections and disputes. We also consider recent
developments in commutation activity between reinsurers and cedants, and recent
trends in arbitration and litigation outcomes in disputes between cedants and
reinsurers in seeking to maximize our reinsurance recoveries.
Adverse developments in the insurance industry have led to a decline in the
financial strength of some of our reinsurance carriers, causing amounts
recoverable from them and future claims ceded to them to be considered a higher
risk. There has also been consolidation activity in the industry, which causes
reinsurance risk across the industry to be
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concentrated among fewer companies. In addition, some companies have segregated
asbestos, environmental, and other discontinued lines exposures into separate
legal entities with dedicated capital. Regulatory bodies in certain cases have
supported these actions. We are unable to determine the impact, if any, that
these developments will have on the collectability of reinsurance recoverables
in the future.
The effects of reinsurance ceded on our property-liability premiums earned
and claims and claims expense for the years ended December 31 are summarized in
the following table.
($ in millions) 2012 2011 2010 Ceded property-liability premiums earned $ 1,090 $ 1,098
$ 1,092
Ceded property-liability claims and claims expense
Industry pool and facilities
MCCA $ 962 $ 509
$ 142
National Flood Insurance Program 758 196
50
FHCF - 8 10
Other 70 84 64
Subtotal industry pools and facilities 1,790 797
266
Other 261 130
5
Ceded property-liability claims and claims expense $ 2,051$ 927
$ 271
In 2012, ceded property-liability premiums earned decreased $8 million
compared to 2011, primarily due to decreased premiums in our catastrophe
reinsurance program. In 2011, ceded property-liability premiums earned increased
$6 million compared to 2010 year, primarily due to higher premium rates and an
increase in policies written for the National Flood Insurance Program.
Ceded property-liability claims and claims expense increased in 2012
primarily due to amounts ceded to the National Flood Insurance Program related
to Sandy, reserve increases in the MCCA program, and amounts ceded under our
catastrophe reinsurance program related to Sandy. The reserve increases in the
MCCA program are attributable to an increased recognition of longer term paid
loss trends. The paid loss trends are rising due to increased costs in medical
and attendant care and increased longevity of claimants. Ceded
property-liability claims and claims expense increased in 2011 primarily due to
reserve increases in the MCCA program and an increase in claim activity on the
National Flood Insurance Program due to multiple flooding events throughout the
year.
For a detailed description of the MCCA, FHCF and Lloyd's, see Note 10 of the
consolidated financial statements. As of December 31, 2012, other than the
recoverable balances listed in the table above, no other amount due or estimated
to be due from any single Property-Liability reinsurer was in excess of
$26 million.
We enter into certain intercompany insurance and reinsurance transactions
for the Property-Liability operations in order to maintain underwriting control
and manage insurance risk among various legal entities. These reinsurance
agreements have been approved by the appropriate regulatory authorities. All
significant intercompany transactions have been eliminated in consolidation.
Catastrophe reinsurance
Our catastrophe reinsurance program is designed, utilizing our risk
management methodology, to address our exposure to catastrophes nationwide. Our
program is designed to provide reinsurance protection for catastrophes including
hurricanes, windstorms, hail, tornados, fires following earthquakes, earthquakes
and wildfires. These reinsurance agreements are part of our catastrophe
management strategy, which is intended to provide our shareholders an acceptable
return on the risks assumed in our property business, and to reduce variability
of earnings, while providing protection to our customers.
We anticipate completing the placement of our 2013 catastrophe reinsurance
program in March 2013. We expect the program will be similar to our 2012
catastrophe reinsurance program. For further details of the existing 2012
program, see Note 10 of the consolidated financial statements.
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ALLSTATE FINANCIAL 2012 HIGHLIGHTS
º •
º Net income was $541 million in 2012 compared to $590 million in 2011.
º •
º Premiums and contract charges on underwritten products, including
traditional life, interest-sensitive life and accident and health
insurance, totaled $2.18 billion in 2012, an increase of 3.8% from
$2.10 billion in 2011.
º •
º Investments totaled $57.00 billion as of December 31, 2012, reflecting a
decrease in carrying value of $374 million from $57.37 billion as of
December 31, 2011. Net investment income decreased 2.5% to $2.65 billion in
2012 from $2.72 billion in 2011.
º •
º Net realized capital losses totaled $13 million in 2012 compared to net
realized capital gains of $388 million in 2011.
º •
º Contractholder funds totaled $39.32 billion as of December 31, 2012,
reflecting a decrease of $3.01 billion from $42.33 billion as of
December 31, 2011.
ALLSTATE FINANCIAL SEGMENT
Overview and strategy The Allstate Financial segment sells life insurance,
voluntary employee benefits products, and products designed to meet customer
retirement and investment needs. We serve our customers through Allstate
exclusive agencies and exclusive financial specialists, workplace distribution
and non-proprietary distribution channels. Allstate Financial brings value to
The Allstate Corporation in three principal ways: through profitable growth, by
bringing new customers to Allstate, and by improving the economics of the
Protection business through increased customer loyalty and stronger customer
relationships based on cross selling Allstate Financial products to existing
customers. Allstate Financial's strategy is focused on expanding Allstate
customer relationships, growing our underwritten product sales through Allstate
exclusive agencies and Allstate Benefits (our workplace distribution business),
improving returns on and reducing our exposure to spread-based products, and
emphasizing capital efficiency and shareholder returns.
Our products include interest-sensitive, traditional and variable life
insurance; voluntary accident and health insurance; fixed annuities such as
deferred and immediate annuities; and funding agreements backing medium-term
notes, which we most recently offered in 2008. Our products are sold through
multiple distribution channels including Allstate exclusive agencies and
exclusive financial specialists, workplace enrolling independent agents and, to
a lesser extent, independent master brokerage agencies, specialized structured
settlement brokers, and directly through call centers and the internet. Our
institutional product line consists of funding agreements sold to unaffiliated
trusts that use them to back medium-term notes issued to institutional and
individual investors. Banking products and services were previously offered to
customers through the Allstate Bank, which ceased operations in 2011.
We continue to shift our mix of products in force by decreasing our lower
returning spread-based products, principally fixed annuities and institutional
products, and through growth of our higher returning underwritten products
having mortality or morbidity risk, principally life insurance and accident and
health products. In addition to focusing on higher return markets, products and
distribution channels, Allstate Financial continues to implement capital
efficiency and enterprise risk and return management strategies and actions.
Based upon Allstate's strong financial position and brand, we have a unique
opportunity to cross-sell to our customer base. We will enhance trusted customer
relationships through our Allstate exclusive agencies to serve those who are
looking for assistance in meeting their protection and retirement needs by
providing them with the information, products and services that they need. To
further strengthen Allstate Financial's value proposition to Allstate exclusive
agencies and drive further engagement in selling our products, Allstate
Financial products are integrated into the Allstate Protection sales processes
and the new agent compensation structure incorporates sales of Allstate
Financial products. Life insurance policies issued through Allstate agencies
increased 9.3% and 31.5% in 2012 and 2011, respectively, compared to the prior
years. During 2012, we introduced a new deferred annuity product that allows our
Allstate exclusive agents to continue to offer a full range of products that
meet customer retirement needs while providing Allstate with an attractive risk
adjusted return profile.
Our employer relationships through Allstate Benefits also afford
opportunities to offer additional Allstate products and grow our business.
Allstate Benefits is an industry leader in voluntary benefits, offering one of
the broadest product portfolios in the voluntary benefits market. Our strategy
for Allstate Benefits focuses on growth in the national accounts market by
increasing the number of sales and account management personnel, expanding
independent agent distribution in targeted geographic locations for increased
new sales, increasing Allstate exclusive agency engagement to drive cross
selling of voluntary benefits products, capitalizing on strategic alliance
opportunities, and developing opportunities for revenue growth through new
product and fee income offerings. In 2012, Allstate Benefits new business
written premiums increased 6.5% compared to 2011.
Our deferred and immediate annuity business has been adversely impacted by
the credit cycle and historically low interest rate environment. Our immediate
annuity business has been impacted by medical advancements that have
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resulted in annuitants living longer than anticipated when many of these
contracts were originated. We are aggressively reducing the level of legacy
deferred annuities in force and proactively managing annuity crediting rates to
improve the profitability of the business. We are managing the investment
portfolio supporting our immediate annuities to ensure the assets match the
characteristics of the liabilities and provide the long-term returns needed to
support this business. We are increasing limited partnership and other
alternative asset investments to appropriately match investment duration with
these long-term illiquid liabilities.
Allstate Financial outlook
º •
º Our growth initiatives continue to focus on increasing the number of
customers served through our proprietary and Allstate Benefits channels.
º •
º We continue to focus on improving returns and reducing our concentration in
spread-based products resulting in net reductions in contractholder fund
obligations.
º •
º We plan to further grow premiums and contract charges on underwritten
insurance products and offer a broad range of products to meet our customers' needs for retirement income, including third-party solutions
when we choose not to offer certain products.
º •
º We expect lower investment spread due to reduced contractholder funds, the
continuing low interest rate environment and changes in asset allocations.
The amount by which the low interest rate environment will reduce our
investment spread is contingent on our ability to maintain the portfolio
yield and lower interest crediting rates on spread-based products, which
could be limited by market conditions, regulatory minimum rates or
contractual minimum rate guarantees, and may not match the timing or
magnitude of changes in asset yields. We also anticipate changing our asset
allocation for long-term immediate annuities by reducing fixed income
securities and increasing investments in limited partnerships and other
alternative investments. This shift could result in lower and more volatile
investment income; however, we anticipate that this strategy will lead to
higher total returns and attributed equity.
º •
º We expect increases in Allstate Financial's attributed GAAP equity as there
may be limitations on the amount of dividends Allstate Financial companies
can pay without prior approval by their insurance departments.
º •
º We continue to review our strategic options to reduce our exposure and
improve returns of the spread-based businesses. As a result, we may take
additional operational and financial actions that offer return improvement
and risk reduction opportunities.
Summary analysis Summarized financial data for the years ended December 31
is presented in the following table.
($ in millions) 2012 2011
2010
Revenues
Life and annuity premiums and contract charges $ 2,241$ 2,238$ 2,168
Net investment income 2,647 2,716
2,853
Realized capital gains and losses (13 ) 388
(517 )
Total revenues 4,875 5,342 4,504
Costs and expenses Life and annuity contract benefits (1,818 ) (1,761 )
(1,815 )
Interest credited to contractholder funds (1,316 ) (1,645 )
(1,807 )
Amortization of DAC (401 ) (494 ) (290 )
Operating costs and expenses (576 ) (555 ) (568 )
Restructuring and related charges - (1 ) 3
Total costs and expenses (4,111 ) (4,456 ) (4,477 )
Gain (loss) on disposition of operations 18 (7 ) 14
Income tax (expense) benefit (241 ) (289 ) 1
Net income $ 541 $ 590 $ 42
Investments as of December 31 $ 56,999 $ 57,373 $ 61,582
Net income
Life insurance $ 226 $ 262
Accident and health insurance 81 95
Annuities and institutional products 234 233
Net income $ 541 $ 590
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Net income in 2012 was $541 million compared to $590 million in 2011. The
decrease was primarily due to net realized capital losses in 2012 compared to
net realized capital gains in 2011, lower net investment income and higher life
and annuity contract benefits, partially offset by decreased interest credited
to contractholder funds and lower amortization of DAC.
Net income in 2011 was $590 million compared to $42 million in 2010. The
increase was primarily due to net realized capital gains in 2011 compared to net
realized capital losses in 2010, decreased interest credited to contractholder
funds, higher life and annuity premiums and contract charges and lower life and
annuity contract benefits, partially offset by higher amortization of DAC and
lower net investment income.
Analysis of revenues Total revenues decreased 8.7% or $467 million in 2012
compared to 2011 due to net realized capital losses in 2012 compared to net
realized capital gains in 2011 and lower net investment income. Total revenues
increased 18.6% or $838 million in 2011 compared to 2010 due to net realized
capital gains in 2011 compared to net realized capital losses in 2010 and higher
premiums and contract charges, partially offset by lower net investment income.
Life and annuity premiums and contract charges Premiums represent revenues
generated from traditional life insurance, immediate annuities with life
contingencies, and accident and health insurance products that have significant
mortality or morbidity risk. Contract charges are revenues generated from
interest-sensitive and variable life insurance and fixed annuities for which
deposits are classified as contractholder funds or separate account liabilities.
Contract charges are assessed against the contractholder account values for
maintenance, administration, cost of insurance and surrender prior to
contractually specified dates.
The following table summarizes life and annuity premiums and contract
charges by product for the years ended December 31.
($ in millions) 2012 2011 2010
Underwritten products
Traditional life insurance premiums $ 470 $ 441 $ 420
Accident and health insurance premiums 653 643 621
Interest-sensitive life insurance contract charges 1,055 1,015 991
Subtotal 2,178 2,099 2,032
Annuities
Immediate annuities with life contingencies premiums 45 106 97
Other fixed annuity contract charges 18 33 39
Subtotal 63 139 136
Life and annuity premiums and contract charges (1) $ 2,241 $ 2,238 $ 2,168
--------------------------------------------------------------------------------
º (1)
º Contract charges related to the cost of insurance totaled $696 million,
$659 million and $637 million in 2012, 2011 and 2010, respectively.
Total premiums and contract charges increased 0.1% in 2012 compared to 2011
primarily due to higher contract charges on interest-sensitive life insurance
products primarily resulting from the aging of our policyholders and lower
reinsurance ceded, and increased traditional life insurance premiums due to
lower reinsurance ceded and higher sales through Allstate agencies, partially
offset by lower sales of immediate annuities with life contingencies. Sales of
immediate annuities with life contingencies fluctuate with changes in our
pricing competitiveness relative to other insurers.
Total premiums and contract charges increased 3.2% in 2011 compared to 2010
primarily due to higher contract charges on interest-sensitive life insurance
products primarily resulting from the aging of our policyholders, growth in
Allstate Benefits's accident and health insurance business in force and
increased traditional life insurance premiums. Increased traditional life
insurance premiums were primarily due to lower reinsurance premiums resulting
from higher retention, partially offset by lower renewal premiums.
Contractholder funds represent interest-bearing liabilities arising from the
sale of products such as interest-sensitive life insurance, fixed annuities,
funding agreements and, prior to December 31, 2011, bank deposits. The balance
of contractholder funds is equal to the cumulative deposits received and
interest credited to the contractholder less
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cumulative contract benefits, surrenders, withdrawals, maturities and contract
charges for mortality or administrative expenses. The following table shows the
changes in contractholder funds for the years ended December 31.
($ in millions) 2012 2011
2010
Contractholder funds, beginning balance $ 42,332 $ 48,195 $ 52,582
Deposits
Fixed annuities 928 667 932
Interest-sensitive life insurance 1,347 1,291 1,515
Bank deposits - 360 991
Total deposits 2,275 2,318 3,438
Interest credited 1,323
1,629 1,794
Benefits, withdrawals, maturities and other adjustments
Benefits
(1,463 ) (1,461 ) (1,552 )
Surrenders and partial withdrawals (3,990 ) (4,935 ) (4,201 )
Bank withdrawals -
(1,463 ) (1,002 )
Maturities of and interest payments on institutional
products
(138 ) (867 ) (1,833 )
Contract charges (1,066 ) (1,028 ) (983 )
Net transfers from separate accounts 11 12 11
Fair value hedge adjustments for institutional products - (34 ) (196 )
Other adjustments (1) 35
(34 ) 137
Total benefits, withdrawals, maturities and other
adjustments (6,611 )
(9,810 ) (9,619 )
Contractholder funds, ending balance $ 39,319 $
42,332 $ 48,195
--------------------------------------------------------------------------------
º (1)
º The table above illustrates the changes in contractholder funds, which are
presented gross of reinsurance recoverables on the 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 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 7.1%, 12.2% and 8.3% in 2012, 2011 and 2010,
respectively, reflecting our continuing strategy to reduce our concentration in
spread-based products. Average contractholder funds decreased 9.8% in 2012
compared to 2011 and 10.2% in 2011 compared to 2010.
Contractholder deposits decreased 1.9% in 2012 compared to 2011 primarily
due to increased fixed annuity deposits driven by new equity-indexed annuity
products launched in second quarter 2012 being more than offset by the absence
of Allstate Bank deposits in 2012. Contractholder deposits decreased 32.6% in
2011 compared to 2010 primarily due to lower deposits on Allstate Bank products
and fixed annuities. In September 2011, Allstate Bank stopped opening new
customer accounts and all funds were returned to Allstate Bank account holders
prior to December 31, 2011.
Surrenders and partial withdrawals on deferred fixed annuities and
interest-sensitive life insurance products decreased 19.1% to $3.99 billion in
2012 from $4.94 billion in 2011. 2011 had elevated surrenders on fixed annuities
resulting from crediting rate actions and a large number of contracts reaching
the 30-45 day period (typically at their 5 or 6 year anniversary) during which
there is no surrender charge. In 2011, surrenders and partial withdrawals on
deferred fixed annuities and interest-sensitive life insurance products
increased 17.5% to $4.94 billion from $4.20 billion in 2010 primarily due to
higher surrenders on fixed annuities, partially offset by lower surrenders and
partial withdrawals on interest-sensitive life insurance products. The surrender
and partial withdrawal rate on deferred fixed annuities and interest-sensitive
life insurance products, based on the beginning of year contractholder funds,
was 11.3% in 2012 compared to 12.6% in 2011 and 10.1% in 2010.
Maturities of and interest payments on institutional products decreased to
$138 million in 2012 from $867 million in 2011 and $1.83 billion in 2010,
reflecting differences in the timing and magnitude of maturities for these
declining obligations.
Net investment income decreased 2.5% to $2.65 billion in 2012 from
$2.72 billion in 2011 primarily due to lower average investment balances and
lower yields on fixed income securities, partially offset by income from limited
partnerships. Net investment income decreased 4.8% to $2.72 billion in 2011 from
$2.85 billion in 2010 primarily due to
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lower average investment balances which were partially offset by higher yields.
The higher yields are primarily attributable to yield optimization actions
including the termination of interest rate swaps during the first quarter of
2011.
Net realized capital gains and losses for the years ended December 31 are
presented in the following table.
($ in millions) 2012 2011 2010
Impairment write-downs $ (51 ) $ (246 ) $ (501 )
Change in intent write-downs (17 ) (51 ) (142 )
Net other-than-temporary impairment losses recognized in
earnings
(68 ) (297 ) (643 )
Sales 20 838 219
Valuation of derivative instruments (16 ) (237 ) (94 )
Settlements of derivative instruments 51 22 (31 )
EMA limited partnership income (1) -
62 32
Realized capital gains and losses, pre-tax (13 ) 388 (517 )
Income tax benefit (expense) 5
(138 ) 180
Realized capital gains and losses, after-tax $ (8 ) $
250 $ (337 )
--------------------------------------------------------------------------------
º (1)
º Income from EMA limited partnerships is reported in net investment income
in 2012 and realized capital gains and losses in 2011 and 2010.
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 decreased 7.7% or
$345 million in 2012 compared to 2011 primarily due to lower interest credited
to contractholder funds and amortization of DAC, partially offset by higher life
and annuity contract benefits. Total costs and expenses decreased 0.5% or
$21 million in 2011 compared to 2010 primarily due to lower interest credited to
contractholder funds and life and annuity contract benefits, partially offset by
higher amortization of DAC.
Life and annuity contract benefits increased 3.2% or $57 million in 2012
compared to 2011 primarily due to worse mortality experience on life insurance
and the reduction in accident and health insurance reserves at Allstate Benefits
in 2011, partially offset by lower sales of immediate annuities with life
contingencies and the reduction in reserves for secondary guarantees on
interest-sensitive life insurance. Our 2012 annual review of assumptions
resulted in a $13 million decrease in the reserves for secondary guarantees on
interest-sensitive life insurance due to favorable projected mortality.
Life and annuity contract benefits decreased 3.0% or $54 million in 2011
compared to 2010 primarily due to reserve reestimations recorded in second
quarter 2010 that did not recur in 2011 and a $38 million reduction in accident
and health insurance reserves at Allstate Benefits as of December 31, 2011
related to a contract modification, partially offset by unfavorable mortality
experience on life insurance. The reserve reestimations in second quarter 2010
utilized more refined policy level information and assumptions. The increase in
reserves for certain secondary guarantees on universal life insurance policies
resulted in a charge to contract benefits of $68 million. The decrease in
reserves for immediate annuities resulted in a credit to contract benefits of
$26 million.
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 $538 million, $541 million and $549 million in 2012, 2011 and
2010, respectively.
The benefit spread by product group for the years ended December 31 is
disclosed in the following table.
($ in millions) 2012 2011 2010
Life insurance $ 347 $ 355 $ 282
Accident and health insurance 303 329 252
Annuities (66 ) (55 ) (25 )
Total benefit spread $ 584 $ 629 $ 509
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Benefit spread decreased 7.2% or $45 million in 2012 compared to 2011
primarily due to worse mortality experience on life insurance and annuities and
the reduction in accident and health insurance reserves at Allstate Benefits in
2011, partially offset by lower reinsurance premiums ceded on life insurance,
higher cost of insurance contract charges on interest-sensitive life insurance
and the reduction in reserves for secondary guarantees on interest-sensitive
life insurance.
Benefit spread increased 23.6% or $120 million in 2011 compared to 2010
primarily due to reestimations of reserves that increased contract benefits for
interest-sensitive life insurance and decreased contract benefits for immediate
annuities with life contingencies in 2010, a reduction in accident and health
insurance reserves at Allstate Benefits as of December 31, 2011 related to a
contract modification, and favorable morbidity experience on certain accident
and health products and growth at Allstate Benefits.
Interest credited to contractholder funds decreased 20.0% or $329 million in
2012 compared to 2011 primarily due to the valuation change on derivatives
embedded in equity-indexed annuity contracts that reduced interest credited
expense, lower average contractholder funds and lower interest crediting rates.
Valuation changes on derivatives embedded in equity-indexed annuity contracts
that are not hedged decreased interest credited to contractholder funds by
$126 million in 2012 compared to an $18 million increase in 2011. During third
quarter 2012, we reviewed the significant valuation inputs for these embedded
derivatives and reduced the projected option cost to reflect management's
current and anticipated crediting rate setting actions, which were informed by
the existing and projected low interest rate environment and are consistent with
our strategy to reduce exposure to spread-based business. The reduction in
projected interest rates to the level currently being credited, approximately
2%, resulted in a reduction of contractholder funds and interest credited
expense by $169 million. Amortization of deferred sales inducement costs was
$14 million in 2012 compared to $23 million in 2011.
Interest credited to contractholder funds decreased 9.0% or $162 million in
2011 compared to 2010 primarily due to lower average contractholder funds and
lower interest crediting rates on deferred fixed annuities, interest-sensitive
life insurance and immediate fixed annuities. Additionally, valuation changes on
derivatives embedded in equity-indexed annuity contracts that are not hedged
increased interest credited to contractholder funds by $18 million in 2011.
Amortization of deferred sales inducement costs was $23 million in 2011 compared
to $27 million in 2010.
In order to analyze the impact of net investment income and interest
credited to contractholders on net income, we monitor the difference between net
investment income and the sum of interest credited to contractholder funds and
the implied interest on immediate annuities with life contingencies, which is
included as a component of life and annuity contract benefits on the
Consolidated Statements of Operations ("investment spread").
The investment spread by product group for the years ended December 31 is
shown in the following table.
($ in millions) 2012 2011 2010
Annuities and institutional products $ 292 $ 188 $ 179
Life insurance 82 54 35
Accident and health insurance 25 19 18
Allstate Bank products - 22 31
Net investment income on investments supporting capital 268 265 234
Investment spread before valuation changes on embedded
derivatives that are not hedged
667
548 497
Valuation changes on derivatives embedded in equity-indexed
annuity contracts that are not hedged
126 (18 ) -
Total investment spread $ 793 $ 530 $ 497
Investment spread before valuation changes on embedded derivatives that are
not hedged increased 21.7% or $119 million in 2012 compared to 2011 due to
income from limited partnerships and lower crediting rates, partially offset by
lower yields on fixed income securities and the continued managed reduction in
our spread-based business in force. Investment spread before valuation changes
on embedded derivatives that are not hedged increased 10.3% or $51 million in
2011 compared to 2010 as actions to improve investment portfolio yields and
lower crediting rates more than offset the effect of the continuing decline in
our spread-based business in force. For further analysis on the valuation
changes on derivatives embedded in equity-indexed annuity contracts, see the
interest credited to contractholder funds section.
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To further analyze investment spreads, the following table summarizes the
weighted average investment yield on assets supporting product liabilities and
capital, interest crediting rates and investment spreads.
Weighted average Weighted average Weighted average
investment yield interest crediting rate investment spreads
2012 2011 2010 2012 2011 2010 2012 2011 2010
Interest-sensitive
life insurance 5.2 % 5.4 % 5.5 % 4.0 % 4.2 % 4.4 % 1.2 % 1.2 % 1.1 %
Deferred fixed
annuities and
institutional
products 4.6 4.6 4.4 3.2 3.3 3.2 1.4 1.3 1.2
Immediate fixed
annuities with and
without life
contingencies 6.9 6.3 6.4 6.1 6.2 6.4 0.8 0.1 -
Investments
supporting
capital,
traditional life
and other products 4.0 3.9 3.7 n/a n/a n/a n/a n/a n/a
The following table summarizes our product liabilities as of December 31 and
indicates the account value of those contracts and policies in which an
investment spread is generated.
($ in millions) 2012 2011
2010
Immediate fixed annuities with life contingencies $ 8,889$ 8,831
$ 8,696
Other life contingent contracts and other 6,006 5,575
4,754
Reserve for life-contingent contract benefits $ 14,895$ 14,406
$ 13,450
Interest-sensitive life insurance $ 11,011 $ 10,826
$ 10,675
Deferred fixed annuities 22,066 25,228
29,367
Immediate fixed annuities without life contingencies 3,815 3,821
3,799
Institutional products 1,851 1,891 2,650
Allstate Bank products - - 1,091
Other 576 566 613
Contractholder funds $ 39,319 $ 42,332 $ 48,195
The following table summarizes the weighted average guaranteed crediting
rates and weighted average current crediting rates as of December 31, 2012 for
certain fixed annuities and interest-sensitive life contracts where management
has the ability to change the crediting rate, subject to a contractual minimum.
Other products, including equity-indexed, variable and immediate annuities,
equity-indexed and variable life, and institutional products totaling
$10.72 billion of contractholder funds, have been excluded from the analysis
because management does not have the ability to change the crediting rate or the
minimum crediting rate is not considered meaningful in this context.
Weighted Weighted
average average
guaranteed current
crediting crediting Contractholder
($ in millions) rates rates funds
Annuities with annual crediting rate
resets 3.17 % 3.18 % $ 10,654
Annuities with multi-year rate
guarantees (1):
Resettable in next 12 months 2.05 3.93 1,610
Resettable after 12 months 1.56 3.54 5,434
Interest-sensitive life insurance 3.92 4.17
10,904
--------------------------------------------------------------------------------
º (1)
º These contracts include interest rate guarantee periods which are typically
5 or 6 years.
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Amortization of DAC decreased 18.8% or $93 million in 2012 compared to 2011
and increased 70.3% or $204 million in 2011 compared to 2010. The components of
amortization of DAC for the years ended December 31 are summarized in the
following table.
($ in millions) 2012 2011 2010
Amortization of DAC before amortization relating to realized
capital gains and losses, valuation changes on embedded
derivatives that are not hedged and changes in assumptions $ 310 $ 331 $ 270
Amortization relating to realized capital gains and losses (1)
and valuation changes on embedded derivatives that are not
hedged 57 156 36
Amortization acceleration (deceleration) for changes in
assumptions ("DAC unlocking") 34 7 (16 )
Total amortization of DAC $ 401 $ 494 $ 290
--------------------------------------------------------------------------------
º (1)
º 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 decrease in DAC amortization in 2012 compared to 2011 was primarily due
to decreased amortization relating to realized capital gains and losses and
decreased amortization on fixed annuity products due to the DAC balance for
contracts issued prior to 2010 being fully amortized, partially offset by
increased amortization acceleration for changes in assumptions and increased
amortization relating to valuation changes on embedded derivatives that are not
hedged. Amortization relating to valuation changes on derivatives embedded in
equity-indexed annuity contracts was $25 million in 2012.
The increase in DAC amortization in 2011 compared to 2010 was primarily due
to increased amortization relating to realized capital gains, lower amortization
in the second quarter of 2010 resulting from decreased benefit spread on
interest-sensitive life insurance due to the reestimation of reserves, and an
unfavorable change in amortization acceleration/deceleration for changes in
assumptions.
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 persistency, mortality,
expenses, investment returns, including capital gains and losses, interest
crediting rates to policyholders, and the effect of any hedges in all product
lines. In 2012, the review resulted in an acceleration of DAC amortization
(charge to income) of $34 million. Amortization acceleration of $38 million
related to variable life insurance and was primarily due to an increase in
projected mortality. Amortization acceleration of $4 million related to fixed
annuities and was primarily due to lower projected investment returns.
Amortization deceleration of $8 million related to interest-sensitive life
insurance and was primarily due to an increase in projected persistency.
In 2011, the review resulted in an acceleration of DAC amortization of
$7 million. Amortization acceleration of $12 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 2010, the review resulted in a deceleration of DAC amortization (credit
to income) of $16 million. Amortization deceleration of $37 million related to
variable life insurance and was primarily due to appreciation in the underlying
separate account valuations. Amortization acceleration of $20 million related to
interest-sensitive life insurance and was primarily due to an increase in
projected realized capital losses and lower projected renewal premium (which is
also expected to reduce persistency), partially offset by lower expenses.
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The changes in DAC for the years ended December 31 are detailed in the
following table.
($ in millions) Traditional life and
accident and Interest-sensitive life
health insurance Fixed annuities Total
2012 2011 2012 2011 2012 2011 2012 2011
Beginning
balance $ 616 $ 573 $ 1,698 $ 1,917 $ 209 $ 369 $ 2,523 $ 2,859
Acquisition
costs deferred 154 133 192 178 25 22 371 333
Amortization of
DAC before
amortization
relating to
realized capital
gains and
losses,
valuation
changes on
embedded
derivatives that
are not hedged
and changes in
assumptions (1) (99 ) (90 ) (186 ) (186 ) (25 ) (55 ) (310 ) (331 )
Amortization
relating to
realized capital
gains and losses
and valuation
changes on
embedded
derivatives that
are not hedged
(1) - - (18 ) (21 ) (39 ) (135 ) (57 ) (156 )
Amortization
(acceleration)
deceleration for
changes in
assumptions
("DAC
unlocking") (1) - - (30 ) (12 ) (4 ) 5 (34 ) (7 )
Effect of
unrealized
capital gains
and losses (2) - - (127 ) (178 ) (141 ) 3 (268 ) (175 )
Ending balance $ 671 $ 616 $ 1,529 $ 1,698 $ 25$ 209$ 2,225$ 2,523
--------------------------------------------------------------------------------
º (1)
º Included as a component of amortization of DAC on the Consolidated
Statements of Operations.
º (2) º Represents the change in the DAC adjustment for unrealized capital gains
and losses. The DAC adjustment balance was $(380) million and
$(112) million as of December 31, 2012 and 2011, respectively, and
represents the amount by which the amortization of DAC would increase or
decrease if the unrealized gains and losses in the respective product
portfolios were realized.
Operating costs and expenses increased 3.8% or $21 million in 2012 compared
to 2011 and decreased 2.3% or $13 million in 2011 compared to 2010. The
following table summarizes operating costs and expenses for the years ended
December 31.
($ in millions) 2012 2011 2010
Non-deferrable commissions $ 103 $ 111 $ 109
General and administrative expenses 421 385 396
Taxes and licenses 52 59 63
Total operating costs and expenses $ 576 $ 555 $ 568
Restructuring and related charges $ - $ 1 $ (3 )
General and administrative expenses increased 9.4% or $36 million in 2012
compared to 2011 primarily due to higher employee related expenses, lower
reinsurance expense allowances and increased marketing costs, partially offset
by a charge in 2011 related to the liquidation plan for Executive Life Insurance
Company of New York, the elimination of expenses following our exit from the
banking business in 2011 and lower pension costs.
General and administrative expenses decreased 2.8% or $11 million in 2011
compared to 2010 primarily due to lower employee and professional service costs,
reduced insurance department assessments for 2011 and lower net Allstate
agencies distribution channel expenses reflecting increased fees from sales of
third party financial products, partially offset by a charge related to the
liquidation plan for Executive Life Insurance Company of New York.
Gain on disposition of $18 million in 2012 relates to the amortization of
the deferred gain from the disposition through reinsurance of substantially all
of our variable annuity business in 2006, and the sale of Surety Life Insurance
Company, which was not used for new business, in third quarter 2012. Loss on
disposition of $7 million in 2011 included $22 million related to the
dissolution of Allstate Bank. In 2011, after receiving regulatory approval to
dissolve, Allstate Bank ceased operations. We canceled the bank's charter in
March 2012 and effective July 1, 2012The Allstate Corporation is no longer a
savings and loan holding company.
Reinsurance ceded We enter into reinsurance agreements with unaffiliated
reinsurers to limit our risk of mortality and morbidity losses. In addition,
Allstate Financial has used reinsurance to effect the acquisition or disposition
of certain blocks of business. We retain primary liability as a direct insurer
for all risks ceded to reinsurers. As of December 31, 2012 and 2011, 39% and
42%, respectively, of our face amount of life insurance in force was reinsured.
Additionally, we ceded substantially all of the risk associated with our
variable annuity business and we cede 100% of the morbidity risk on
substantially all of our long-term care contracts.
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Our reinsurance recoverables, summarized by reinsurer as of December 31, are
shown in the following table.
($ in millions) Reinsurance
Standard & Poor's recoverable on paid
financial and unpaid benefits
strength rating (4) 2012 2011
Prudential Insurance Company of
America AA- $ 1,691 $ 1,681
Employers Reassurance Corporation A+ 1,059 960
Transamerica Life Group AA- 447 454
RGA Reinsurance Company AA- 361 359
Swiss Re Life and Health
America, Inc. (1) AA- 217 212
Scottish Re Group (2) N/A 131 134
Munich American Reassurance AA- 131 127
Paul Revere Life Insurance Company A 127 132
Mutual of Omaha Insurance A+ 96 96
Security Life of Denver A- 83 71
Manulife Insurance Company AA- 62 64
Lincoln National Life Insurance AA- 60 63
Triton Insurance Company N/A 55
56
American Health & Life Insurance Co. N/A 45 48
Other (3) 123 120
Total $ 4,688 $ 4,577
--------------------------------------------------------------------------------
º (1)
º The Company has extensive reinsurance contracts directly with Swiss Re and
its affiliates and indirectly through Swiss Re's acquisition of other
companies with whom we had reinsurance or retrocession contracts.
º (2)
º The reinsurance recoverable on paid and unpaid benefits related to the
Scottish Re Group as of December 31, 2012 comprised $71 million related to
Scottish Re Life Corporation and $60 million related to Scottish Re
(U.S.), Inc. The reinsurance recoverable on paid and unpaid benefits
related to the Scottish Re Group as of December 31, 2011 comprised
$73 million related to Scottish Re Life Corporation and $61 million related
to Scottish Re (U.S.), Inc.
º (3)
º As of December 31, 2012 and 2011, the other category includes $106 million
and $103 million, respectively, of recoverables due from reinsurers with an
investment grade credit rating from Standard & Poor's ("S&P").
º (4)
º N/A reflects no rating available.
We continuously monitor the creditworthiness of reinsurers in order to
determine our risk of recoverability on an individual and aggregate basis, and a
provision for uncollectible reinsurance is recorded if needed. No amounts have
been deemed unrecoverable in the three-years ended December 31, 2012.
We enter into certain intercompany reinsurance transactions for the Allstate
Financial operations in order to maintain underwriting control and manage
insurance risk among various legal entities. These reinsurance agreements have
been approved by the appropriate regulatory authorities. All significant
intercompany transactions have been eliminated in consolidation.
INVESTMENTS 2012 HIGHLIGHTS
º •
º Investments totaled $97.28 billion as of December 31, 2012, an increase of
1.7% from $95.62 billion as of December 31, 2011.
º •
º Unrealized net capital gains totaled $5.55 billion as of December 31, 2012,
increasing from $2.88 billion as of December 31, 2011.
º •
º Net investment income was $4.01 billion in 2012, an increase of 1.0% from
$3.97 billion in 2011.
º •
º Net realized capital gains were $327 million in 2012 compared to
$503 million in 2011.
INVESTMENTS
Overview and strategy The return on our investment portfolios is an
important component of our financial results. Investment portfolios are
segmented between the Property-Liability, Allstate Financial and Corporate and
Other operations. While taking into consideration the investment portfolio in
aggregate, we manage the underlying portfolios based upon the nature of each
respective business and its corresponding liability structure.
We employ a strategic asset allocation approach which considers the nature
of the liabilities and risk tolerances, as well as the risk and return
parameters of the various asset classes in which we invest. This asset
allocation is informed by our global economic and market outlook, as well as
other inputs and constraints, including diversification effects,
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duration, liquidity and capital considerations. Within the ranges set by the
strategic asset allocation, tactical investment decisions are made in
consideration of prevailing market conditions. We manage risks associated with
interest rates, credit spreads, equity markets, real estate and currency
exchange rates. Our continuing focus is to manage risks and returns and to
position our portfolio to take advantage of market opportunities while
attempting to mitigate adverse effects.
The Property-Liability portfolio's investment strategy emphasizes protection
of principal and consistent income generation, within a total return framework.
This approach, which has produced competitive returns over the long term, is
designed to ensure financial strength and stability for paying claims, while
maximizing economic value and surplus growth.
The Allstate Financial portfolio's investment strategy focuses on the total
return of assets needed to support the underlying liabilities, asset-liability
management and achieving an appropriate return on capital.
The Corporate and Other portfolio's investment strategy balances the unique
liquidity needs of the portfolio in relation to the overall corporate capital
structure with the pursuit of returns.
Investments outlook
We anticipate that interest rates may remain below historic averages for an
extended period of time and that financial markets will continue to have periods
of high volatility. Invested assets and income are expected to decline in line
with reductions in contractholder funds for the Allstate Financial segment and
as we continue to invest and reinvest proceeds at market yields that are below
the current portfolio yield. We plan to focus on the following priorities:
º •
º Optimizing return and risk in an uncertain economic climate and
volatile investment markets.
º • º Reducing our exposure to interest rate risk by targeting a shorter
maturity profile in the Property-Liability portfolio.
º •
º Shifting the portfolio mix in the next few years to have less reliance
on lending to borrowers and a greater proportion of ownership of
assets including real estate and other cash-generating assets.
º •
º Managing the alignment of assets with respect to Allstate Financial's
changing liability profile.
Portfolio composition The composition of the investment portfolios as of
December 31, 2012 is presented in the table below.
Corporate and
Property-Liability (5) Allstate Financial (5) Other (5) Total
($ in Percent Percent Percent Percent
millions) to total to total to total to total
Fixed income
securities (1) $ 29,681 77.7 % $ 45,796 80.3 % $ 1,540 74.6 % $ 77,017 79.2 %
Equity
securities (2) 3,671 9.6 366 0.6 - - 4,037 4.1
Mortgage loans 493 1.3 6,077 10.7 - - 6,570 6.8
Limited
partnership
interests (3) 2,991 7.8 1,924 3.4 7 0.3 4,922 5.1
Short-term (4) 912 2.4 907 1.6 517 25.1 2,336 2.4
Other 467 1.2 1,929 3.4 - - 2,396 2.4
Total $ 38,215 100.0 % $ 56,999 100.0 % $ 2,064 100.0 % $ 97,278 100.0 %
--------------------------------------------------------------------------------
º (1)
º Fixed income securities are carried at fair value. Amortized cost basis for
these securities was $28.37 billion, $42.05 billion and $1.50 billion for
Property-Liability, Allstate Financial and Corporate and Other,
respectively.
º (2)
º Equity securities are carried at fair value. Cost basis for these securities was $3.25 billion and $327 million for Property-Liability and
Allstate Financial, respectively.
º (3)
º We have commitments to invest in additional limited partnership interests
totaling $1.13 billion and $947 million for Property-Liability and Allstate
Financial, respectively.
º (4)
º Short-term investments are carried at fair value. Amortized cost basis for
these investments was $912 million, $907 million and $517 million for
Property-Liability, Allstate Financial and Corporate and Other,
respectively.
º (5)
º Balances reflect the elimination of related party investments between
segments.
Total investments increased to $97.28 billion as of December 31, 2012, from
$95.62 billion as of December 31, 2011, primarily due to higher valuations of
fixed income securities and positive Property-Liability operating cash flows,
partially offset by net reductions in Allstate Financial's contractholder funds.
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 referenced 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
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for assuming credit, liquidity and/or prepayment risks. The increase in
valuation of fixed income securities during 2012 was due to tightening credit
spreads and decreasing risk-free interest rates.
The Property-Liability investment portfolio increased to $38.22 billion as
of December 31, 2012, from $36.00 billion as of December 31, 2011, primarily due
to higher valuations of fixed income securities and positive operating cash
flows, 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 $57.00 billion as
of December 31, 2012, from $57.37 billion as of December 31, 2011, primarily due
to net reductions in contractholder funds of $3.01 billion, partially offset by
higher valuations of fixed income securities.
The Corporate and Other investment portfolio decreased to $2.06 billion as
of December 31, 2012, from $2.25 billion as of December 31, 2011, primarily due
to offsetting capital transactions.
During 2012, strategic actions focused on optimizing portfolio yield, return
and risk considerations in the low interest rate environment. We increased our
investment in intermediate corporate fixed income securities and reduced our
investment in long-duration municipal and corporate bonds, shorter duration U.S.
government and agencies and asset-backed securities ("ABS"), as well as equity
securities. This positioning, coupled with an increase in bank loans, has
reduced our exposure to interest rate risk in the Property-Liability investment
portfolio. While the dispositions generated net realized capital gains, we
expect a decline in investment income prospectively due to the lower yield on
the reinvestment of proceeds. We opportunistically reduced our investment in
structured securities, including residential mortgage-backed securities ("RMBS")
and commercial mortgage-backed securities ("CMBS") and ARS, taking advantage of
increased valuations and demand. We also increased our limited partnership
interests, consistent with our strategy to have a greater proportion of
ownership of assets.
Fixed income securities by type are listed in the table below.
Fair value as of Percent to Fair value as of Percent to
December 31, total December 31, total
($ in millions) 2012 investments 2011 investments
U.S. government
and agencies $ 4,713 4.9 % $ 6,315 6.6 %
Municipal 13,069 13.5 14,241 14.9
Corporate 48,537 49.9 43,581 45.6
Foreign
government 2,517 2.6 2,081 2.2
ABS 3,624 3.7 3,966 4.1
RMBS 3,032 3.1 4,121 4.3
CMBS 1,498 1.5 1,784 1.9
Redeemable
preferred stock 27 - 24 -
Total fixed
income
securities $ 77,017 79.2 % $ 76,113 79.6 %
As of December 31, 2012, 91.4% 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
S&P, Fitch, Dominion, Kroll 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 are 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.
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The following table summarizes the fair value and unrealized net capital
gains and losses for fixed income securities by credit rating as of December 31,
2012.
($ in millions) Aaa Aa A
Fair Unrealized Fair Unrealized Fair Unrealized
value gain/(loss) value gain/(loss) value gain/(loss)
U.S. government
and agencies $ 4,713 $ 326 $ - $ - $ - $ -
Municipal
Tax exempt 1,343 43 3,852 201 1,929 132
Taxable 278 33 2,789 428 1,091 142
ARS 186 (15 ) 146 (19 ) 23 (4 )
Corporate
Public 935 70 2,731 187 12,670 1,046
Privately
placed 1,185 68 1,343 112 4,035 367
Foreign
government 1,047 116 654 34 413 31
ABS
Collateralized
debt
obligations
("CDO") 153 5 608 3 251 (25 )
Consumer and
other
asset-backed
securities
("Consumer and
other ABS") 1,182 49 437 9 385 10
RMBS
U.S. government
sponsored
entities ("U.S.
Agency") 1,387 59 - - - -
Prime
residential
mortgage-backed
securities
("Prime") 72 2 41 2 65 1
Alt-A
residential
mortgage-backed
securities
("Alt-A") 4 - 1 - 25 1
Subprime
residential
mortgage-backed
securities
("Subprime") - - 24 (1 ) 18 -
CMBS 802 40 100 3 155 5
Redeemable
preferred stock - - - - - -
Total fixed
income
securities $ 13,287 $ 796 $ 12,726 $ 959 $ 21,060 $ 1,706
Baa Ba or lower Total
Fair Unrealized Fair Unrealized Fair Unrealized
value gain/(loss) value gain/(loss) value gain/(loss)
U.S. government
and agencies $ - $ - $ - $ - $ 4,713 $ 326
Municipal
Tax exempt 626 30 288 (12 ) 8,038 394
Taxable 357 (7 ) 92 (12 ) 4,607 584
ARS 40 (8 ) 29 (2 ) 424 (48 )
Corporate
Public 14,506 1,149 3,212 165 34,054 2,617
Privately placed 6,549 395 1,371 35 14,483 977
Foreign
government 403 46 - - 2,517 227
ABS
CDO 195 (28 ) 121 (26 ) 1,328 (71 )
Consumer and
other ABS 264 8 28 (4 ) 2,296 72
RMBS
U.S. Agency - - - - 1,387 59
Prime 132 2 432 35 742 42
Alt-A 46 1 441 (3 ) 517 (1 )
Subprime 9 - 335 (67 ) 386 (68 )
CMBS 169 (4 ) 272 (56 ) 1,498 (12 )
Redeemable
preferred stock 26 4 1 - 27 4
Total fixed
income
securities $ 23,322 $ 1,588 $ 6,622 $ 53 $ 77,017 $ 5,102
Municipal bonds, including tax exempt, taxable and ARS securities, totaled
$13.07 billion as of December 31, 2012 with an unrealized net capital gain of
$930 million. The municipal bond portfolio includes general obligations of state
and local issuers and revenue bonds (including pre-refunded bonds, which are
bonds for which an irrevocable trust has been established to fund the remaining
payments of principal and interest).
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The following table summarizes by state the fair value, amortized cost and
credit rating of our municipal bonds, excluding $938 million of pre-refunded
bonds, as of December 31, 2012.
State Average
($ in millions) general Local general Fair Amortized credit
State obligation obligation Revenue (1) value cost rating
Texas $ 32 $ 385 $ 571 $ 988 $ 890 Aa
California 88 452 446 986 905 A
Florida 135 134 522 791 744 Aa
New York 27 102 590 719 674 Aa
Pennsylvania 110 89 275 474 458 Aa
Missouri 65 127 260 452 423 A
Michigan 64 96 283 443 410 Aa
Ohio 99 159 170 428 388 Aa
Illinois - 115 286 401 353 A
Washington 26 50 271 347 322 Aa
All others 1,164 1,461 3,477 6,102 5,707 Aa
Total $ 1,810 $ 3,170 $ 7,151 $ 12,131 $ 11,274 Aa
--------------------------------------------------------------------------------
º (1)
º The nature of the activities supporting revenue bonds is highly diversified
and includes transportation, health care, industrial development, housing,
higher education, utilities, recreation/convention centers and other
activities.
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 December 31, 2012, 99.6% of our
insured municipal bond portfolio is rated investment grade.
ARS totaled $424 million as of December 31, 2012 with an unrealized net
capital loss of $48 million. Our holdings primarily have a credit rating of Aaa
and Aa. As of December 31, 2012, our ARS backed by student loans portfolio of
$394 million was 76% to 100% insured by the U.S. Department of Education. All of
our ARS holdings are experiencing failed auctions and we receive the failed
auction rate or, for those which contain maximum reset rate formulas, we receive
the contractual maximum rate. We anticipate that failed auctions may persist and
most of our holdings will continue to pay the failed auction rate or, for those
that contain maximum rate reset formulas, the maximum rate. Auctions continue to
be conducted as scheduled for each of the securities.
Corporate bonds, including publicly traded and privately placed, totaled
$48.54 billion as of December 31, 2012, with an unrealized net capital gain of
$3.59 billion. Privately placed securities primarily consist of corporate issued
senior debt securities that are directly negotiated with the borrower or are in
unregistered form.
Our $14.48 billion portfolio of privately placed securities is broadly
diversified by issuer, industry sector and country. The portfolio is made up of
518 issuers. Privately placed corporate obligations contain structural security
features such as financial covenants and call protections that provide investors
greater protection against credit deterioration, reinvestment risk or
fluctuations in interest rates than those typically found in publicly registered
debt securities. Additionally, investments in these securities are made after
extensive due diligence of the issuer, typically including direct discussions
with senior management and on-site visits to company facilities. Ongoing
monitoring includes direct periodic dialog with senior management of the issuer
and continuous monitoring of operating performance and financial position. Every
issue not rated by an independent rating agency is internally rated with a
formal rating affirmation at least once a year.
Foreign government securities totaled $2.52 billion as of December 31, 2012,
with 100% rated investment grade and an unrealized net capital gain of
$227 million. Of these securities, 55.0% are in Canadian governmental and
provincial securities, 35.4% of which are held by our Canadian companies, 16.2%
are backed by the U.S. government and the remaining 28.8% are highly diversified
in other foreign governments.
ABS, RMBS and CMBS 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
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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 can have fixed interest rates, variable
interest rates (such as adjustable rate mortgages) or may contain features of
both fixed and variable rate mortgages.
ABS, including CDO and Consumer and other ABS, totaled $3.62 billion as of
December 31, 2012, with 95.9% rated investment grade and an unrealized net
capital gain of $1 million. 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.
CDO totaled $1.33 billion as of December 31, 2012, with 90.9% rated
investment grade. CDO consist primarily of obligations collateralized by high
yield and investment grade corporate credits including $1.14 billion of cash
flow collateralized loan obligations ("CLO") with unrealized net capital losses
of $22 million. Cash flow CLO are structures collateralized primarily by below
investment grade senior secured corporate loans. The underlying collateral is
generally actively managed by external managers that monitor the collateral's
performance and is well diversified across industries and among issuers. The
remaining $188 million of securities consisted of project finance CDO, market
value CDO and trust preferred CDO with unrealized net capital losses of
$49 million.
Consumer and other ABS totaled $2.30 billion as of December 31, 2012, with
98.8% rated investment grade. Consumer and other ABS consists of $486 million of
consumer auto and $1.81 billion of other ABS with unrealized net capital gains
of $9 million and $63 million, respectively.
RMBS, including U.S. Agency, Prime, Alt-A and Subprime, totaled
$3.03 billion as of December 31, 2012, with 60.2% rated investment grade and an
unrealized net capital gain of $32 million. 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 the U.S. Agency portfolio is mitigated
because they were issued by or have underlying collateral guaranteed by U.S.
government agencies. Prime are collateralized by residential mortgage loans
issued to prime borrowers. 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.
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 $264 million and
$122 million of first lien and second lien securities, respectively. The
Subprime portfolio unrealized net capital loss of $68 million as of December 31,
2012 was the result of wider credit spreads than at initial purchase. Wider
spreads are largely due to the risk associated with the underlying collateral
supporting certain Subprime securities.
CMBS totaled $1.50 billion as of December 31, 2012, with 81.8% rated
investment grade and an unrealized net capital loss of $12 million. The CMBS
portfolio is subject to credit risk and has a sequential paydown structure, 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, 91.7% 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.
Equity securities Equity securities primarily include common stocks,
exchange traded and mutual funds, non-redeemable preferred stocks and real
estate investment trust equity investments. The equity securities portfolio was
$4.04 billion as of December 31, 2012 compared to $4.36 billion as of
December 31, 2011. The unrealized net capital gain totaled $460 million as of
December 31, 2012 compared to $160 million as of December 31, 2011.
Mortgage loans Our mortgage loan portfolio, which is primarily held in the
Allstate Financial portfolio, totaled $6.57 billion as of December 31, 2012,
compared to $7.14 billion as of December 31, 2011, and primarily comprises loans
secured by first mortgages on developed commercial real estate. Key
considerations used to manage our exposure include property type and geographic
diversification. For further detail on our mortgage loan portfolio, see Note 5
of the consolidated financial statements.
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Limited partnership interests consist of investments in private equity/debt
funds, real estate funds, hedge funds and tax credit funds. The limited
partnership interests portfolio is well diversified across a number of
characteristics including fund managers, vintage years, strategies, geography
(including international), and company/property types. The following table
presents information about our limited partnership interests as of December 31,
2012.
($ in millions) Private Tax
equity/debt Real estate Hedge credit
funds funds funds funds Total
Cost method of accounting
("Cost") $ 912 $ 448 $ 46 $ - $ 1,406
Equity method of accounting
("EMA") 1,439 1,115 293 669 3,516
Total $ 2,351 (1) $ 1,563 $ 339 $ 669 $ 4,922
Number of managers 98 45 14 11
Number of individual funds 165 96 38 21
Largest exposure to single
fund $ 123 $ 224 $ 83 $ 56
--------------------------------------------------------------------------------
º (1)
º Includes $479 million of infrastructure and real asset funds.
The following table shows the earnings from our limited partnership
interests by fund type and accounting classification for the years ended
December 31.
($ in
millions) 2012 2011
Total Impairment Total Impairment
Cost EMA (1) income write-downs Cost EMA (1) income write-downsPrivate
equity/debt
funds $ 94 $ 152 $ 246 $ (2 ) $ 77 $ 72 $ 149 $ (3 )
Real estate
funds 17 106 123 (4 ) 12 86 98 (3 )
Hedge funds - 7 7 (2 ) - 12 12 -
Tax credit
funds - (28 ) (28 ) - (1 ) (11 ) (12 ) -
Total $ 111 $ 237 $ 348 $ (8 ) $ 88 $ 159 $ 247 $ (6 )
--------------------------------------------------------------------------------
º (1)
º Income from EMA limited partnerships is reported in net investment income
in 2012 and realized capital gains and losses in 2011.
Limited partnership interests produced income, excluding impairment
write-downs, of $348 million in 2012 compared to $247 million in 2011. 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 method limited partnerships is recognized only upon
receipt of amounts distributed by the partnerships.
Short-term investments Our short-term investment portfolio was
$2.34 billion and $1.29 billion as of December 31, 2012 and 2011, respectively.
Other investments Our other investments as of December 31, 2012 primarily
comprise $1.14 billion of policy loans, $682 million of bank loans, $319 million
of agent loans and $133 million of certain derivatives. For further detail on
our use of derivatives, see Note 7 of the consolidated financial statements.
Unrealized net capital gains totaled $5.55 billion as of December 31, 2012
compared to $2.88 billion as of December 31, 2011. The increase for fixed income
securities was due to tightening credit spreads and decreasing
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risk-free interest rates. The increase for equity securities was primarily due
to positive returns in the equity markets. The following table presents
unrealized net capital gains and losses as of December 31.
($ in millions) 2012 2011
U.S. government and agencies $ 326 $ 349
Municipal 930 607
Corporate 3,594 2,364
Foreign government 227 215
ABS 1 (214 )
RMBS 32 (411 )
CMBS (12 ) (178 )
Redeemable preferred stock 4 2
Fixed income securities 5,102 2,734
Equity securities 460
160
EMA limited partnerships 7 2
Derivatives (22 ) (17 )
Unrealized net capital gains and losses, pre-tax $ 5,547$ 2,879
The unrealized net capital gains for the fixed income portfolio totaled
$5.10 billion and comprised $5.63 billion of gross unrealized gains and
$530 million of gross unrealized losses as of December 31, 2012. This is
compared to unrealized net capital gains for the fixed income portfolio totaling
$2.73 billion, comprised of $4.40 billion of gross unrealized gains and
$1.67 billion of gross unrealized losses as of December 31, 2011. Unrealized
capital gains and losses may decrease or increase as risk-free interest rates
increase or decrease in the future.
Gross unrealized gains and losses on fixed income securities by type and
sector as of December 31, 2012 are provided in the table below.
Amortized Gross unrealized
($ in millions) cost Gains Losses Fair value
Corporate:
Banking $ 3,707 $ 195 $ (55 ) $ 3,847
Utilities 7,792 879 (17 ) 8,654
Capital goods 5,281 424 (15 ) 5,690
Financial services 3,436 257 (10 ) 3,683
Consumer goods (cyclical and
non-cyclical) 9,960 758 (11 ) 10,707
Transportation 1,960 203 (8 ) 2,155
Technology 2,355 147 (4 ) 2,498
Basic industry 2,626 191 (3 ) 2,814
Energy 3,993 338 (1 ) 4,330
Communications 2,931 253 (1 ) 3,183
Other 902 76 (2 ) 976
Total corporate fixed income
portfolio 44,943 3,721 (127 ) 48,537
U.S. government and agencies 4,387 326 - 4,713
Municipal 12,139 1,038 (108 ) 13,069
Foreign government 2,290 228 (1 ) 2,517
ABS 3,623 108 (107 ) 3,624
RMBS 3,000 142 (110 ) 3,032
CMBS 1,510 65 (77 ) 1,498
Redeemable preferred stock 23 4 - 27
Total fixed income securities $ 71,915 $ 5,632 $ (530 ) $ 77,017
The banking, utilities and capital goods sectors had the highest
concentration of gross unrealized losses in our corporate fixed income
securities portfolio as of December 31, 2012. In general, credit spreads remain
wider than at initial purchase for most of the securities with gross unrealized
losses in these categories.
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The unrealized net capital gain for the equity portfolio totaled
$460 million and comprised $494 million of gross unrealized gains and
$34 million of gross unrealized losses as of December 31, 2012. This is compared
to an unrealized net capital gain for the equity portfolio totaling
$160 million, comprised of $369 million of gross unrealized gains and
$209 million of gross unrealized losses as of December 31, 2011.
Gross unrealized gains and losses on equity securities by sector as of
December 31, 2012 are provided in the table below.
Gross unrealized
($ in millions) Cost Gains Losses Fair value
Energy $ 194 $ 27 $ (7 ) $ 214
Consumer goods (cyclical and
non-cyclical) 643 117 (5 ) 755
Technology 213 44 (5 ) 252
Basic industry 138 30 (5 ) 163
Financial services 183 35 (3 ) 215
Capital goods 160 31 (2 ) 189
Utilities 76 7 (2 ) 81
Index-based funds 403 46 (1 ) 448
Banking 143 27 (1 ) 169
Communications 110 25 (1 ) 134
Real estate 102 19 (1 ) 120
Transportation 42 12 (1 ) 53
Emerging market fixed income funds 753 55 - 808
Emerging market equity funds 417 19 - 436
Total equity securities $ 3,577 $ 494 $ (34 ) $ 4,037
Within the equity portfolio, the losses were primarily concentrated in the
energy, consumer goods, technology and basic industry sectors. The unrealized
losses were company and sector specific. As of December 31, 2012, we have the
intent and ability to hold our equity securities with unrealized losses until
recovery.
As of December 31, 2012, the total fair value of our direct investments in
fixed income and equity securities in the Eurozone (European Union member states
using the Euro currency) is $1.48 billion, with net unrealized capital gains of
$62 million, comprised of $83 million of gross unrealized gains and $21 million
of gross unrealized losses. The following table summarizes our total direct
exposure related to the Eurozone and the "GIIPS" group of countries, including
Greece, Ireland, Italy, Portugal and Spain. As of December 31, 2012, we do not
have any direct exposure to Greece. We have no sovereign debt investments in the
Eurozone.
Financials (1) Non-financials (2) Total
Gross Gross Gross
($ in Fair unrealized Fair unrealized Fair unrealized
millions) value losses value losses value losses
GIIPS
Fixed income
securities $ 25 $ (7 ) $ 365 $ (9 ) $ 390 $ (16 )
Equity
securities 1 - - - 1 -
Total 26 (7 ) 365 (9 ) 391 (16 )
Eurozone
non-GIIPS
Fixed income
securities 165 (4 ) 921 (1 ) 1,086 (5 )
Equity
securities 2 - 3 - 5 -
Total 167 (4 ) 924 (1 ) 1,091 (5 )
Total Eurozone $ 193 $ (11 ) $ 1,289 $ (10 ) $ 1,482 $ (21 )
--------------------------------------------------------------------------------
º (1)
º Financials primarily includes banking and financial services.
º (2)
º Non-financials primarily includes energy, capital goods, consumer goods,
communication, technology and basic industries.
Other direct exposure to investments in fixed income and equity securities
in European Union ("EU") member states that do not use the Euro currency is
$2.29 billion, with net unrealized capital gains of $183 million. Remaining
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direct exposure to non-EU countries total $885 million, with net unrealized
capital gains of $78 million. The large majority of these investments are in
multinational public companies with global revenue sources that are well
diversified across region and sector, including a higher allocation to energy,
capital goods, non-cyclical consumer goods and communications sectors. We also
have additional indirect and diversified exposures through investments in
multinational equity funds and limited partnership interests that invest in
Europe. We estimate these indirect exposures do not exceed 1% of total
investments.
Net investment income The following table presents net investment income
for the years ended December 31.
($ in millions) 2012 2011 2010
Fixed income securities $ 3,234 $ 3,484 $ 3,737
Equity securities 127 122 90
Mortgage loans 374 359 385
Limited partnership interests (1) 348 88 40
Short-term investments 6 6 8
Other 132 95 19
Investment income, before expense 4,221 4,154 4,279
Investment expense (211 ) (183 ) (177 )
Net investment income $ 4,010 $ 3,971 $ 4,102
--------------------------------------------------------------------------------
º (1)
º Income from EMA limited partnerships is reported in net investment income
in 2012 and realized capital gains and losses in 2011 and 2010.
Net investment income increased 1.0% or $39 million in 2012 compared to
2011, after decreasing 3.2% or $131 million in 2011 compared to 2010. The 2012
increase was primarily due to income from limited partnerships, partially offset
by lower average investment balances and lower fixed income yields. The 2011
decline was primarily due to lower average investment balances, partially offset
by higher yields.
Realized capital gains and losses The following table presents the
components of realized capital gains and losses and the related tax effect for
the years ended December 31.
($ in millions) 2012 2011 2010
Impairment write-downs $ (185 ) $ (496 ) $ (797 )
Change in intent write-downs (48 ) (100 ) (204 )
Net other-than-temporary impairment losses recognized in
earnings
(233 ) (596 ) (1,001 )
Sales 536 1,336 686
Valuation of derivative instruments (11 ) (291 ) (427 )
Settlements of derivative instruments 35 (105 ) (174 )
EMA limited partnership income (1) -
159 89
Realized capital gains and losses, pre-tax 327 503 (827 )
Income tax (expense) benefit (111 )
(179 ) 290
Realized capital gains and losses, after-tax $ 216 $
324 $ (537 )
--------------------------------------------------------------------------------
º (1)
º Income from EMA limited partnerships is reported in net investment income
in 2012 and realized capital gains and losses in 2011 and 2010.
Impairment write-downs for the years ended December 31 are presented in the
following table.
($ in millions) 2012 2011 2010
Fixed income securities $ (108 ) $ (302 ) $ (626 )
Equity securities (63 ) (131 ) (57 )
Mortgage loans 5 (37 ) (65 )
Limited partnership interests (8 ) (6 ) (46 )
Other investments (11 ) (20 ) (3 )
Impairment write-downs $ (185 ) $ (496 ) $ (797 )
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Impairment write-downs on fixed income securities in 2012 were primarily
driven by RMBS and CMBS that experienced deterioration in expected cash flows
and municipal and corporate fixed income securities impacted by issuer specific
circumstances. 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.
Impairment write-downs in 2011 were primarily driven by RMBS, which
experienced deterioration in expected cash flows; investments with commercial
real estate exposure, including CMBS, mortgage loans and municipal bonds, which
were impacted by lower real estate valuations or experienced deterioration in
expected cash flows; and corporate fixed income securities impacted by issuer
specific circumstances.
Change in intent write-downs were $48 million, $100 million and $204 million
in 2012, 2011 and 2010, respectively. The change in intent write-downs in 2012
were primarily a result of ongoing comprehensive reviews of our portfolios
resulting in write-downs of individually identified investments, primarily RMBS
and equity securities. The change in intent write-downs in 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, and equity securities.
Sales generated $536 million, $1.34 billion and $686 million of net realized
gains in 2012, 2011 and 2010, respectively. The sales in 2012 primarily related
to corporate, municipal and U.S. government and agencies fixed income securities
and equity securities in connection with portfolio repositioning. The sales in
2011 were primarily due to $1.11 billion of net gains on sales of corporate,
foreign government, U.S. government, ABS, U.S. Agency and municipal fixed income
securities and $202 million of net gains on sales of equity securities.
Valuation and settlements of derivative instruments net realized capital
gains totaling $24 million in 2012 included $11 million of losses on the
valuation of derivative instruments and $35 million of gains on the settlements
of derivative instruments. The net realized capital gains on derivative
instruments in 2012 primarily included gains on credit default swaps due to the
tightening of credit spreads on the underlying credit names. In 2011, net
realized capital losses on the valuation and settlements of derivative
instruments totaled $396 million, including $291 million of losses on the
valuation of derivative instruments and $105 million of losses on the
settlements of derivative instruments. The net realized capital losses on
derivative instruments in 2011 primarily included losses on interest rate risk
management due to decreases in interest rates. As a component of our approach to
managing interest rate risk, 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.
MARKET RISK
Market risk is the risk that we will incur losses due to adverse changes in
interest rates, credit spreads, equity prices or currency exchange rates.
Adverse changes to these rates and prices may occur due to changes in fiscal
policy, the economic climate, the liquidity of a market or market segment,
insolvency or financial distress of key market makers or participants or changes
in market perceptions of credit worthiness and/or risk tolerance. Our primary
market risk exposures are to changes in interest rates, credit spreads and
equity prices.
The active management of market risk is integral to our results of
operations. We may use the following approaches to manage exposure to market
risk within defined tolerance ranges: 1) rebalancing existing asset or liability
portfolios, 2) changing the type of investments purchased in the future and
3) using derivative instruments to modify the market risk characteristics of
existing assets and liabilities or assets expected to be purchased. For a more
detailed discussion of our use of derivative financial instruments, see Note 7
of the consolidated financial statements.
Overview In formulating and implementing guidelines for investing funds, we
seek to earn returns that enhance our ability to offer competitive rates and
prices to customers while contributing to attractive and stable profits and
long-term capital growth. Accordingly, our investment decisions and objectives
are a function of the underlying risks and product profiles of each business.
Investment policies define the overall framework for managing market and
other investment risks, including accountability and controls over risk
management activities. Subsidiaries that conduct investment activities follow
policies that have been approved by their respective boards of directors. These
investment policies specify the investment limits and strategies that are
appropriate given the liquidity, surplus, product profile and regulatory
requirements of the subsidiary. Executive oversight of investment activities is
conducted primarily through subsidiaries' boards of directors and investment
committees. For Allstate Financial, its asset-liability management ("ALM")
policies
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further define the overall framework for managing market and investment risks.
ALM focuses on strategies to enhance yields, mitigate market risks and optimize
capital to improve profitability and returns for Allstate Financial. Allstate
Financial ALM activities follow asset-liability policies that have been approved
by their respective boards of directors. These ALM policies specify limits,
ranges and/or targets for investments that best meet Allstate Financial's
business objectives in light of its product liabilities.
We use quantitative and qualitative market-based approaches to measure,
monitor and manage market risk. We evaluate our exposure to market risk through
the use of multiple measures including but not limited to duration,
value-at-risk, scenario analysis and sensitivity analysis. Duration measures the
price sensitivity of assets and liabilities to changes in interest rates. For
example, if interest rates increase 100 basis points, the fair value of an asset
with a duration of 5 is expected to decrease in value by 5%. Value-at-risk is a
statistical estimate of the probability that the change in fair value of a
portfolio will exceed a certain amount over a given time horizon. Scenario
analysis estimates the potential changes in the fair value of a portfolio that
could occur under different hypothetical market conditions defined by changes to
multiple market risk factors: interest rates, credit spreads, equity prices or
currency exchange rates. Sensitivity analysis estimates the potential changes in
the fair value of a portfolio that could occur under different hypothetical
shocks to a market risk factor. In general, we establish investment portfolio
asset allocation and market risk limits for the Property-Liability and Allstate
Financial businesses based upon a combination of duration, value-at-risk,
scenario analysis and sensitivity analysis. The asset allocation limits place
restrictions on the total funds that may be invested within an asset class.
Comprehensive day-to-day management of market risk within defined tolerance
ranges occurs as portfolio managers buy and sell within their respective markets
based upon the acceptable boundaries established by investment policies. For
Allstate Financial, this day-to-day management is integrated with and informed
by the activities of the ALM organization. This integration is intended to
result in a prudent, methodical and effective adjudication of market risk and
return, conditioned by the unique demands and dynamics of Allstate Financial's
product liabilities and supported by the continuous application of advanced risk
technology and analytics.
Although we apply a similar overall philosophy to market risk, the
underlying business frameworks and the accounting and regulatory environments
differ considerably between the Property-Liability and Allstate Financial
businesses affecting investment decisions and risk parameters.
Interest rate risk is the risk that we will incur a loss due to adverse
changes in interest rates relative to the characteristics of our interest
bearing assets and liabilities. This risk arises from many of our primary
activities, as we invest substantial funds in interest-sensitive assets and
issue interest-sensitive liabilities. Interest rate risk includes risks related
to changes in U.S. Treasury yields and other key risk-free reference yields.
We manage the interest rate risk in our assets relative to the interest rate
risk in our liabilities. One of the measures used to quantify this exposure is
duration. The difference in the duration of our assets relative to our
liabilities is our duration gap. To calculate the duration gap between assets
and liabilities, we project asset and liability cash flows and calculate their
net present value using a risk-free market interest rate adjusted for credit
quality, sector attributes, liquidity and other specific risks. Duration is
calculated by revaluing these cash flows at alternative interest rates and
determining the percentage change in aggregate fair value. The cash flows used
in this calculation include the expected maturity and repricing characteristics
of our derivative financial instruments, all other financial instruments, and
certain other items including unearned premiums, property-liability insurance
claims and claims expense reserves, annuity liabilities and other
interest-sensitive liabilities. The projections include assumptions (based upon
historical market experience and our experience) that reflect the effect of
changing interest rates on the prepayment, lapse, leverage and/or option
features of instruments, where applicable. The preceding assumptions relate
primarily to mortgage-backed securities, municipal housing bonds, callable
municipal and corporate obligations, and fixed rate single and flexible premium
deferred annuities. Additionally, the calculations include assumptions regarding
the renewal of property-liability policies.
As of December 31, 2012, the difference between our asset and liability
duration was a (0.23) gap, compared to a 0.14 gap as of December 31, 2011. A
negative duration gap indicates that the fair value of our liabilities is more
sensitive to interest rate movements than the fair value of our assets, while a
positive duration gap indicates that the fair value of our assets is more
sensitive to interest rate movements than the fair value of our liabilities. The
Property-Liability segment generally maintains a positive duration gap between
its assets and liabilities due to the relatively short duration of auto and
homeowners claims, which are its primary liabilities. The Allstate Financial
segment may have a positive or negative duration gap, as the duration of its
assets and liabilities vary with its product mix and investing activity. As of
December 31, 2012, Property-Liability had a positive duration gap while Allstate
Financial had a negative duration gap.
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In the management of investments supporting the Property-Liability business,
we adhere to an objective of emphasizing safety of principal and consistency of
income within a total return framework. This approach is designed to ensure our
financial strength and stability for paying claims, while maximizing economic
value and surplus growth.
For the Allstate Financial business, we seek to invest premiums, contract
charges and deposits to generate future cash flows that will fund future claims,
benefits and expenses, and that will earn stable returns across a wide variety
of interest rate and economic scenarios. To achieve this objective and limit
interest rate risk for Allstate Financial, we adhere to a philosophy of managing
the duration of assets and related liabilities within predetermined tolerance
levels. This philosophy is executed using duration targets for fixed income
investments in addition to interest rate swaps, futures, forwards, caps, floors
and swaptions to reduce the interest rate risk resulting from mismatches between
existing assets and liabilities, and financial futures and other derivative
instruments to hedge the interest rate risk of anticipated purchases and sales
of investments and product sales to customers.
Based upon the information and assumptions used in the duration calculation,
and interest rates in effect as of December 31, 2012, we estimate that a 100
basis point immediate, parallel increase in interest rates ("rate shock") would
increase the net fair value of the assets and liabilities by $211 million,
compared to a decrease of $127 million as of December 31, 2011, reflecting year
to year changes in duration. Reflected in the duration calculation are the
effects of a program that uses swaps, eurodollar futures, options on Treasury
futures and interest rate swaptions to manage interest rate risk. In calculating
the impact of a 100 basis point increase on the value of the derivatives, we
have assumed interest rate volatility remains constant. Based on the swaps,
eurodollar futures, options on Treasury futures and interest rate swaptions in
place as of December 31, 2012, we would recognize realized capital losses
totaling $2 million in the event of a 100 basis point immediate, parallel
interest rate increase and $2 million in realized capital gains in the event of
a 100 basis point immediate, parallel interest rate decrease on these
derivatives. The selection of a 100 basis point immediate, parallel change in
interest rates should not be construed as our prediction of future market
events, but only as an illustration of the potential effect of such an event.
The above estimate excludes the traditional and interest-sensitive life
insurance products that are not considered financial instruments and the
$12.04 billion of assets supporting them and the associated liabilities. The
$12.04 billion of assets excluded from the calculation has increased from
$10.49 billion as of December 31, 2011, due to an increase in interest-sensitive
life contractholder funds and improved fixed income valuations as a result of
declining risk-free interest rates and tightening of credit spreads in certain
sectors. Based on assumptions described above, in the event of a 100 basis point
immediate increase in interest rates, the assets supporting life insurance
products would decrease in value by $737 million, compared to a decrease of
$660 million as of December 31, 2011.
To the extent that conditions differ from the assumptions we used in these
calculations, duration and rate shock measures could be significantly impacted.
Additionally, our calculations assume that the current relationship between
short-term and long-term interest rates (the term structure of interest rates)
will remain constant over time. As a result, these calculations may not fully
capture the effect of non-parallel changes in the term structure of interest
rates and/or large changes in interest rates.
Credit spread risk is the risk that we will incur a loss due to adverse
changes in credit spreads ("spreads"). This risk arises from many of our primary
activities, as we invest substantial funds in spread-sensitive fixed income
assets.
We manage the spread risk in our assets. One of the measures used to
quantify this exposure is spread duration. Spread duration measures the price
sensitivity of the assets to changes in spreads. For example, if spreads
increase 100 basis points, the fair value of an asset exhibiting a spread
duration of 5 is expected to decrease in value by 5%.
Spread duration is calculated similarly to interest rate duration. As of
December 31, 2012, the spread duration of Property-Liability assets was 4.04,
compared to 4.77 as of December 31, 2011, and the spread duration of Allstate
Financial assets was 5.85, compared to 5.58 as of December 31, 2011. Based upon
the information and assumptions we use in this spread duration calculation, and
spreads in effect as of December 31, 2012, we estimate that a 100 basis point
immediate, parallel increase in spreads across all asset classes, industry
sectors and credit ratings ("spread shock") would decrease the net fair value of
the assets by $4.04 billion, compared to $4.10 billion as of December 31, 2011.
Reflected in the duration calculation are the effects of our tactical actions
that use credit default swaps to manage spread risk. The selection of a 100
basis point immediate parallel change in spreads should not be construed as our
prediction of future market events, but only as an illustration of the potential
effect of such an event.
Equity price risk is the risk that we will incur losses due to adverse
changes in the general levels of the equity markets. As of December 31, 2012, we
held $3.99 billion in common stocks and exchange traded and mutual funds and
$4.97 billion in other securities with equity risk (including primarily limited
partnership interests, non-redeemable preferred securities and equity-linked
notes), compared to $4.26 billion and $4.82 billion, respectively, as of
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December 31, 2011. 90.8% and 60.2% of these totals, respectively, represented
assets of the Property-Liability operations as of December 31, 2012, compared to
95.7% and 63.3%, respectively, as of December 31, 2011.
As of December 31, 2012, our portfolio of common stocks and other securities
with equity risk had a cash market portfolio beta of 0.86, compared to a beta of
0.72 as of December 31, 2011. Beta represents a widely used methodology to
describe, quantitatively, an investment's market risk characteristics relative
to an index such as the Standard & Poor's 500 Composite Price Index ("S&P 500").
Based on the beta analysis, we estimate that if the S&P 500 increases or
decreases by 10%, the fair value of our equity investments will increase or
decrease by 8.6%, respectively. Based upon the information and assumptions we
used to calculate beta as of December 31, 2012, we estimate that an immediate
decrease in the S&P 500 of 10% would decrease the net fair value of our equity
investments identified above by $766 million, compared to $652 million as of
December 31, 2011, and an immediate increase in the S&P 500 of 10% would
increase the net fair value by $766 million compared to $654 million as of
December 31, 2011. The selection of a 10% immediate decrease or increase in the
S&P 500 should not be construed as our prediction of future market events, but
only as an illustration of the potential effect of such an event.
The beta of our common stocks and other securities with equity risk was
determined by calculating the change in the fair value of the portfolio
resulting from stressing the equity market up and down 10%. The illustrations
noted above may not reflect our actual experience if the future composition of
the portfolio (hence its beta) and correlation relationships differ from the
historical relationships.
As of December 31, 2012 and 2011, we had separate accounts assets related to
variable annuity and variable life contracts with account values totaling
$6.61 billion and $6.98 billion, respectively. Equity risk exists for contract
charges based on separate account balances and guarantees for death and/or
income benefits provided by our variable products. In 2006, we disposed of
substantially all of the variable annuity business through reinsurance
agreements with The Prudential Insurance Company of America, a subsidiary of
Prudential Financial Inc. and therefore mitigated this aspect of our risk.
Equity risk for our variable life business relates to contract charges and
policyholder benefits. Total variable life contract charges for 2012 and 2011
were $71 million and $76 million, respectively. Separate account liabilities
related to variable life contracts were $767 million and $716 million in
December 31, 2012 and 2011, respectively.
As of December 31, 2012 and 2011 we had $3.63 billion and $3.87 billion,
respectively, in equity-indexed annuity liabilities that provide customers with
interest crediting rates based on the performance of the S&P 500. We hedge the
majority of the risk associated with these liabilities using equity-indexed
options and futures and eurodollar futures, maintaining risk within specified
value-at-risk limits.
Foreign currency exchange rate risk is the risk that we will incur economic
losses due to adverse changes in foreign currency exchange rates. This risk
primarily arises from our foreign equity investments, including real estate
funds and private equity funds, and our Canadian and Northern Ireland
operations. We also have investments in certain fixed income securities and
emerging market fixed income funds that are denominated in foreign currencies;
however, derivatives are used to hedge approximately 28% of this foreign
currency risk.
As of December 31, 2012, we had $1.11 billion in foreign currency
denominated equity investments, $858 million net investment in our foreign
subsidiaries, and $548 million in unhedged non-dollar pay fixed income
securities. These amounts were $1.24 billion, $786 million, and $363 million,
respectively, as of December 31, 2011. 78.9% of the foreign currency exposure is
in the Property-Liability business.
Based upon the information and assumptions used as of December 31, 2012, we
estimate that a 10% immediate unfavorable change in each of the foreign currency
exchange rates to which we are exposed would decrease the value of our foreign
currency denominated instruments by $264 million, compared with an estimated
$225 million decrease as of December 31, 2011. The selection of a 10% immediate
decrease in all currency exchange rates should not be construed as our
prediction of future market events, but only as an illustration of the potential
effect of such an event.
The modeling technique we use to report our currency exposure does not take
into account correlation among foreign currency exchange rates. Even though we
believe it is very unlikely that all of the foreign currency exchange rates that
we are exposed to would simultaneously decrease by 10%, we nonetheless stress
test our portfolio under this and other hypothetical extreme adverse market
scenarios. Our actual experience may differ from these results because of
assumptions we have used or because significant liquidity and market events
could occur that we did not foresee.
PENSION PLANS
We have defined benefit pension plans, which cover most full-time, certain
part-time employees and employee-agents. See Note 17 of the consolidated
financial statements for a complete discussion of these plans and their effect
on
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the consolidated financial statements. The pension and other postretirement
plans may be amended or terminated at any time. Any revisions could result in
significant changes to our obligations and our obligation to fund the plans.
We report unrecognized pension and other postretirement benefit cost in the
Consolidated Statements of Financial Position as a component of accumulated
other comprehensive income in shareholders' equity. It represents the after-tax
differences between the fair value of plan assets and the projected benefit
obligation ("PBO") for pension plans and the accumulated postretirement benefit
obligation for other postretirement plans that have not yet been recognized as a
component of net periodic cost. The measurement of the unrecognized pension and
other postretirement benefit cost can vary based upon the fluctuations in the
fair value of plan assets and the actuarial assumptions used for the plans as
discussed below. The unrecognized pension and other postretirement benefit cost
as of December 31, 2012 was $1.73 billion, an increase of $302 million from
$1.43 billion as of December 31, 2011. The increase was the result of updated
actuarial assumptions primarily the discount rates. As of December 31, 2012,
$1.88 billion related to pension benefits and $(150) million related to other
postretirement benefits.
The components of net periodic pension cost for all pension plans for the
years ended December 31 are as follows:
($ in millions) 2012 2011 2010
Service cost $ 152 $ 151 $ 150
Interest cost 298 322 320
Expected return on plan assets (393 ) (367 ) (331 )
Amortization of:
Prior service credit (2 ) (2 ) (2 )
Net actuarial loss 178 154 160
Settlement loss 33 46 48
Net periodic cost $ 266 $ 304 $ 345
The service cost component is the actuarial present value of the benefits
attributed by the plans benefit formula to services rendered by the employees
during the period. Interest cost is the increase in the PBO in the period due to
the passage of time at the discount rate. Interest cost fluctuates as the
discount rate changes and is also impacted by the related change in the size of
the PBO. The change in the PBO due to the change in the discount rate is
deferred as a component of net actuarial loss. It is recorded in accumulated
other comprehensive income as unrecognized pension benefit cost and may be
amortized.
The expected return on plan assets is determined as the product of the
expected long-term rate of return on plan assets and the adjusted fair value of
plan assets, referred to as the market-related value of plan assets. To
determine the market-related value, the fair value of plan assets is adjusted
annually so that differences between changes in the fair value of equity
securities and hedge fund limited partnerships and the expected long-term rate
of return on these securities are recognized into the market-related value of
plan assets over a five year period. We believe this is consistent with the
long-term nature of pension obligations.
The difference between the actual return on plan assets and the expected
return on plan assets is deferred as a component of net actuarial loss. It is
recorded in accumulated other comprehensive income as unrecognized pension
benefit cost and may be amortized. The market-related value adjustment
represents the current difference between actual returns and expected returns on
equity securities and hedge fund limited partnerships recognized over a five
year period. The market-related value adjustment is a deferred net gain of
$460 million as of December 31, 2012. The expected return on plan assets
fluctuates when the market-related value of plan assets changes and when the
expected long-term rate of return on plan assets assumption changes.
Amortization of net actuarial loss in pension cost is recorded when the net
actuarial loss including the unamortized market-related value adjustment exceeds
10% of the greater of the PBO or the market-related value of plan assets. The
amount of amortization is equal to the excess divided by the average remaining
service period for active employees for each plan, which approximates 9 years
for Allstate's largest plan. As a result, the effect of changes in the PBO due
to changes in the discount rate and changes in the fair value of plan assets may
be experienced in our net periodic pension cost in periods subsequent to those
in which the fluctuations actually occur.
Net actuarial loss fluctuates as the discount rate fluctuates, as the actual
return on plan assets differ from the expected long-term rate of return on plans
assets, and as actual plan experience differs from other actuarial assumptions.
Net actuarial loss related to changes in the discount rate will change when
interest rates change and from amortization of net actuarial loss when there is
an excess sufficient to qualify for amortization. Net actuarial loss related to
changes in the fair value of plan assets will change when plan assets change in
fair value and when there is an excess sufficient to qualify for amortization.
Other net actuarial loss will change over time due to changes in other valuation
assumptions and the plan participants or when there is an excess sufficient to
qualify for amortization.
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The change in the discount rate increased the net actuarial loss by
$806 million, $407 million, and $166 million in 2012, 2011 and 2010,
respectively. The difference between actual and expected returns on plan assets
(decreased) increased the net actuarial loss by $(201) million, $100 million,
and $(164) million in 2012, 2011 and 2010, respectively.
Net periodic pension cost in 2013 is estimated to be $333 million based on
current assumptions, including settlement charges. This represents an increase
compared to $266 million in 2012 due to an increase in the amortization expense
for prior years net actuarial losses (gain) which increased due to a lower
discount rate used to value the pension plans. Net periodic pension cost
decreased in 2012 compared to $304 million in 2011 primarily due to an increase
in the expected return on plan assets, a lower discount rate used to value the
pension plans and a decrease in settlement charges partially offset by increased
amortization of net actuarial loss (gain). Net periodic pension cost decreased
in 2011 compared to $345 million in 2010 primarily due to an increase in the
expected return on plan assets. In 2012, 2011 and 2010, net pension cost
included non-cash settlement charges primarily resulting from lump sum
distributions made to agents. Settlement charges also occurred during 2012, 2011
and 2010 related to the Supplemental Retirement Income Plan as a result of lump
sum payments made from the plan. Settlement charges are likely to continue for
some period in the future as we settle our remaining agent pension obligations
by making lump sum distributions to agents.
Since December 31, 2007, unrecognized pension benefit cost, pre-tax, has
increased approximately $2 billion, approximately one third of which arose from
asset returns differing from expected returns and approximately two thirds of
which is related to changes in the discount rates which have been declining over
this period. As of December 31, 2012, the discount rate had declined over the
last five years from 6.5% to 4.0%, due to the decline in the weighted average
yields of the investments that qualify for consideration to establish the
assumption for the discount rate. Also, plan assets sustained net losses in 2008
primarily due to declines in equity and credit markets.
These changes in discount rates and prior year asset losses, combined with
all other unrecognized actuarial gains and losses, resulted in a net actuarial
loss of $2.89 billion and amortization of net actuarial loss (and additional net
periodic pension cost) of $178 million in 2012 and $153 million in 2011. We
anticipate that the net actuarial loss for our pension plans will exceed 10% of
the greater of the PBO or the market-related value of assets in 2013 and into
the foreseeable future, resulting in additional amortization and net periodic
pension cost. The net actuarial loss will be amortized over the remaining
service life of active employees (approximately 9 years) or will reverse with
increases in the discount rate or better than expected returns on plan assets.
Amounts recorded for net periodic pension cost and accumulated other
comprehensive income are significantly affected by changes in the assumptions
used to determine the discount rate and the expected long-term rate of return on
plan assets. The discount rate is based on rates at which expected pension
benefits attributable to past employee service could effectively be settled on a
present value basis at the measurement date. We develop the assumed discount
rate by utilizing the weighted average yield of a theoretical dedicated
portfolio derived from non-callable bonds and bonds with a make-whole provision
available in the Bloomberg corporate bond universe having ratings of at least
"AA" by S&P or at least "Aa" by Moody's on the measurement date with cash flows
that match expected plan benefit requirements. Significant changes in discount
rates, such as those caused by changes in the credit spreads, yield curve, the
mix of bonds available in the market, the duration of selected bonds and
expected benefit payments, may result in volatility in pension cost and
accumulated other comprehensive income.
Holding other assumptions constant, a hypothetical decrease of 100 basis
points in the discount rate would result in an increase of $51 million in net
periodic pension cost and a $503 million increase in the unrecognized pension
cost liability recorded as accumulated other comprehensive income as of
December 31, 2012, compared to an increase of $52 million in net periodic
pension cost and a $427 million increase in the unrecognized pension cost
liability as of December 31, 2011. A hypothetical increase of 100 basis points
in the discount rate would decrease net periodic pension cost by $45 million and
would decrease the unrecognized pension cost liability recorded as accumulated
other comprehensive income by $421 million as of December 31, 2012, compared to
a decrease in net periodic pension cost of $46 million and a $360 million
decrease in the unrecognized pension cost liability recorded as accumulated
other comprehensive income as of December 31, 2011. This non-symmetrical range
results from the non-linear relationship between discount rates and pension
obligations, and changes in the amortization of unrealized net actuarial gains
and losses.
The expected long-term rate of return on plan assets reflects the average
rate of earnings expected on plan assets. While this rate reflects long-term
assumptions and is consistent with long-term historical returns, sustained
changes in the market or changes in the mix of plan assets may lead to revisions
in the assumed long-term rate of return on plan assets that may result in
variability of pension cost. Differences between the actual return on plan
assets and the
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expected long-term rate of return on plan assets are a component of net
actuarial loss and are recorded in accumulated other comprehensive income.
Holding other assumptions constant, a hypothetical decrease of 100 basis
points in the expected long-term rate of return on plan assets would result in
an increase of $51 million in pension cost as of December 31, 2012, compared to
$47 million as of December 31, 2011. A hypothetical increase of 100 basis points
in the expected long-term rate of return on plan assets would result in a
decrease in net periodic pension cost of $51 million as of December 31, 2012,
compared to $47 million as of December 31, 2011.
We target funding levels that do not restrict the payment of plan benefits
in our domestic plans and were within our targeted range as of December 31,
2012. In 2012, we contributed $439 million to our pension plans. We expect to
contribute $578 million for the 2013 fiscal year to maintain the plans' funded
status. This estimate could change significantly following either an improvement
or decline in investment markets.
GOODWILL
Goodwill represents the excess of amounts paid for acquiring businesses over
the fair value of the net assets acquired. The goodwill balances were
$822 million and $418 million as of December 31, 2012 for the Allstate
Protection segment and the Allstate Financial segment, respectively. Our
reporting units are equivalent to our 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.
Goodwill is not amortized but is tested for impairment at least annually. We
perform our annual goodwill impairment testing during the fourth quarter of each
year based upon data as of the close of the third quarter. We also review
goodwill for impairment whenever events or changes in circumstances, such as
deteriorating or adverse market conditions, indicate that it is more likely than
not that the carrying amount of goodwill may exceed its implied fair value.
Impairment testing requires the use of estimates and judgments. For purposes
of goodwill impairment testing, if the carrying value of a reporting unit
exceeds its estimated fair value, the second step of the goodwill test is
required. In such instances, the implied fair value of the goodwill is
determined in the same manner as the amount of goodwill that would be determined
in a business acquisition. The excess of the carrying value of goodwill over the
implied fair value of goodwill would be recognized as an impairment and recorded
as a charge against net income.
To estimate the fair value of our reporting units for our annual impairment
test, we initially utilize a stock price and market capitalization analysis and
apportion the value between our reporting units using peer company price to book
multiples. If the stock price and market capitalization analysis does not result
in the fair value of the reporting unit exceeding its carrying value, we may
also utilize a peer company price to earnings multiples analysis and/or a
discounted cash flow analysis to supplement the stock price and market
capitalization analysis. If a combination of valuation techniques are utilized,
the analyses would be weighted based on management's judgment of their relevance
given current facts and circumstances.
The stock price and market capitalization analysis takes into consideration
the quoted market price of our 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. The total market
capitalization of the consolidated entity is allocated to the individual
reporting units using book value multiples derived from peer company data for
the respective reporting units. The peer company price to earnings multiples
analysis takes into consideration the price earnings multiples of peer companies
for each reporting unit and estimated income from our strategic plan. The
discounted cash flow analysis utilizes long term assumptions for revenue growth,
capital growth, earnings projections including those used in our strategic plan,
and an appropriate discount rate. We apply significant judgment when determining
the fair value of our reporting units and when assessing the relationship of
market capitalization to the estimated fair value of our reporting units. The
valuation analyses described above are subject to critical judgments and
assumptions and may be potentially sensitive to variability. Estimates of fair
value are inherently uncertain and represent management's reasonable expectation
regarding future developments. These estimates and the judgments and assumptions
utilized may differ from future actual results. Declines in the estimated fair
value of our reporting units could result in goodwill impairments in future
periods which may be material to our results of operations but not our financial
position.
During fourth quarter 2012, we completed our annual goodwill impairment test
using information as of September 30, 2012. The stock price and market
capitalization analysis resulted in the fair value of our reporting units
exceeding their respective carrying values. While the fair value of the
reporting units exceeded their respective carrying values, the results indicated
that the amount of excess fair value was disproportionately greater for the
Allstate
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Protection reporting unit and relatively less for the Allstate Financial
reporting unit. The results of this analysis are consistent with both the
relative operating performance of the individual reporting units as well as
their respective industry sector's performance. Specifically, spread-based
products, which are a material component of the Allstate Financial reporting
unit, are experiencing the continued impacts of the historically low interest
rate environment which has depressed operating margins. In contrast,
underwriting results from the Allstate Protection business have benefitted by
the general presence of stable to higher premium rates and stable loss costs.
Goodwill impairment evaluations indicated no impairment as of December 31,
2012 and no reporting unit was at risk of having its carrying value including
goodwill exceed its fair value.
CAPITAL RESOURCES AND LIQUIDITY 2012 HIGHLIGHTS
º •
º Shareholders' equity as of December 31, 2012 was $20.58 billion, an
increase of 12.5% from $18.30 billion as of December 31, 2011.
º •
º On January 3, 2012, April 2, 2012, July 2, 2012, October 1, 2012 and
December 31, 2012, we paid shareholder dividends of $0.21, $0.22, $0.22,
$0.22 and $0.22, respectively. On February 6, 2013, we declared a quarterly
shareholder dividend of $0.25 payable on April 1, 2013.
º •
º In November 2012, we completed a $1.00 billion share repurchase program
that commenced in November 2011. In December 2012, we commenced a new
$1.00 billion share repurchase program that is expected to be completed by
December 31, 2013, and as of December 31, 2012, had $984 million remaining.
In February 2013, an additional $1 billion share repurchase program was
authorized and is expected to be completed by March 31, 2014. Our
repurchase programs may utilize an accelerated repurchase program. During
2012, we repurchased 26.7 million common shares for $910 million.
CAPITAL RESOURCES AND LIQUIDITY
Capital resources consist of shareholders' equity and debt, representing
funds deployed or available to be deployed to support business operations or for
general corporate purposes. The following table summarizes our capital resources
as of December 31.
($ in millions) 2012 2011 2010Common stock, retained income and other shareholders'
equity items
$ 19,405 $ 18,269 $ 18,789
Accumulated other comprehensive income (loss) 1,175 29 (172 )
Total shareholders' equity 20,580 18,298 18,617
Debt 6,057 5,908 5,908
Total capital resources $ 26,637 $ 24,206 $ 24,525
Ratio of debt to shareholders' equity 29.4% 32.3% 31.7%
Ratio of debt to capital resources 22.7%
24.4% 24.1%
Shareholders' equity increased in 2012, primarily due to net income and
increased unrealized net capital gains on investments, partially offset by share
repurchases and dividends paid to shareholders. Shareholders' equity decreased
in 2011, primarily due to share repurchases and dividends paid to shareholders,
partially offset by net income and increased unrealized net capital gains on
investments.
Debt The debt balance increased in 2012 due to increases in long-term debt.
On January 11, 2012, we issued $500 million of 5.20% Senior Notes due 2042,
utilizing the registration statement filed with the Securities and Exchange
Commission on May 8, 2009. The proceeds of this issuance were used for general
corporate purposes, including the repayment of $350 million of 6.125% Senior
Notes on February 15, 2012.
On January 10, 2013, we issued $500 million of 5.10% Fixed-to-Floating Rate
Subordinated Debentures due 2053, utilizing the registration statement filed
with the Securities and Exchange Commission on April 30, 2012. The proceeds of
this issuance will be used for general corporate purposes, including the
repurchase of our common stock through open market purchases from time to time
or through an accelerated repurchase program. The next debt maturity is on
June 15, 2013 when $250 million of 7.50% Debentures are due, which is expected
to be refinanced or repaid from available capital. For further information on
outstanding debt, see Note 12 of the consolidated financial statements. As of
December 31, 2012 and 2011, there were no outstanding commercial paper
borrowings.
Share repurchases In November 2012, we completed our $1.00 billion share
repurchase program that commenced in November 2011. In December 2012, we
commenced a new $1.00 billion share repurchase program that is expected to
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be completed by December 31, 2013, and as of December 31, 2012, had $984 million
remaining. This program is expected to be funded by issuing a like amount of
subordinated debentures (half of which were issued in January 2013). In February
2013, an additional $1 billion share repurchase program was authorized and is
expected to be completed by March 31, 2014. Our repurchase programs may utilize
an accelerated repurchase program. During 2012, we repurchased 26.7 million
common shares for $910 million.
Since 1995, we have acquired 523 million shares of our common stock at a
cost of $21.13 billion, primarily as part of various stock repurchase programs.
We have reissued 104 million shares since 1995, primarily associated with our
equity incentive plans, the 1999 acquisition of American Heritage Life
Investment Corporation and the 2001 redemption of certain mandatorily redeemable
preferred securities. Since 1995, total shares outstanding has decreased by
417 million shares or 46.5%, primarily due to our repurchase programs.
Financial ratings and strength The following table summarizes our senior
long-term debt, commercial paper and insurance financial strength ratings as of
December 31, 2012.
Standard &
Moody's Poor's A.M. Best
The Allstate Corporation (senior long-term debt) A3 A-
a-
The Allstate Corporation (commercial paper) P-2 A-2
AMB-1
Allstate Insurance Company (insurance financial
strength) Aa3 AA-
A+
Allstate Life Insurance Company (insurance
financial strength) A1 A+
A+
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.
On January 31, 2013, A.M. Best affirmed The Allstate Corporation's debt and
commercial paper ratings of a- and AMB-1, respectively, and our insurance
entities financial strength ratings of A+ for AIC and Allstate Life Insurance
Company ("ALIC"). The outlook for AIC and ALIC remained stable. In April 2012,
S&P affirmed The Allstate Corporation's debt and commercial paper ratings of A-
and A-2, respectively, AIC's financial strength ratings of AA- and ALIC's
financial strength rating of A+. The outlook for all S&P ratings remained
negative. There were no changes to our debt, commercial paper and insurance
financial strength ratings from Moody's during 2012. The outlook for all of our
Moody's ratings is negative. In the future, if our financial position is less
than rating agency expectations including those related to capitalization at the
parent company, AIC or ALIC, we could be exposed to a downgrade in our ratings
of one notch or more which we do not view as being material to our business
model or strategies.
We have distinct and separately capitalized groups of subsidiaries licensed
to sell property and casualty insurance in New Jersey and Florida that maintain
separate group ratings. The ratings of these groups are influenced by the risks
that relate specifically to each group. Many mortgage companies require property
owners to have insurance from an insurance carrier with a secure financial
strength rating from an accredited rating agency. In February 2013, A.M. Best
affirmed the Allstate New Jersey Insurance Company, which writes auto and
homeowners insurance, rating of A-. The outlook for this rating is stable.
Allstate New Jersey Insurance Company also has a Financial Stability Rating® of
A" from Demotech, which was affirmed on November 28, 2012. On September 19,
2012, A.M. Best affirmed the Castle Key Insurance Company, which underwrites
personal lines property insurance in Florida, rating of B-. The outlook for the
rating is negative. Castle Key Insurance Company also has a Financial Stability
Rating® of A' from Demotech, which was affirmed on November 28, 2012.
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
securities lending to fund intercompany borrowings.
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Allstate's domestic property-liability and life insurance subsidiaries
prepare their statutory-basis financial statements in conformity with accounting
practices prescribed or permitted by the insurance department of the applicable
state of domicile. Statutory surplus is a measure that is often used as a basis
for determining dividend paying capacity, operating leverage and premium growth
capacity, and it is also reviewed by rating agencies in determining their
ratings. As of December 31, 2012, total statutory surplus is $17.28 billion
compared to $15.59 billion as of December 31, 2011. Property-Liability surplus
was $13.74 billion as of December 31, 2012, compared to $11.99 billion as of
December 31, 2011. Allstate Financial surplus was $3.54 billion as of
December 31, 2012, compared to $3.60 billion as of December 31, 2011.
The ratio of net premiums written to statutory surplus is a common measure
of operating leverage used in the property-casualty insurance industry and
serves as an indicator of a company's premium growth capacity. Ratios in excess
of 3 to 1 are typically considered outside the usual range by insurance
regulators and rating agencies, and for homeowners and related coverages that
have significant net exposure to natural catastrophes a ratio of 1 to 1 is
considered appropriate. AIC's premium to surplus ratio was 1.6x as of both
December 31, 2012 and 2011.
State laws specify regulatory actions if an insurer's risk-based capital
("RBC"), a measure of an insurer's solvency, falls below certain levels. The
NAIC has a standard formula for annually assessing RBC. The formula for
calculating RBC for property-liability companies takes into account asset and
credit risks but places more emphasis on underwriting factors for reserving and
pricing. The formula for calculating RBC for life insurance companies takes into
account factors relating to insurance, business, asset and interest rate risks.
As of December 31, 2012, the statutory capital and surplus for each of our
domestic insurance companies exceeds its company action level RBC.
The NAIC has also developed a set of financial relationships or tests known
as the Insurance Regulatory Information System to assist state regulators in
monitoring the financial condition of insurance companies and identifying
companies that require special attention or actions by insurance regulatory
authorities. The NAIC analyzes financial data provided by insurance companies
using prescribed ratios, each with defined "usual ranges". Generally, regulators
will begin to monitor an insurance company if its ratios fall outside the usual
ranges for four or more of the ratios. If an insurance company has insufficient
capital, regulators may act to reduce the amount of insurance it can issue. The
ratios of our domestic insurance companies are within these ranges.
Liquidity sources and uses Our potential sources of funds principally
include activities shown in the following table.
Property- Allstate Corporate
Liability Financial and Other
Receipt of insurance premiums X X
Contractholder fund deposits X
Reinsurance recoveries X X
Receipts of principal, interest and dividends on
investments X X X
Sales of investments X X
X
Funds from securities lending, commercial paper
and line of credit agreements X X
X
Intercompany loans X X
X
Capital contributions from parent X X
Dividends from subsidiaries X
X
Tax refunds/settlements X X
X
Funds from periodic issuance of additional
securities
X
Receipt of intercompany settlements related to
employee benefit plans X
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Our potential uses of funds principally include activities shown in the
following table.
Property- Allstate Corporate
Liability Financial and Other
Payment of claims and related expenses X
Payment of contract benefits, maturities,
surrenders and withdrawals X
Reinsurance cessions and payments X X
Operating costs and expenses X X X
Purchase of investments X X
X
Repayment of securities lending, commercial paper
and line of credit agreements X X
X
Payment or repayment of intercompany loans X X
X
Capital contributions to subsidiaries X
X
Dividends to shareholders/parent company X X
X
Tax payments/settlements X X
Share repurchases
X
Debt service expenses and repayment X X
X
Payments related to employee and agent benefit
plans X X X
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 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 $2.06 billion as of December 31, 2012.
These assets include investments that are generally saleable within one quarter
totaling $1.48 billion. The substantial earnings capacity of the operating
subsidiaries is the primary source of capital generation for the Corporation. In
2013, AIC will have the capacity to pay dividends currently estimated at
$1.95 billion without prior regulatory approval. In addition, we have access to
$1.00 billion of funds from either commercial paper issuance or an unsecured
revolving credit facility. These provide funds for the parent company's
relatively low fixed charges and other corporate purposes.
In 2012, AIC paid dividends totaling $1.51 billion. These dividends
comprised $1.06 billion in cash paid to its parent, Allstate Insurance
Holdings, LLC ("AIH"), of which $1.04 billion were paid by AIH to its parent,
the Corporation, and the transfer of ownership (valued at $450 million) to AIH
of three insurance companies that were formerly subsidiaries of AIC (Allstate
Indemnity Company, Allstate Fire and Casualty Insurance Company and Allstate
Property and Casualty Insurance Company). In 2011, dividends totaling
$838 million were paid by AIC to the Corporation. In 2010, dividends totaling
$1.30 billion were paid by AIC to the Corporation. There were no capital
contributions paid by the Corporation to AIC in 2012, 2011 or 2010. There were
no capital contributions by AIC to ALIC in 2012, 2011 or 2010. In 2012, Allstate
Financial paid $357 million of dividends and repayments of surplus notes to the
Corporation and other affiliates.
The Corporation has access to additional borrowing to support liquidity as
follows:
º •
º A commercial paper facility with a borrowing limit of $1.00 billion to
cover short-term cash needs. As of December 31, 2012, there were no
balances outstanding and therefore the remaining borrowing capacity was
$1.00 billion; however, the outstanding balance can fluctuate daily.
º •
º Our credit facility is available for short-term liquidity requirements and
backs our commercial paper facility. The $1.00 billion unsecured revolving
credit facility has an initial term of five years expiring in April 2017.
The facility is fully subscribed among 12 lenders with the largest
commitment being $115 million. We have the option to extend the expiration
by one year at the first and second anniversary of the facility, upon
approval of existing or replacement lenders. 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. This facility has a financial covenant requiring
that we not exceed a 37.5% debt to capitalization ratio as defined in the
agreement. This ratio was 19.8% as of December 31, 2012. 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, unguaranteed long-term
debt. There were no borrowings under the credit facility during 2012. The
total amount
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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.
º •
º A universal shelf registration statement was filed with the Securities and
Exchange Commission on April 30, 2012. We can use this shelf registration
to issue an unspecified amount of debt securities, common stock (including
421 million shares of treasury stock as of December 31, 2012), 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 were $39.32 billion as of
December 31, 2012. The following table summarizes contractholder funds by their
contractual withdrawal provisions as of December 31, 2012.
Percent to
($ in millions) total
Not subject to discretionary withdrawal $ 6,012
15.3 %
Subject to discretionary withdrawal with adjustments:
Specified surrender charges (1)
13,170
33.5
Market value adjustments (2) 5,382
13.7
Subject to discretionary withdrawal without adjustments (3) 14,755
37.5
Total contractholder funds (4) $ 39,319
100.0 %
--------------------------------------------------------------------------------
º (1)
º Includes $6.81 billion of liabilities with a contractual surrender charge
of less than 5% of the account balance.
º (2)
º $4.45 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.
º (3)
º 76% of these contracts have a minimum interest crediting rate guarantee of
3% or higher.
º (4)
º Includes $1.12 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 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 decreased 20.1% in
2012 compared to 2011. The annualized surrender and partial withdrawal rate on
deferred fixed annuities and interest-sensitive life insurance products, based
on the beginning of year contractholder funds, was 11.3% and 12.6% in 2012 and
2011, 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 December 31, 2012,
total institutional products outstanding were $1.84 billion, with scheduled
maturities of $1.75 billion in April of 2013 and $85 million in 2016.
Our asset-liability management practices limit the differences between the
cash flows generated by our investment portfolio and the expected cash flow
requirements of our life insurance, annuity and institutional product
obligations.
Certain remote events and circumstances could constrain our liquidity. Those
events and circumstances include, for example, a catastrophe resulting in
extraordinary losses, a downgrade in our senior long-term debt rating of A3, A-
and a- (from Moody's, S&P and A.M. Best, respectively) to non-investment grade
status of below Baa3/BBB-/bb, a downgrade in AIC's financial strength rating
from Aa3, AA- and A+ (from Moody's, S&P and A.M. Best, respectively) to below
Baa2/BBB/A-, or a downgrade in ALIC's financial strength ratings from A1, A+ and
A+ (from Moody's, S&P and A.M. Best, respectively) to below A3/A-/A-. The rating
agencies also consider the interdependence of our individually rated entities;
therefore, a rating change in one entity could potentially affect the ratings of
other related entities.
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The following table summarizes consolidated cash flow activities by segment.
($ in Corporate and
millions) Property-Liability (1) Allstate Financial (1) Other (1) Consolidated
2012 2011 2010 2012 2011 2010 2012 2011 2010 2012 2011 2010
Net cash
provided by
(used in):
Operating
activities $ 2,023 $ 789 $ 1,373 $ 1,165 $ 1,295 $ 2,407 $ (134 ) $ (155 ) $ (91 ) $ 3,054 $ 1,929 $ 3,689
Investing
activities (1,081 ) 244 (44 ) 2,497 5,284 3,096 165 633 (720 ) 1,581 6,161 2,332
Financing
activities (18 ) (4 ) (8 ) (3,363 ) (6,504 ) (5,510 ) (1,224 ) (1,368 ) (553 ) (4,605 ) (7,876 ) (6,071 )
Net increase
(decrease)
in
consolidated
cash $ 30 $ 214 $ (50 )
--------------------------------------------------------------------------------
º (1)
º Business unit cash flows reflect the elimination of intersegment dividends,
contributions and borrowings.
Property-Liability Higher cash provided by operating activities in 2012
compared to 2011 was primarily due to lower claim payments. Lower cash provided
by operating activities in 2011 compared to 2010 was primarily due to higher
claim payments, partially offset by lower income tax payments.
Cash used in investing activities in 2012 compared to cash provided by
investing activities in 2011 was primarily due to 2012 operating cash flows
being invested. There were lower sales of fixed income and equity securities and
lower purchases of fixed income and equity securities. Cash provided by
investing activities in 2011 compared to cash used in investing activities in
2010 was primarily due to higher net sales of fixed income and equity
securities, partially offset by higher net purchases of fixed income and equity
securities.
Allstate Financial Lower cash provided by operating cash flows in 2012
compared to 2011 was primarily due to higher contract benefits paid. Lower cash
provided by operating cash flows in 2011 was primarily due to income tax
payments in 2011 compared to income tax refunds in 2010.
Lower cash provided by investing activities in 2012 compared to 2011 was
primarily due to lower financing needs as reflected in lower sales of fixed
income securities, partially offset by decreased purchases of fixed income
securities. Higher cash provided by investing activities in 2011 compared to
2010 was impacted by lower net purchases of fixed income securities and higher
net sales of fixed income securities used to fund reductions in contractholder
fund liabilities.
Lower cash used in financing activities in 2012 compared to 2011 was
primarily due to lower surrenders and partial withdrawals on fixed annuities,
decreased maturities of institutional products and the absence of Allstate Bank
activity in 2012. Higher cash used in financing activities in 2011 compared to
2010 was primarily due to higher surrenders and partial withdrawals on fixed
annuities and Allstate Bank products and lower deposits on Allstate Bank
products and fixed annuities, partially offset by decreased maturities of
institutional products. In 2011, Allstate Bank ceased operations and all funds
were returned to customers by December 31, 2011. For quantification of the
changes in contractholder funds, see the Allstate Financial Segment section of
the MD&A.
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 parent company portfolio,
including the acquisition of Esurance and Answer Financial in 2011. 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.
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Contractual obligations and commitments Our contractual obligations as of
December 31, 2012 and the payments due by period are shown in the following
table.
Less than Over
($ in millions) Total 1 year 1-3 years 4-5 years 5 years
Liabilities for
collateral (1) $ 808 $ 808 $ - $ - $ -
Contractholder funds (2) 54,517 7,924 9,929 6,990 29,674
Reserve for life-contingent
contract benefits (2) 35,195 1,216 2,241 2,108 29,630
Long-term debt (3) 12,652 607 1,628 591 9,826
Capital lease
obligations (3) 63 19 24 9 11
Operating leases (3) 580 166 229 115 70
Unconditional purchase
obligations (3) 392 158 183 51 -
Defined benefit pension
plans and other
postretirement benefit
plans (3)(4) 3,276 622 280 286 2,088
Reserve for
property-liability insurance
claims and claims
expense (5) 21,288 9,258 6,513 2,392 3,125
Other liabilities and
accrued expenses (6)(7) 3,722 3,529 98 69 26
Net unrecognized tax
benefits (8) 25 25 - - -
Total contractual cash
obligations $ 132,518 $ 24,332 $ 21,125 $ 12,611 $ 74,450
--------------------------------------------------------------------------------
º (1)
º Liabilities for collateral are typically fully secured with cash or
short-term investments. We manage our short-term liquidity position to
ensure the availability of a sufficient amount of liquid assets to extinguish short-term liabilities as they come due in the normal course of
business, including utilizing potential sources of liquidity as disclosed
previously.
º (2)
º Contractholder funds represent interest-bearing liabilities arising from
the sale of products such as interest-sensitive life, fixed annuities,
including immediate annuities without life contingencies and institutional
products. The reserve for life-contingent contract benefits relates
primarily to traditional life insurance, immediate annuities with life
contingencies and voluntary accident and health insurance. These amounts
reflect the present value of estimated cash payments to be made to
contractholders and policyholders. Certain of these contracts, such as
immediate annuities without life contingencies and institutional products,
involve payment obligations where the amount and timing of the payment is
essentially fixed and determinable. These amounts relate to (i) policies or
contracts where we are currently making payments and will continue to do so
and (ii) contracts where the timing of a portion or all of the payments has
been determined by the contract. Other contracts, such as
interest-sensitive life, fixed deferred annuities, traditional life
insurance, immediate annuities with life contingencies and voluntary
accident and health insurance, involve payment obligations where a portion
or all of the amount and timing of future payments is uncertain. For these
contracts, we are not currently making payments and will not make payments
until (i) the occurrence of an insurable event such as death or illness or
(ii) the occurrence of a payment triggering event such as the surrender or
partial withdrawal on a policy or deposit contract, which is outside of our
control. We have estimated the timing of payments related to these
contracts based on historical experience and our expectation of future
payment patterns. Uncertainties relating to these liabilities include
mortality, morbidity, expenses, customer lapse and withdrawal activity,
estimated additional deposits for interest-sensitive life contracts, and
renewal premium for life policies, which may significantly impact both the
timing and amount of future payments. Such cash outflows reflect adjustments for the estimated timing of mortality, retirement, and other
appropriate factors, but are undiscounted with respect to interest. As a
result, the sum of the cash outflows shown for all years in the table
exceeds the corresponding liabilities of $39.32 billion for contractholder
funds and $14.90 billion for reserve for life-contingent contract benefits
as included in the Consolidated Statements of Financial Position as of
December 31, 2012. The liability amount in the Consolidated Statements of
Financial Position reflects the discounting for interest as well as
adjustments for the timing of other factors as described above.
º (3)
º Our payment obligations relating to long-term debt, capital lease
obligations, operating leases, unconditional purchase obligations and
pension and other post employment benefits ("OPEB") contributions are managed within the structure of our intermediate to long-term liquidity
management program. Amount differs from the balance presented on the
Consolidated Statements of Financial Position as of December 31, 2012
because the long-term debt amount above includes interest.
º (4) º The pension plans' obligations in the next 12 months represent our planned
contributions, and the remaining years' contributions are projected based
on the average remaining service period using the current underfunded
status of the plans. The OPEB plans' obligations are estimated based on the
expected benefits to be paid. These liabilities are discounted with respect
to interest, and as a result the sum of the cash outflows shown for all
years in the table exceeds the corresponding liability amount of
$2.14 billion included in other liabilities and accrued expenses on the
Consolidated Statements of Financial Position. º (5)
º Reserve for property-liability insurance claims and claims expense is an
estimate of amounts necessary to settle all outstanding claims, including
claims that have been IBNR as of the balance sheet date. We have estimated
the timing of these payments based on our historical experience and our
expectation of future payment patterns. However, the timing of these
payments may vary significantly from the amounts shown above, especially
for IBNR claims. The ultimate cost of losses may vary materially from
recorded amounts which are our best estimates. The reserve for
property-liability insurance claims and claims expense includes loss
reserves related to asbestos and environmental claims as of December 31,
2012, of $1.52 billion and $241 million, respectively. º (6)
º Other liabilities primarily include accrued expenses and certain benefit
obligations and claim payments and other checks outstanding. Certain of
these long-term liabilities are discounted with respect to interest, as a
result the sum of the cash outflows shown for all years in the table
exceeds the corresponding liability amount of $3.65 billion.
º (7)
º Balance sheet liabilities not included in the table above include unearned
and advance premiums of $11.08 billion and gross deferred tax liabilities
of $2.89 billion. These items were excluded as they do not meet the
definition of a contractual liability as we are not contractually obligated
to pay
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these amounts to third parties. Rather, they represent an accounting mechanism
that allows us to present our financial statements on an accrual basis. In
addition, other liabilities of $244 million were not included in the table above
because they did not represent a contractual obligation or the amount and timing
of their eventual payment was sufficiently uncertain.
º (8)
º Net unrecognized tax benefits represent our potential future obligation to
the taxing authority for a tax position that was not recognized in the
consolidated financial statements. We believe it is reasonably possible
that the liability balance will be reduced by $25 million within the next
twelve months upon the resolution of an outstanding issue resulting from
the 2005-2006 and 2007-2008 Internal Revenue Service examinations. The
resolution of this obligation may be for an amount different than what we
have accrued.
Our contractual commitments as of December 31, 2012 and the periods in which
the commitments expire are shown in the following table.
Less than Over
($ in millions) Total 1 year 1-3 years 4-5 years 5 years
Other commitments -
conditional $ 128 $ 74 $ - $ 12 $ 42
Other commitments -
unconditional 2,080 253 457 1,171 199
Total commitments $ 2,208 $ 327 $ 457 $ 1,183 $ 241
Contractual commitments represent investment commitments such as private
placements, limited partnership interests and other loans.
We have agreements in place for services we conduct, generally at cost,
between subsidiaries relating to insurance, reinsurance, loans and
capitalization. All material intercompany transactions have appropriately been
eliminated in consolidation. Intercompany transactions among insurance
subsidiaries and affiliates have been approved by the appropriate departments of
insurance as required.
For a more detailed discussion of our off-balance sheet arrangements, see
Note 7 of the consolidated financial statements.
ENTERPRISE RISK AND RETURN MANAGEMENT
Allstate manages enterprise risk under an integrated Enterprise Risk and
Return Management ("ERRM") framework with risk-return principles, governance and
analytics. This framework provides an enterprise view of risks and opportunities
and is used by senior leaders and business managers to drive strategic and
business decisions. Allstate's risk management strategies adapt to changes in
business and market environments and seek to optimize returns. Allstate
continually validates and improves its ERRM practices by benchmarking and
securing external perspectives for our processes.
Our qualitative risk-return principles define how we operate and guide
decision-making around risk and return. These principles are built around three
key operating components: maintaining our strong foundation of stakeholder trust
and financial strength, building strategic value and optimizing return per unit
of risk.
ERRM governance includes an executive management committee structure, Board
oversight and chief risk officers ("CROs"). The Enterprise Risk & Return Council
("ERRC") is Allstate's senior risk management committee. It directs ERRM by
establishing risk-return targets, determining economic capital levels and
directing integrated strategies and actions from an enterprise perspective. It
consists of Allstate's chief executive officer, business unit presidents,
enterprise and business unit chief risk officers and chief financial officers,
general counsel and treasurer. Allstate's Board of Directors and Audit Committee
provide ERRM oversight by reviewing enterprise principles, guidelines and limits
for Allstate's significant risks and by monitoring strategies and actions
management has taken to control these risks.
CROs are appointed for the enterprise and for Allstate Protection, Allstate
Financial and Allstate Investments. Collectively, the CROs create an integrated
approach to risk and return management to ensure risk management practices and
strategies are aligned with Allstate's overall enterprise objectives.
Our ERRM governance is supported with an analytic framework to manage risk
exposure and optimize returns on risk-adjusted capital. Allstate views economic
capital primarily on a statutory accounting basis. Management and the ERRC use
enterprise stochastic modeling, risk expertise and judgment to determine an
appropriate level of enterprise economic capital to hold considering a broad
range of risk objectives and external constraints. These include limiting risks
of financial stress, insolvency, likelihood of capital stress and volatility,
maintaining stakeholder value and financial strength ratings and satisfying
regulatory and rating agency risk-based capital requirements. Enterprise
economic capital approximates a combination of statutory surplus and deployable
invested assets at the parent holding company level.
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Using our governance and analytic framework, Allstate designs business and
enterprise strategies that seek to optimize returns on risk-adjusted capital.
Examples include shifting Allstate Financial away from spread-based products
toward underwritten products, implementing a comprehensive program of margin
improvement actions in homeowners insurance, and balancing yield and return
considerations in the low interest rate environment.
REGULATION AND LEGAL PROCEEDINGS
We are subject to extensive regulation and we are involved in various legal
and regulatory actions, all of which have an effect on specific aspects of our
business. For a detailed discussion of the legal and regulatory actions in which
we are involved, see Note 14 of the consolidated financial statements.
PENDING ACCOUNTING STANDARDS
There are several pending accounting standards that we have not implemented
because the implementation date has not yet occurred. For a discussion of these
pending standards, see Note 2 of the consolidated financial statements.
The effect of implementing certain accounting standards on our financial
results and financial condition is often based in part on market conditions at
the time of implementation of the standard and other factors we are unable to
determine prior to implementation. For this reason, we are sometimes unable to
estimate the effect of certain pending accounting standards until the relevant
authoritative body finalizes these standards or until we implement them.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information required for Item 7A is incorporated by reference to the
material under the caption "Market Risk" in Part II, Item 7 of this report.
Item 8. Financial Statements and Supplementary Data
Page
Consolidated Statements of Operations 104
Consolidated Statements of Comprehensive Income 105
Consolidated Statements of Financial Position 106
Consolidated Statements of Shareholders' Equity 107
Consolidated Statements of Cash Flows 108
Notes to Consolidated Financial Statements (Notes) 109
Report of Independent Registered Public Accounting Firm 191
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THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in millions, except per share data) Year Ended December 31,
2012 2011 2010
Revenues
Property-liability insurance premiums (net of
reinsurance ceded of $1,090, $1,098 and $1,092) $ 26,737 $
25,942 $ 25,957
Life and annuity premiums and contract charges (net of
reinsurance ceded of $674, $750 and $804)
2,241 2,238 2,168
Net investment income 4,010 3,971 4,102
Realized capital gains and losses:
Total other-than-temporary impairment losses (239 ) (563 ) (937 )
Portion of loss recognized in other comprehensive
income 6
(33 ) (64 )
Net other-than-temporary impairment losses recognized
in earnings
(233 ) (596 ) (1,001 )
Sales and other realized capital gains and losses 560
1,099 174
Total realized capital gains and losses 327 503 (827 )
33,315 32,654 31,400
Costs and expenses
Property-liability insurance claims and claims expense
(net of reinsurance ceded of $2,051, $927 and $271) 18,484 20,161 18,951
Life and annuity contract benefits (net of reinsurance
ceded of $665, $653 and $702) 1,818 1,761 1,815
Interest credited to contractholder funds (net of
reinsurance ceded of $28, $27 and $32) 1,316 1,645 1,807
Amortization of deferred policy acquisition costs 3,884 3,971 3,807
Operating costs and expenses 4,118 3,739 3,542
Restructuring and related charges 34 44 30
Interest expense 373 367 367
30,027 31,688 30,319
Gain (loss) on disposition of operations 18 (7 ) 19
Income from operations before income tax expense 3,306 959 1,100
Income tax expense 1,000 172 189
Net income $ 2,306 $ 787 $ 911
Earnings per share:
Net income per share - Basic $ 4.71 $
1.51 $ 1.69
Weighted average shares - Basic 489.4
520.7 540.3
Net income per share - Diluted $ 4.68 $
1.50 $ 1.68
Weighted average shares - Diluted 493.0
523.1 542.5
Cash dividends declared per share $ 0.88 $ 0.84 $ 0.80
See notes to consolidated financial statements.
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THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions) Year Ended December 31,
2012 2011 2010
Net income $ 2,306 $ 787 $ 911
Other comprehensive income, after-tax
Changes in:
Unrealized net capital gains and losses 1,434 452 1,911
Unrealized foreign currency translation adjustments 14 (12 ) 23
Unrecognized pension and other postretirement benefit
cost
(302 )
(239 ) 94
Other comprehensive income, after-tax 1,146 201 2,028
Comprehensive income $ 3,452 $ 988 $ 2,939
See notes to consolidated financial statements.
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THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ in millions, except par value data) December 31,
2012 2011
Assets
InvestmentsFixed income securities, at fair value (amortized cost
$71,915 and $73,379)
$ 77,017 $ 76,113
Equity securities, at fair value (cost $3,577 and $4,203) 4,037 4,363
Mortgage loans 6,570 7,139
Limited partnership interests 4,922 4,697
Short-term, at fair value (amortized cost $2,336 and $1,291) 2,336
1,291
Other 2,396 2,015
Total investments 97,278 95,618
Cash 806 776
Premium installment receivables, net 5,051
4,920
Deferred policy acquisition costs 3,621
3,871
Reinsurance recoverables, net 8,767 7,251
Accrued investment income 781 826
Deferred income taxes - 722
Property and equipment, net 989 914
Goodwill 1,240 1,242
Other assets 1,804 2,069
Separate Accounts 6,610 6,984
Total assets $ 126,947 $ 125,193
Liabilities
Reserve for property-liability insurance claims and claims
expense
$ 21,288 $ 20,375
Reserve for life-contingent contract benefits 14,895 14,406
Contractholder funds 39,319 42,332
Unearned premiums 10,375 10,057
Claim payments outstanding 797
827
Deferred income taxes 597
-
Other liabilities and accrued expenses 6,429 5,978
Long-term debt 6,057 5,908
Separate Accounts 6,610 6,984
Total liabilities 106,367 106,867
Commitments and Contingent Liabilities (Note 7, 8 and 14)
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, 479 million and 501 million shares
outstanding 9 9
Additional capital paid-in 3,162 3,189
Retained income 33,783 31,909
Deferred ESOP expense (41 ) (43 )
Treasury stock, at cost (421 million and 399 million shares) (17,508 ) (16,795 )
Accumulated other comprehensive income:
Unrealized net capital gains and losses:
Unrealized net capital losses on fixed income securities with
OTTI (11 ) (174 )
Other unrealized net capital gains and losses 3,614
2,041
Unrealized adjustment to DAC, DSI and insurance reserves (769 )
(467 )
Total unrealized net capital gains and losses 2,834
1,400
Unrealized foreign currency translation adjustments 70
56
Unrecognized pension and other postretirement benefit cost (1,729 )
(1,427 )
Total accumulated other comprehensive income 1,175 29
Total shareholders' equity 20,580 18,298
Noncontrolling interest - 28
Total equity 20,580 18,326
Total liabilities and equity $ 126,947 $ 125,193
See notes to consolidated financial statements.
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THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ in millions, except per share data) Year Ended December 31,
2012 2011 2010
Common stock $ 9 $ 9 $ 9
Additional capital paid-in
Balance, beginning of year 3,189 3,176 3,172
Equity incentive plans activity (27 ) 13 4
Balance, end of year 3,162 3,189 3,176
Retained income
Balance, beginning of year 31,909 31,558 31,098
Net income 2,306 787 911
Dividends ($0.88, $0.84 and $0.80 per share) (432 ) (436 ) (433 )
Cumulative effect of change in accounting principle - - (18 )
Balance, end of year 33,783 31,909 31,558
Deferred ESOP expense
Balance, beginning of year (43 ) (44 ) (47 )
Payments 2 1 3
Balance, end of year (41 ) (43 ) (44 )
Treasury stock
Balance, beginning of year (16,795 ) (15,910 ) (15,828 )
Shares acquired (910 ) (950 ) (166 )
Shares reissued under equity incentive plans, net 197 65 84
Balance, end of year (17,508 ) (16,795 ) (15,910 )
Accumulated other comprehensive income
Balance, beginning of year 29 (172 ) (2,220 )
Change in unrealized net capital gains and losses 1,434 452 1,911
Change in unrealized foreign currency translation
adjustments 14 (12 ) 23
Change in unrecognized pension and other
postretirement benefit cost (302 ) (239 ) 94
Cumulative effect of change in accounting principle - - 20
Balance, end of year 1,175 29 (172 )
Total shareholders' equity 20,580 18,298 18,617
Noncontrolling interest
Balance, beginning of year 28 28 29
Change in noncontrolling interest ownership (28 ) (4 ) (14 )
Noncontrolling gain - 4 3
Cumulative effect of change in accounting principle - - 10
Balance, end of year - 28 28
Total equity $ 20,580 $ 18,326 $ 18,645
See notes to consolidated financial statements.
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THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions) Year Ended December 31,
2012 2011 2010
Cash flows from operating activities
Net income $ 2,306 $ 787 $ 911
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and other non-cash items 388 252 94
Realized capital gains and losses (327 ) (503 ) 827
(Gain) loss on disposition of operations (18 ) 7 (19 )
Interest credited to contractholder funds 1,316 1,645 1,807
Changes in:
Policy benefits and other insurance reserves 214 (77 ) 238
Unearned premiums 306 37 (40 )
Deferred policy acquisition costs (18 ) 177 (61 )
Premium installment receivables, net (125 ) 33 10
Reinsurance recoverables, net (1,560 ) (716 ) (265 )
Income taxes 698 133 192
Other operating assets and liabilities (126 ) 154 (5 )
Net cash provided by operating activities 3,054
1,929 3,689
Cash flows from investing activities
Proceeds from sales
Fixed income securities 18,872 29,436 22,881
Equity securities 1,495 2,012 4,349
Limited partnership interests 1,398 1,000 505
Mortgage loans 14 97 124
Other investments 148 164 121
Investment collections
Fixed income securities 5,417 4,951 5,147
Mortgage loans 1,064 634 1,076
Other investments 128 123 137
Investment purchases
Fixed income securities (22,658 ) (27,896 ) (25,745 )
Equity securities (671 ) (1,824 ) (3,564 )
Limited partnership interests (1,524 ) (1,696 ) (1,342 )
Mortgage loans (525 ) (1,241 ) (120 )
Other investments (665 ) (204 ) (181 )
Change in short-term investments, net (698 ) 2,182 (382 )
Change in other investments, net 58 (415 ) (519 )
Purchases of property and equipment, net (285 )
(246 ) (162 )
Disposition (acquisition) of operations, net of cash
acquired
13
(916 ) 7
Net cash provided by investing activities 1,581
6,161 2,332
Cash flows from financing activities
Proceeds from issuance of long-term debt 493 7 -
Repayment of long-term debt (352 ) (7 ) (2 )
Contractholder fund deposits 2,158 2,176 2,980
Contractholder fund withdrawals (5,519 ) (8,680 ) (8,470 )
Dividends paid (534 ) (435 ) (430 )
Treasury stock purchases (913 ) (953 ) (152 )
Shares reissued under equity incentive plans, net 85 19 28
Excess tax benefits on share-based payment
arrangements 10 (5 ) (7 )
Other (33 ) 2 (18 )
Net cash used in financing activities (4,605 )
(7,876 ) (6,071 )
Net increase (decrease) in cash 30 214 (50 )
Cash at beginning of year 776 562 612
Cash at end of year $ 806 $ 776 $ 562
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
Basis of presentation
The accompanying consolidated financial statements include the accounts of
The Allstate Corporation (the "Corporation") and its wholly owned subsidiaries,
primarily Allstate Insurance Company ("AIC"), a property-liability insurance
company with various property-liability and life and investment subsidiaries,
including Allstate Life Insurance Company ("ALIC") (collectively referred to as
the "Company" or "Allstate"). These consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America ("GAAP"). All significant intercompany accounts and
transactions have been eliminated.
To conform to the current year presentation, certain amounts in the prior
years' consolidated financial statements and notes have been reclassified.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Nature of operations
Allstate is engaged, principally in the United States, in the
property-liability insurance, life insurance, retirement and investment product
business. Allstate's primary business is the sale of private passenger auto and
homeowners insurance. The Company also sells several other personal property and
casualty insurance products, select commercial property and casualty coverages,
life insurance, voluntary accident and health insurance, annuities and funding
agreements. Allstate primarily distributes its products through exclusive
agencies, financial specialists, independent agencies, call centers and the
internet.
The Allstate Protection segment principally sells private passenger auto and
homeowners insurance, with earned premiums accounting for 80% of Allstate's 2012
consolidated revenues. Allstate was the country's second largest insurer for
both private passenger auto and homeowners insurance as of December 31, 2011.
Allstate Protection, through several companies, is authorized to sell certain
property-liability products in all 50 states, the District of Columbia and
Puerto Rico. The Company is also authorized to sell certain insurance products
in Canada. For 2012, the top geographic locations for premiums earned by the
Allstate Protection segment were New York, California, Texas, Florida and
Pennsylvania. No other jurisdiction accounted for more than 5% of premiums
earned for Allstate Protection.
Allstate has exposure to catastrophes, an inherent risk of the
property-liability insurance business, which have contributed, and will continue
to contribute, to material year-to-year fluctuations in the Company's results of
operations and financial position (see Note 8). The nature and level of
catastrophic loss caused by natural events (high winds, winter storms,
tornadoes, hailstorms, wildfires, tropical storms, hurricanes, earthquakes and
volcanoes) and man-made events (terrorism and industrial accidents) experienced
in any period cannot be predicted and could be material to results of operations
and financial position. The Company considers the greatest areas of potential
catastrophe losses due to hurricanes to generally be major metropolitan centers
in counties along the eastern and gulf coasts of the United States. The Company
considers the greatest areas of potential catastrophe losses due to earthquakes
and fires following earthquakes to be major metropolitan areas near fault lines
in the states of California, Oregon, Washington, South Carolina, Missouri,
Kentucky and Tennessee. The Company also has exposure to asbestos, environmental
and other discontinued lines claims (see Note 14).
The Allstate Financial segment sells life insurance, voluntary accident and
health insurance, and retirement and investment products. The principal
individual products are interest-sensitive, traditional and variable life
insurance; voluntary accident and health insurance; and fixed annuities
including deferred and immediate. The institutional product line, which the
Company most recently offered in 2008, consists primarily of funding agreements
sold to unaffiliated trusts that use them to back medium-term notes issued to
institutional and individual investors. Banking products and services were
previously offered to customers through the Allstate Bank, which ceased
operations in 2011.
Allstate Financial, through several companies, is authorized to sell life
insurance and retirement products in all 50 states, the District of Columbia,
Puerto Rico, the U.S. Virgin Islands and Guam. For 2012, the top geographic
locations for statutory premiums and annuity considerations for the Allstate
Financial segment were California, Texas and Florida. No other jurisdiction
accounted for more than 5% of statutory premiums and annuity considerations for
Allstate Financial. Allstate Financial distributes its products to individuals
through multiple distribution channels, including
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Allstate exclusive agencies and exclusive financial specialists, workplace
enrolling independent agents and independent master brokerage agencies,
specialized structured settlement brokers, and directly through call centers and
the internet.
Allstate has exposure to market risk as a result of its investment
portfolio. Market risk is the risk that the Company will incur realized and
unrealized net capital losses due to adverse changes in interest rates, credit
spreads, equity prices or currency exchange rates. The Company's primary market
risk exposures are to changes in interest rates, credit spreads and equity
prices. Interest rate risk is the risk that the Company will incur a loss due to
adverse changes in interest rates relative to the interest rate characteristics
of its interest bearing assets and liabilities. This risk arises from many of
the Company's primary activities, as it invests substantial funds in
interest-sensitive assets and issues interest-sensitive liabilities. Interest
rate risk includes risks related to changes in U.S. Treasury yields and other
key risk-free reference yields. Credit spread risk is the risk that the Company
will incur a loss due to adverse changes in credit spreads. This risk arises
from many of the Company's primary activities, as the Company invests
substantial funds in spread-sensitive fixed income assets. Equity price risk is
the risk that the Company will incur losses due to adverse changes in the
general levels of the equity markets.
The Company monitors economic and regulatory developments that have the
potential to impact its business. Federal and state laws and regulations affect
the taxation of insurance companies and life insurance and annuity products.
Congress and various state legislatures from time to time consider legislation
that would reduce or eliminate the favorable policyholder tax treatment
currently applicable to life insurance and annuities. Congress and various state
legislatures also consider proposals to reduce the taxation of certain products
or investments that may compete with life insurance or annuities. Legislation
that increases the taxation on insurance products or reduces the taxation on
competing products could lessen the advantage or create a disadvantage for
certain of the Company's products making them less competitive. Such proposals,
if adopted, could have an adverse effect on the Company's financial position or
Allstate Financial's ability to sell such products and could result in the
surrender of some existing contracts and policies. In addition, changes in the
federal estate tax laws could negatively affect the demand for the types of life
insurance used in estate planning.
2. Summary of Significant Accounting Policies
Investments
Fixed income securities include bonds, asset-backed securities ("ABS"),
residential mortgage-backed securities ("RMBS"), commercial mortgage-backed
securities ("CMBS") and redeemable preferred stocks. Fixed income securities,
which may be sold prior to their contractual maturity, are designated as
available for sale and are carried at fair value. The difference between
amortized cost and fair value, net of deferred income taxes, certain life and
annuity deferred policy acquisition costs ("DAC"), certain deferred sales
inducement costs ("DSI") and certain reserves for life-contingent contract
benefits, is reflected as a component of accumulated other comprehensive income.
Cash received from calls, principal payments and make-whole payments is
reflected as a component of proceeds from sales and cash received from
maturities and pay-downs, including prepayments, is reflected as a component of
investment collections within the Consolidated Statements of Cash Flows.
Equity securities primarily include common stocks, exchange traded and
mutual funds, non-redeemable preferred stocks and real estate investment trust
equity investments. Equity securities are designated as available for sale and
are carried at fair value. The difference between cost and fair value, net of
deferred income taxes, is reflected as a component of accumulated other
comprehensive income.
Mortgage loans are carried at outstanding principal balances, net of
unamortized premium or discount and valuation allowances. Valuation allowances
are established for impaired loans when it is probable that contractual
principal and interest will not be collected.
Investments in limited partnership interests, including interests in private
equity/debt funds, real estate funds, hedge funds and tax credit funds, where
the Company's interest is so minor that it exercises virtually no influence over
operating and financial policies are accounted for in accordance with the cost
method of accounting; all other investments in limited partnership interests are
accounted for in accordance with the equity method of accounting ("EMA").
Short-term investments, including money market funds, commercial paper and
other short-term investments, are carried at fair value. Other investments
primarily consist of policy loans, bank loans, agent loans and derivatives.
Policy loans are carried at unpaid principal balances and were $1.14 billion and
$1.15 billion as of December 31, 2012 and 2011, respectively. Bank loans are
primarily senior secured corporate loans and are carried at amortized cost.
Agent loans are
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loans issued to exclusive Allstate agents and are carried at unpaid principal
balances, net of valuation allowances and unamortized deferred fees or costs.
Derivatives are carried at fair value.
Investment income primarily consists of interest, dividends, income from
certain derivative transactions, income from cost method limited partnership
interests, and, in 2012, income from EMA limited partnership interests. Interest
is recognized on an accrual basis using the effective yield method and dividends
are recorded at the ex-dividend date. Interest income for certain ABS, RMBS and
CMBS is determined considering estimated pay-downs, including prepayments,
obtained from third party data sources and internal estimates. Actual prepayment
experience is periodically reviewed and effective yields are recalculated when
differences arise between the prepayments originally anticipated and the actual
prepayments received and currently anticipated. For beneficial interests in
securitized financial assets not of high credit quality, the effective yield is
recalculated on a prospective basis. For other ABS, RMBS and CMBS, the effective
yield is recalculated on a retrospective basis. Accrual of income is suspended
for other-than-temporarily impaired fixed income securities when the timing and
amount of cash flows expected to be received is not reasonably estimable.
Accrual of income is suspended for mortgage loans, bank loans and agent loans
that are in default or when full and timely collection of principal and interest
payments is not probable. Cash receipts on investments on nonaccrual status are
generally recorded as a reduction of carrying value. Income from cost method
limited partnership interests is recognized upon receipt of amounts distributed
by the partnerships. Income from EMA limited partnership interests is recognized
based on the Company's share of the overall earnings of the partnerships, and is
recognized on a delay due to the availability of the related financial
statements. Income recognition on hedge funds is generally on a one month delay
and income recognition on private equity/debt funds, real estate funds and tax
credit funds is generally on a three month delay.
Realized capital gains and losses include gains and losses on investment
sales, write-downs in value due to other-than-temporary declines in fair value,
adjustments to valuation allowances on mortgage loans and agent loans, periodic
changes in fair value and settlements of certain derivatives including hedge
ineffectiveness, and, in 2011 and 2010, income from EMA limited partnership
interests. Realized capital gains and losses on investment sales, including
calls and principal payments, are determined on a specific identification basis.
Derivative and embedded derivative financial instruments
Derivative financial instruments include interest rate swaps, credit default
swaps, futures (interest rate and equity), options (including swaptions),
interest rate caps and floors, warrants and rights, foreign currency swaps,
foreign currency forwards, certain investment risk transfer reinsurance
agreements, and certain bond forward purchase commitments. Derivatives required
to be separated from the host instrument and accounted for as derivative
financial instruments ("subject to bifurcation") are embedded in certain fixed
income securities, equity-indexed life and annuity contracts, reinsured variable
annuity contracts and certain funding agreements.
All derivatives are accounted for on a fair value basis and reported as
other investments, other assets, other liabilities and accrued expenses or
contractholder funds. Embedded derivative instruments subject to bifurcation are
also accounted for on a fair value basis and are reported together with the host
contract. The change in fair value of derivatives embedded in certain fixed
income securities and subject to bifurcation is reported in realized capital
gains and losses. The change in fair value of derivatives embedded in life and
annuity product contracts and subject to bifurcation is reported in life and
annuity contract benefits or interest credited to contractholder funds. Cash
flows from embedded derivatives subject to bifurcation and derivatives receiving
hedge accounting are reported consistently with the host contracts and hedged
risks, respectively, within the Consolidated Statements of Cash Flows. Cash
flows from other derivatives are reported in cash flows from investing
activities within the Consolidated Statements of Cash Flows.
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. The hedged item may be either
all or a specific portion of a recognized asset, liability or an unrecognized
firm commitment attributable to a particular risk for fair value hedges. At the
inception of the hedge, the Company formally documents the hedging relationship
and risk management objective and strategy. The documentation identifies the
hedging instrument, the hedged item, the nature of the risk being hedged and the
methodology used to assess the effectiveness of the hedging instrument in
offsetting the exposure to changes in the hedged item's fair value attributable
to the hedged risk. For a cash flow hedge, this documentation includes the
exposure to changes in the variability in cash flows attributable to the hedged
risk. The Company does not exclude any component of the change in fair value of
the hedging instrument from the effectiveness assessment. At each reporting
date, the Company confirms that the hedging instrument continues to be highly
effective in offsetting the hedged risk. Ineffectiveness in fair value hedges
and cash flow hedges, if any, is reported in realized capital gains and losses.
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Fair value hedges The change in fair value of hedging instruments used in
fair value hedges of investment assets or a portion thereof is reported in net
investment income, together with the change in fair value of the hedged items.
The change in fair value of hedging instruments used in fair value hedges of
contractholder funds liabilities or a portion thereof is reported in interest
credited to contractholder funds, together with the change in fair value of the
hedged items. Accrued periodic settlements on swaps are reported together with
the changes in fair value of the swaps in net investment income or interest
credited to contractholder funds. The amortized cost for fixed income
securities, the carrying value for mortgage loans or the carrying value of the
hedged liability is adjusted for the change in fair value of the hedged risk.
Cash flow hedges For hedging instruments used in cash flow hedges, the
changes in fair value of the derivatives representing the effective portion of
the hedge are reported in accumulated other comprehensive income. Amounts are
reclassified to net investment income, realized capital gains and losses or
interest expense as the hedged or forecasted transaction affects income. Accrued
periodic settlements on derivatives used in cash flow hedges are reported in net
investment income. The amount reported in accumulated other comprehensive income
for a hedged transaction is limited to the lesser of the cumulative gain or loss
on the derivative less the amount reclassified to income, or the cumulative gain
or loss on the derivative needed to offset the cumulative change in the expected
future cash flows on the hedged transaction from inception of the hedge less the
derivative gain or loss previously reclassified from accumulated other
comprehensive income to income. If the Company expects at any time that the loss
reported in accumulated other comprehensive income would lead to a net loss on
the combination of the hedging instrument and the hedged transaction which may
not be recoverable, a loss is recognized immediately in realized capital gains
and losses. If an impairment loss is recognized on an asset or an additional
obligation is incurred on a liability involved in a hedge transaction, any
offsetting gain in accumulated other comprehensive income is reclassified and
reported together with the impairment loss or recognition of the obligation.
Termination of hedge accounting If, subsequent to entering into a hedge
transaction, the derivative becomes ineffective (including if the hedged item is
sold or otherwise extinguished, the occurrence of a hedged forecasted
transaction is no longer probable or the hedged asset becomes
other-than-temporarily impaired), the Company may terminate the derivative
position. The Company may also terminate derivative instruments or redesignate
them as non-hedge as a result of other events or circumstances. If the
derivative instrument is not terminated when a fair value hedge is no longer
effective, the future gains and losses recognized on the derivative are reported
in realized capital gains and losses. When a fair value hedge is no longer
effective, is redesignated as non-hedge or when the derivative has been
terminated, the fair value gain or loss on the hedged asset, liability or
portion thereof which has already been recognized in income while the hedge was
in place and used to adjust the amortized cost for fixed income securities, the
carrying value for mortgage loans or the carrying value of the hedged liability,
is amortized over the remaining life of the hedged asset, liability or portion
thereof, and reflected in net investment income or interest credited to
contractholder funds beginning in the period that hedge accounting is no longer
applied. If the hedged item in a fair value hedge is an asset that has become
other-than-temporarily impaired, the adjustment made to the amortized cost for
fixed income securities or the carrying value for mortgage loans is subject to
the accounting policies applied to other-than-temporarily impaired assets.
When a derivative instrument used in a cash flow hedge of an existing asset
or liability is no longer effective or is terminated, the gain or loss
recognized on the derivative is reclassified from accumulated other
comprehensive income to income as the hedged risk impacts income. If the
derivative instrument is not terminated when a cash flow hedge is no longer
effective, the future gains and losses recognized on the derivative are reported
in realized capital gains and losses. When a derivative instrument used in a
cash flow hedge of a forecasted transaction is terminated because it is probable
the forecasted transaction will not occur, the gain or loss recognized on the
derivative is immediately reclassified from accumulated other comprehensive
income to realized capital gains and losses in the period that hedge accounting
is no longer applied.
Non-hedge derivative financial instruments For derivatives for which hedge
accounting is not applied, the income statement effects, including fair value
gains and losses and accrued periodic settlements, are reported either in
realized capital gains and losses or in a single line item together with the
results of the associated asset or liability for which risks are being managed.
Securities loaned
The Company's business activities include securities lending transactions,
which are used primarily to generate net investment income. The proceeds
received in conjunction with securities lending transactions are reinvested in
short-term investments and fixed income securities. These transactions are
short-term in nature, usually 30 days or less.
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The Company receives cash collateral for securities loaned in an amount
generally equal to 102% and 105% of the fair value of domestic and foreign
securities, respectively, and records the related obligations to return the
collateral in other liabilities and accrued expenses. The carrying value of
these obligations approximates fair value because of their relatively short-term
nature. The Company monitors the market value of securities loaned on a daily
basis and obtains additional collateral as necessary under the terms of the
agreements to mitigate counterparty credit risk. The Company maintains the right
and ability to repossess the securities loaned on short notice.
Recognition of premium revenues and contract charges, and related benefits and
interest credited
Property-liability premiums are deferred and earned on a pro-rata basis over
the terms of the policies, typically periods of six or twelve months. The
portion of premiums written applicable to the unexpired terms of the policies is
recorded as unearned premiums. Premium installment receivables, net, represent
premiums written and not yet collected, net of an allowance for uncollectible
premiums. The Company regularly evaluates premium installment receivables and
adjusts its valuation allowance as appropriate. The valuation allowance for
uncollectible premium installment receivables was $70 million as of both
December 31, 2012 and 2011.
Traditional life insurance products consist principally of products with
fixed and guaranteed premiums and benefits, primarily term and whole life
insurance products. Voluntary accident and health insurance products are
expected to remain in force for an extended period. Premiums from these products
are recognized as revenue when due from policyholders. Benefits are reflected in
life and annuity contract benefits and recognized in relation to premiums, so
that profits are recognized over the life of the policy.
Immediate annuities with life contingencies, including certain structured
settlement annuities, provide insurance protection over a period that extends
beyond the period during which premiums are collected. Premiums from these
products are recognized as revenue when received at the inception of the
contract. Benefits and expenses are recognized in relation to premiums. Profits
from these policies come from investment income, which is recognized over the
life of the contract.
Interest-sensitive life contracts, such as universal life and single premium
life, are insurance contracts whose terms are not fixed and guaranteed. The
terms that may be changed include premiums paid by the contractholder, interest
credited to the contractholder account balance and contract charges assessed
against the contractholder account balance. Premiums from these contracts are
reported as contractholder fund deposits. Contract charges consist of fees
assessed against the contractholder account balance for the cost of insurance
(mortality risk), contract administration and surrender of the contract prior to
contractually specified dates. These contract charges are recognized as revenue
when assessed against the contractholder account balance. Life and annuity
contract benefits include life-contingent benefit payments in excess of the
contractholder account balance.
Contracts that do not subject the Company to significant risk arising from
mortality or morbidity are referred to as investment contracts. Fixed annuities,
including market value adjusted annuities, equity-indexed annuities and
immediate annuities without life contingencies, and funding agreements
(primarily backing medium-term notes) are considered investment contracts.
Consideration received for such contracts is reported as contractholder fund
deposits. Contract charges for investment contracts consist of fees assessed
against the contractholder account balance for maintenance, administration and
surrender of the contract prior to contractually specified dates, and are
recognized when assessed against the contractholder account balance.
Interest credited to contractholder funds represents interest accrued or
paid on interest-sensitive life and investment contracts. Crediting rates for
certain fixed annuities and interest-sensitive life contracts are adjusted
periodically by the Company to reflect current market conditions subject to
contractually guaranteed minimum rates. Crediting rates for indexed life and
annuities and indexed funding agreements are generally based on a specified
interest rate index or an equity index, such as the Standard & Poor's ("S&P")
500 Index. Interest credited also includes amortization of DSI expenses. DSI is
amortized into interest credited using the same method used to amortize DAC.
Contract charges for variable life and variable annuity products consist of
fees assessed against the contractholder account balances for contract
maintenance, administration, mortality, expense and surrender of the contract
prior to contractually specified dates. Contract benefits incurred for variable
annuity products include guaranteed minimum death, income, withdrawal and
accumulation benefits. Substantially all of the Company's variable annuity
business is ceded through reinsurance agreements and the contract charges and
contract benefits related thereto are reported net of reinsurance ceded.
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Deferred policy acquisition and sales inducement costs
Costs that are related directly to the successful acquisition of new or
renewal property-liability insurance, life insurance and investment contracts
are deferred and recorded as DAC. These costs are principally agents' and
brokers' remuneration, premium taxes and certain underwriting expenses. DSI
costs, which are deferred and recorded as other assets, relate to sales
inducements offered on sales to new customers, principally on annuity and
interest-sensitive life contracts. These sales inducements are primarily in the
form of additional credits to the customer's account balance or enhancements to
interest credited for a specified period which are in excess of the rates
currently being credited to similar contracts without sales inducements. All
other acquisition costs are expensed as incurred and included in operating costs
and expenses. DAC associated with property-liability insurance is amortized into
income as premiums are earned, typically over periods of six or twelve months,
and is included in amortization of deferred policy acquisition costs.
Amortization of DAC associated with life insurance and investment contracts is
included in amortization of deferred policy acquisition costs and is described
in more detail below. DSI is amortized into income using the same methodology
and assumptions as DAC and is included in interest credited to contractholder
funds. DAC and DSI are periodically reviewed for recoverability and adjusted if
necessary. Future investment income is considered in determining the
recoverability of DAC.
For traditional life insurance, DAC is amortized over the premium paying
period of the related policies in proportion to the estimated revenues on such
business. Assumptions used in the amortization of DAC and reserve calculations
are established at the time the policy is issued and are generally not revised
during the life of the policy. Any deviations from projected business in force
resulting from actual policy terminations differing from expected levels and any
estimated premium deficiencies may result in a change to the rate of
amortization in the period such events occur. Generally, the amortization
periods for these policies approximates the estimated lives of the policies.
For interest-sensitive life, fixed annuities and other investment contracts,
DAC and DSI are amortized in proportion to the incidence of the total present
value of gross profits, which includes both actual historical gross profits
("AGP") and estimated future gross profits ("EGP") expected to be earned over
the estimated lives of the contracts. The amortization is net of interest on the
prior period DAC balance using rates established at the inception of the
contracts. Actual amortization periods generally range from 15-30 years;
however, incorporating estimates of the rate of customer surrenders, partial
withdrawals and deaths generally results in the majority of the DAC being
amortized during the surrender charge period, which is typically 10-20 years for
interest-sensitive life and 5-10 years for fixed annuities. The cumulative DAC
and DSI amortization is reestimated and adjusted by a cumulative charge or
credit to income when there is a difference between the incidence of actual
versus expected gross profits in a reporting period or when there is a change in
total EGP. When DAC or DSI amortization or a component of gross profits for a
quarterly period is potentially negative (which would result in an increase of
the DAC or DSI balance) as a result of negative AGP, the specific facts and
circumstances surrounding the potential negative amortization are considered to
determine whether it is appropriate for recognition in the consolidated
financial statements. Negative amortization is only recorded when the increased
DAC or DSI balance is determined to be recoverable based on facts and
circumstances. Recapitalization of DAC and DSI is limited to the originally
deferred costs plus interest.
AGP and EGP primarily consist of the following components: contract charges
for the cost of insurance less mortality costs and other benefits; investment
income and realized capital gains and losses less interest credited; and
surrender and other contract charges less maintenance expenses. The principal
assumptions for determining the amount of EGP are persistency, mortality,
expenses, investment returns, including capital gains and losses on assets
supporting contract liabilities, interest crediting rates to contractholders,
and the effects of any hedges. For products whose supporting investments are
exposed to capital losses in excess of the Company's expectations which may
cause periodic AGP to become temporarily negative, EGP and AGP utilized in DAC
and DSI amortization may be modified to exclude the excess capital losses.
The Company performs quarterly reviews of DAC and DSI recoverability for
interest-sensitive life, fixed annuities and other investment contracts in the
aggregate using current assumptions. If a change in the amount of EGP is
significant, it could result in the unamortized DAC or DSI not being
recoverable, resulting in a charge which is included as a component of
amortization of deferred policy acquisition costs or interest credited to
contractholder funds, respectively.
The DAC and DSI balances presented include adjustments to reflect the amount
by which the amortization of DAC and DSI would increase or decrease if the
unrealized capital gains or losses in the respective product investment
portfolios were actually realized. The adjustments are recorded net of tax in
accumulated other comprehensive income. DAC, DSI and deferred income taxes
determined on unrealized capital gains and losses and reported in accumulated
other comprehensive income recognize the impact on shareholders' equity
consistently with the amounts that would be recognized in the income statement
on realized capital gains and losses.
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Customers of the Company may exchange one insurance policy or investment
contract for another offered by the Company, or make modifications to an
existing investment, life or property-liability contract issued by the Company.
These transactions are identified as internal replacements for accounting
purposes. Internal replacement transactions determined to result in replacement
contracts that are substantially unchanged from the replaced contracts are
accounted for as continuations of the replaced contracts. Unamortized DAC and
DSI related to the replaced contracts continue to be deferred and amortized in
connection with the replacement contracts. For interest-sensitive life and
investment contracts, the EGP of the replacement contracts are treated as a
revision to the EGP of the replaced contracts in the determination of
amortization of DAC and DSI. For traditional life and property-liability
insurance policies, any changes to unamortized DAC that result from replacement
contracts are treated as prospective revisions. Any costs associated with the
issuance of replacement contracts are characterized as maintenance costs and
expensed as incurred. Internal replacement transactions determined to result in
a substantial change to the replaced contracts are accounted for as an
extinguishment of the replaced contracts, and any unamortized DAC and DSI
related to the replaced contracts are eliminated with a corresponding charge to
amortization of deferred policy acquisition costs or interest credited to
contractholder funds, respectively.
The costs assigned to the right to receive future cash flows from certain
business purchased from other insurers are also classified as DAC in the
Consolidated Statements of Financial Position. The costs capitalized represent
the present value of future profits expected to be earned over the lives of the
contracts acquired. These costs are amortized as profits emerge over the lives
of the acquired business and are periodically evaluated for recoverability. The
present value of future profits was $95 million and $136 million as of
December 31, 2012 and 2011, respectively. Amortization expense of the present
value of future profits was $41 million, $39 million and $23 million in 2012,
2011 and 2010, respectively.
Reinsurance
In the normal course of business, the Company seeks to limit aggregate and
single exposure to losses on large risks by purchasing reinsurance. The Company
has also used reinsurance to effect the acquisition or disposition of certain
blocks of business. The amounts reported as reinsurance recoverables include
amounts billed to reinsurers on losses paid as well as estimates of amounts
expected to be recovered from reinsurers on insurance liabilities and
contractholder funds that have not yet been paid. Reinsurance recoverables on
unpaid losses are estimated based upon assumptions consistent with those used in
establishing the liabilities related to the underlying reinsured contracts.
Insurance liabilities are reported gross of reinsurance recoverables.
Reinsurance premiums are generally reflected in income in a manner consistent
with the recognition of premiums on the reinsured contracts. For catastrophe
coverage, the cost of reinsurance premiums is recognized ratably over the
contract period to the extent coverage remains available. Reinsurance does not
extinguish the Company's primary liability under the policies written.
Therefore, the Company regularly evaluates the financial condition of its
reinsurers, including their activities with respect to claim settlement
practices and commutations, and establishes allowances for uncollectible
reinsurance as appropriate.
Goodwill
Goodwill represents the excess of amounts paid for acquiring businesses over
the fair value of the net assets acquired. The goodwill balances were
$822 million and $418 million as of December 31, 2012 and $824 million and
$418 million as of December 31, 2011 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. Goodwill is
not amortized but is tested for impairment at least annually. The Company
performs its annual goodwill impairment testing during the fourth quarter of
each year based upon data as of the close of the third quarter. The Company also
reviews goodwill for impairment whenever events or changes in circumstances,
such as deteriorating or adverse market conditions, indicate that it is more
likely than not that the carrying amount of goodwill may exceed its implied fair
value.
To estimate the fair value of its reporting units, the Company may utilize a
combination of widely accepted valuation techniques including a stock price and
market capitalization analysis, discounted cash flow calculations and peer
company price to earnings multiples analysis. The stock price and market
capitalization 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. The discounted cash flow analysis utilizes long term
assumptions for revenue growth, capital growth, earnings projections including
those used in the Company's strategic plan, and an appropriate discount rate.
The peer company price to earnings multiples analysis takes into consideration
the price to earnings multiples of peer companies for each reporting unit and
estimated income from the Company's strategic plan.
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Goodwill impairment evaluations indicated no impairment as of December 31,
2012 or 2011.
Property and equipment
Property and equipment is carried at cost less accumulated depreciation.
Included in property and equipment are capitalized costs related to computer
software licenses and software developed for internal use. These costs generally
consist of certain external payroll and payroll related costs. Certain
facilities and equipment held under capital leases are also classified as
property and equipment with the related lease obligations recorded as
liabilities. Property and equipment depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, generally 3
to 10 years for equipment and 40 years for real property. Depreciation expense
is reported in operating costs and expenses. Accumulated depreciation on
property and equipment was $2.41 billion and $2.29 billion as of December 31,
2012 and 2011, respectively. Depreciation expense on property and equipment was
$214 million, $222 million and $239 million in 2012, 2011 and 2010,
respectively. The Company reviews its property and equipment for impairment at
least annually and whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.
Income taxes
The income tax provision is calculated under the liability method. Deferred
tax assets and liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities at the enacted tax
rates. The principal assets and liabilities giving rise to such differences are
DAC, unrealized capital gains and losses, differences in tax bases of invested
assets, insurance reserves and unearned premiums. A deferred tax asset valuation
allowance is established when there is uncertainty that such assets will be
realized.
Reserves for property-liability insurance claims and claims expense and
life-contingent contract benefits
The reserve for property-liability insurance claims and claims expense is
the estimate of amounts necessary to settle all reported and unreported claims
for the ultimate cost of insured property-liability losses, based upon the facts
of each case and the Company's experience with similar cases. Estimated amounts
of salvage and subrogation are deducted from the reserve for claims and claims
expense. The establishment of appropriate reserves, including reserves for
catastrophe losses, is an inherently uncertain and complex process. Reserve
estimates are regularly reviewed and updated, using the most current information
available. Any resulting reestimates are reflected in current results of
operations.
The reserve for life-contingent contract benefits payable under insurance
policies, including traditional life insurance, life-contingent immediate
annuities and voluntary accident and health insurance products, is computed on
the basis of long-term actuarial assumptions of future investment yields,
mortality, morbidity, policy terminations and expenses. These assumptions, which
for traditional life insurance are applied using the net level premium method,
include provisions for adverse deviation and generally vary by characteristics
such as type of coverage, year of issue and policy duration. To the extent that
unrealized gains on fixed income securities would result in a premium deficiency
if those gains were realized, the related increase in reserves for certain
immediate annuities with life contingencies is recorded net of tax as a
reduction of unrealized net capital gains included in accumulated other
comprehensive income.
Contractholder funds
Contractholder funds represent interest-bearing liabilities arising from the
sale of products such as interest-sensitive life insurance, fixed annuities,
funding agreements and, prior to December 31, 2011, bank deposits.
Contractholder funds primarily comprise cumulative deposits received and
interest credited to the contractholder less cumulative contract benefits,
surrenders, withdrawals, maturities and contract charges for mortality or
administrative expenses. Contractholder funds also include reserves for
secondary guarantees on interest-sensitive life insurance and certain fixed
annuity contracts and reserves for certain guarantees on reinsured variable
annuity contracts.
Separate accounts
Separate accounts assets are carried at fair value. The assets of the
separate accounts are legally segregated and available only to settle separate
account contract obligations. Separate accounts liabilities represent the
contractholders' claims to the related assets and are carried at an amount equal
to the separate accounts assets. Investment income and realized capital gains
and losses of the separate accounts accrue directly to the contractholders and
therefore are not included in the Company's Consolidated Statements of
Operations. Deposits to and surrenders and withdrawals from the separate
accounts are reflected in separate accounts liabilities and are not included in
consolidated cash flows.
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Absent any contract provision wherein the Company provides a guarantee,
variable annuity and variable life insurance contractholders bear the investment
risk that the separate accounts' funds may not meet their stated investment
objectives. Substantially all of the Company's variable annuity business was
reinsured beginning in 2006.
Deferred Employee Stock Ownership Plan ("ESOP") expense
Deferred ESOP expense represents the remaining unrecognized cost of shares
acquired by the Allstate ESOP to pre-fund a portion of the Company's
contribution to the Allstate 401(k) Savings Plan.
Equity incentive plans
The Company currently has equity incentive plans under which the Company
grants nonqualified stock options, restricted stock units and performance stock
awards ("equity awards") to certain employees and directors of the Company. The
Company measures the fair value of equity awards at the award date and
recognizes the expense over the shorter of the period in which the requisite
service is rendered or retirement eligibility is attained. The expense for
performance stock awards is adjusted each period to reflect the performance
factor most likely to be achieved at the end of the performance period. The
Company uses a binomial lattice model to determine the fair value of employee
stock options.
Off-balance sheet financial instruments
Commitments to invest, commitments to purchase private placement securities,
commitments to extend loans, financial guarantees and credit guarantees have
off-balance sheet risk because their contractual amounts are not recorded in the
Company's Consolidated Statements of Financial Position (see Note 7 and
Note 14).
Consolidation of variable interest entities ("VIEs")
The Company consolidates VIEs when it is the primary beneficiary. A primary
beneficiary is the entity with both the power to direct the activities of the
VIE that most significantly impact the economic performance of the VIE and the
obligation to absorb losses, or the right to receive benefits, that could
potentially be significant to the VIE (see Note 12).
Foreign currency translation
The local currency of the Company's foreign subsidiaries is deemed to be the
functional currency of the country in which these subsidiaries operate. The
financial statements of the Company's foreign subsidiaries are translated into
U.S. dollars at the exchange rate in effect at the end of a reporting period for
assets and liabilities and at average exchange rates during the period for
results of operations. The unrealized gains and losses from the translation of
the net assets are recorded as unrealized foreign currency translation
adjustments and included in accumulated other comprehensive income. Changes in
unrealized foreign currency translation adjustments are included in other
comprehensive income. Gains and losses from foreign currency transactions are
reported in operating costs and expenses and have not been material.
Earnings per share
Basic earnings per share is computed using the weighted average number of
common shares outstanding, including unvested participating restricted stock
units. Diluted earnings per share is computed using the weighted average number
of common and dilutive potential common shares outstanding. For the Company,
dilutive potential common shares consist of outstanding stock options and
unvested non-participating restricted stock units and contingently issuable
performance stock awards.
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The computation of basic and diluted earnings per share for the years ended
December 31 is presented in the following table.
($ in millions, except per share data) 2012 2011 2010
Numerator:
Net income $ 2,306 $ 787 $ 911
Denominator:
Weighted average common shares outstanding 489.4 520.7 540.3
Effect of dilutive potential common shares:
Stock options 2.4
1.8 2.0
Restricted stock units and performance stock awards
(non-participating)
1.2
0.6 0.2
Weighted average common and dilutive potential common
shares outstanding 493.0 523.1 542.5
Earnings per share - Basic $ 4.71 $ 1.51 $ 1.69
Earnings per share - Diluted $ 4.68 $ 1.50 $ 1.68
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 20.4 million, 27.2 million and
26.7 million Allstate common shares, with exercise prices ranging from $26.56 to
$62.84, $22.71 to $62.84 and $27.36 to $64.53, were outstanding in 2012, 2011
and 2010, respectively, but were not included in the computation of diluted
earnings per share in those years.
Adopted accounting standards
Criteria for Determining Effective Control for Repurchase Agreements
In April 2011, the FASB issued guidance modifying the assessment criteria of
effective control for repurchase agreements. The new guidance removes the
criteria requiring an entity to have the ability to repurchase or redeem
financial assets on substantially the agreed terms and the collateral
maintenance guidance related to that criteria. The guidance is to be applied
prospectively to transactions or modifications of existing transactions that
occur during reporting periods beginning on or after December 15, 2011. The
adoption of this guidance as of January 1, 2012 had no impact on the Company's
results of operations or financial position.
Amendments to Fair Value Measurement and Disclosure Requirements
In May 2011, the FASB issued guidance that clarifies the application of
existing fair value measurement and disclosure requirements and amends certain
fair value measurement principles, requirements and disclosures. Changes were
made to improve consistency in global application. The guidance is to be applied
prospectively for reporting periods beginning after December 15, 2011. The
adoption of this guidance as of January 1, 2012 had no impact on the Company's
results of operations or financial position.
Presentation of Comprehensive Income
In June and December 2011, the FASB issued guidance amending the
presentation of comprehensive income and its components. Under the new guidance,
a reporting entity has the option to present comprehensive income in a single
continuous statement or in two separate but consecutive statements. The Company
adopted the new guidance in the first quarter of 2012. The new guidance affects
presentation only and therefore had no impact on the Company's results of
operations or financial position.
Intangibles - Goodwill and Other
In September 2011, the FASB issued guidance providing the option to first
assess qualitative factors, such as macroeconomic conditions and industry and
market considerations, to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount. If impairment
is indicated by the qualitative assessment, then it is necessary to perform the
two-step goodwill impairment test. If the option is not elected, the guidance
requiring the two-step goodwill impairment test is unchanged. The adoption of
this guidance as of January 1, 2012 had no impact on the Company's results of
operations or financial position.
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Pending accounting standards
Disclosures about Offsetting Assets and Liabilities
In December 2011 and January 2013, the FASB issued guidance requiring
expanded disclosures, including both gross and net information, for derivatives,
repurchase agreements and securities lending transactions that are either offset
in the reporting entity's financial statements or those that are subject to an
enforceable master netting arrangement or similar agreement. The guidance is
effective for reporting periods beginning on or after January 1, 2013 and is to
be applied retrospectively. The new guidance affects disclosures only and will
have no impact on the Company's results of operations or financial position.
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
In February 2013, the FASB issued guidance requiring expanded disclosures
about the amounts reclassified out of accumulated other comprehensive income by
component. The guidance requires the presentation of significant amounts
reclassified out of accumulated other comprehensive income by the respective
line items of net income but only if the amount reclassified is required under
GAAP to be reclassified to net income in its entirety in the same reporting
period. For other amounts that are not required under GAAP to be reclassified in
their entirety to net income, cross-reference to other disclosures that provide
additional detail about those amounts is required. The guidance is to be applied
prospectively for reporting periods beginning after December 15, 2012. The new
guidance affects disclosures only and will have no impact on the Company's
results of operations or financial position.
3. Acquisition
On October 7, 2011, The Allstate Corporation acquired all of the shares of
White Mountains, Inc. and Answer Financial Inc. ("Answer Financial") from White
Mountains Holdings (Luxembourg) S.à r.l. for $1.01 billion in cash. White
Mountains, Inc. primarily comprises the Esurance insurance business
("Esurance"). Esurance sells private passenger auto and renters insurance direct
to consumers online, through call centers and through select agents, including
Answer Financial. Answer Financial is an independent personal lines insurance
agency that offers comparison quotes for auto and homeowners insurance from
approximately 20 insurance companies through its website and over the phone.
Esurance expands the Company's ability to serve the self-directed,
brand-sensitive market segment. Answer Financial strengthens the Company's
offering to self-directed consumers who want a choice between insurance
carriers.
In connection with the acquisition, as of October 7, 2011 the Company
recorded present value of future profits of $42 million, goodwill of
$368 million, other intangible assets of $426 million, reserve for
property-liability claims and claims expense of $487 million, and unearned
premiums of $229 million. In 2012, goodwill was reduced by $2 million related to
reestimates of the opening balance sheet reserve for property-liability claims
and claims expense.
4. Supplemental Cash Flow Information
Non-cash modifications of certain mortgage loans, fixed income securities,
limited partnership interests and other investments, as well as mergers
completed with equity securities, totaled $323 million, $601 million and
$664 million in 2012, 2011 and 2010, respectively. Non-cash financing activities
include $39 million, $18 million and $23 million related to the issuance of
Allstate shares for vested restricted stock units in 2012, 2011 and 2010,
respectively.
Liabilities for collateral received in conjunction with the Company's
securities lending program were $784 million, $419 million and $461 million as
of December 31, 2012, 2011 and 2010, respectively, and are reported in other
liabilities and accrued expenses. Obligations to return cash collateral for
over-the-counter ("OTC") derivatives were $24 million, $43 million and
$23 million as of December 31, 2012, 2011 and 2010, respectively, and are
reported in other liabilities and accrued expenses or other investments. The
accompanying cash flows are included in cash flows from operating
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activities in the Consolidated Statements of Cash Flows along with the
activities resulting from management of the proceeds, which for the years ended
December 31 are as follows:
($ in millions) 2012 2011 2010
Net change in proceeds managed
Net change in short-term investments $ (341 ) $ 21 $ 171
Operating cash flow (used) provided (341 ) 21 171
Net change in cash (5 ) 1 3
Net change in proceeds managed $ (346 ) $ 22 $ 174
Net change in liabilities
Liabilities for collateral, beginning of year $ (462 ) $ (484 ) $ (658 )
Liabilities for collateral, end of year (808 ) (462 ) (484 )
Operating cash flow provided (used) $ 346 $ (22 ) $ (174 )
5. Investments
Fair values
The amortized cost, gross unrealized gains and losses and fair value for
fixed income securities are as follows:
($ in millions)
Amortized Gross unrealized Fair
cost Gains Losses value
December 31, 2012
U.S. government and agencies $ 4,387 $ 326 $ - $ 4,713
Municipal 12,139 1,038 (108 ) 13,069
Corporate 44,943 3,721 (127 ) 48,537
Foreign government 2,290 228 (1 ) 2,517
ABS 3,623 108 (107 ) 3,624
RMBS 3,000 142 (110 ) 3,032
CMBS 1,510 65 (77 ) 1,498
Redeemable preferred stock 23 4 - 27
Total fixed income securities $ 71,915$ 5,632 $ (530 ) $ 77,017
December 31, 2011
U.S. government and agencies $ 5,966 $ 349 $ - $ 6,315
Municipal 13,634 863 (256 ) 14,241
Corporate 41,217 2,743 (379 ) 43,581
Foreign government 1,866 216 (1 ) 2,081
ABS 4,180 73 (287 ) 3,966
RMBS 4,532 110 (521 ) 4,121
CMBS 1,962 48 (226 ) 1,784
Redeemable preferred stock 22 2 - 24
Total fixed income securities $ 73,379$ 4,404 $ (1,670 ) $ 76,113
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Scheduled maturities
The scheduled maturities for fixed income securities are as follows as of
December 31, 2012:
($ in millions) Amortized Fair
cost value
Due in one year or less $ 3,825 $ 3,872
Due after one year through five years 23,168 24,324
Due after five years through ten years 23,808 25,973
Due after ten years 12,981 14,694
63,782 68,863
ABS, RMBS and CMBS 8,133 8,154
Total $ 71,915 $ 77,017
Actual maturities may differ from those scheduled as a result of prepayments
by the issuers. ABS, RMBS and CMBS are shown separately because of the potential
for prepayment of principal prior to contractual maturity dates.
Net investment income
Net investment income for the years ended December 31 is as follows:
($ in millions) 2012 2011 2010
Fixed income securities $ 3,234 $ 3,484 $ 3,737
Equity securities 127 122 90
Mortgage loans 374 359 385
Limited partnership interests (1) 348 88 40
Short-term investments 6 6 8
Other 132 95 19
Investment income, before expense 4,221 4,154 4,279
Investment expense (211 ) (183 ) (177 )
Net investment income $ 4,010 $ 3,971 $ 4,102
--------------------------------------------------------------------------------
º (1)
º Income from EMA limited partnerships is reported in net investment income
in 2012 and realized capital gains and losses in 2011 and 2010.
Realized capital gains and losses
Realized capital gains and losses by asset type for the years ended
December 31 are as follows:
($ in millions) 2012 2011 2010
Fixed income securities $ 107 $ 712 $ (366 )
Equity securities 183 63 153
Mortgage loans 8 (27 ) (71 )
Limited partnership interests (1) 13 159 57
Derivatives 23 (397 ) (600 )
Other (7 ) (7 ) -
Realized capital gains and losses $ 327 $ 503 $ (827 )
--------------------------------------------------------------------------------
º (1)
º Income from EMA limited partnerships is reported in net investment income
in 2012 and realized capital gains and losses in 2011 and 2010.
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Realized capital gains and losses by transaction type for the years ended
December 31 are as follows:
($ in millions) 2012 2011 2010
Impairment write-downs $ (185 ) $ (496 ) $ (797 )
Change in intent write-downs (48 ) (100 ) (204 )
Net other-than-temporary impairment losses recognized in
earnings
(233 ) (596 ) (1,001 )
Sales 536 1,336 686
Valuation of derivative instruments (11 ) (291 ) (427 )
Settlements of derivative instruments 35 (105 ) (174 )
EMA limited partnership income -
159 89
Realized capital gains and losses $ 327 $
503 $ (827 )
Gross gains of $564 million, $1.27 billion and $819 million and gross losses
of $322 million, $240 million and $435 million were realized on sales of fixed
income securities during 2012, 2011 and 2010, respectively.
Other-than-temporary impairment losses by asset type for the years ended
December 31 are as follows:
($ in millions) 2012 2011 2010
Included Included Included
Gross in OCI Net Gross in OCI Net Gross in OCI Net
Fixed income
securities:
Municipal $ (42 ) $ 9 $ (33 ) $ (59 ) $ (3 ) $ (62 ) $ (203 ) $ 24 $ (179 )
Corporate (21 ) (2 ) (23 ) (30 ) 6 (24 ) (68 ) 2 (66 )
Foreign government - - - (1 ) - (1 ) - - -
ABS - - - (9 ) 2 (7 ) (14 ) (16 ) (30 )
RMBS (65 ) (4 ) (69 ) (196 ) (39 ) (235 ) (381 ) (47 ) (428 )
CMBS (22 ) 3 (19 ) (66 ) 1 (65 ) (94 ) (27 ) (121 )
Total fixed income
securities (150 ) 6 (144 ) (361 ) (33 ) (394 ) (760 ) (64 ) (824 )
Equity securities (75 ) - (75 ) (139 ) - (139 ) (57 ) - (57 )
Mortgage loans 5 - 5 (37 ) - (37 ) (71 ) - (71 )
Limited partnership
interests (8 ) - (8 ) (6 ) - (6 ) (46 ) - (46 )
Other (11 ) - (11 ) (20 ) - (20 ) (3 ) - (3 )
Other-than-temporary
impairment losses $ (239 ) $ 6 $ (233 ) $ (563 ) $ (33 ) $ (596 ) $ (937 ) $ (64 ) $ (1,001 )
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 $219 million and $172 million as of
December 31, 2012 and 2011, respectively, of net unrealized gains related to
changes in valuation of the fixed income securities subsequent to the impairment
measurement date.
December 31, December 31,
($ in millions) 2012 2011
Municipal $ (20 ) $ (11 )
Corporate (1 ) (35 )
ABS (14 ) (21 )
RMBS (182 ) (353 )
CMBS (19 ) (19 )
Total $ (236 ) $ (439 )
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Rollforwards of the cumulative credit losses recognized in earnings for
fixed income securities held as of December 31 are as follows:
($ in millions) 2012 2011
2010
Beginning balance $ (944 ) $ (1,046 ) $ (1,187 )
Cumulative effect of change in accounting principle - - 81
Additional credit loss for securities previously
other-than-temporarily impaired (58 )
(152 ) (314 )
Additional credit loss for securities not previously
other-than-temporarily impaired
(50 )
(150 ) (312 )
Reduction in credit loss for securities disposed or
collected
427
379 638
Reduction in credit loss for securities the Company has
made the decision to sell or more likely than not will be
required to sell
7 15 43
Change in credit loss due to accretion of increase in
cash flows 1 10 5
Ending balance $ (617 ) $ (944 ) $ (1,046 )
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.
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Unrealized net capital gains and losses
Unrealized net capital gains and losses included in accumulated other
comprehensive income are as follows:
Gross unrealized
($ in millions) Fair Unrealized net
December 31, 2012 value Gains Losses gains (losses)
Fixed income securities $ 77,017 $ 5,632 $ (530 ) $ 5,102
Equity securities 4,037 494 (34 ) 460
Short-term investments 2,336 - - -
Derivative instruments (1) (17 ) 2 (24 ) (22 )
EMA limited partnerships (2) 7
Unrealized net capital gains and
losses, pre-tax 5,547
Amounts recognized for:
Insurance reserves (3) (771 )
DAC and DSI (4) (412 )
Amounts recognized (1,183 )
Deferred income taxes (1,530 )
Unrealized net capital gains and
losses, after-tax $ 2,834
--------------------------------------------------------------------------------
º (1)
º Included in the fair value of derivative instruments are $2 million
classified as assets and $19 million classified as liabilities.
º (2)
º Unrealized net capital gains and losses for limited partnership interests
represent the Company's share of EMA limited partnerships' other
comprehensive income. Fair value and gross gains and losses are not
applicable.
º (3)
º 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.
º (4)
º 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, 2011 value Gains Losses gains (losses)
Fixed income securities $ 76,113 $ 4,404 $ (1,670 ) $ 2,734
Equity securities 4,363 369 (209 ) 160
Short-term investments 1,291 - - -
Derivative instruments (1) (12 ) 3 (20 ) (17 )
EMA limited partnerships 2
Unrealized net capital gains and
losses, pre-tax 2,879
Amounts recognized for:
Insurance reserves (594 )
DAC and DSI (124 )
Amounts recognized (718 )
Deferred income taxes (761 )
Unrealized net capital gains and
losses, after-tax $ 1,400
--------------------------------------------------------------------------------
º (1)
º Included in the fair value of derivative instruments are $(5) million
classified as assets and $7 million classified as liabilities.
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Change in unrealized net capital gains and losses
The change in unrealized net capital gains and losses for the years ended
December 31 is as follows:
($ in millions) 2012 2011
2010
Fixed income securities $ 2,368 $ 1,908
$ 3,303
Equity securities 300 (423
) 404
Derivative instruments (5 ) 5
1
EMA limited partnerships 5 2
-
Total 2,668 1,492
3,708
Amounts recognized for:
Insurance reserves (177 ) (585 ) (9 )
DAC and DSI (288 ) (209 ) (731 )
Amounts recognized (465 ) (794 ) (740 )
Deferred income taxes (769 ) (246
) (1,037 )
Increase in unrealized net capital gains and losses $ 1,434$ 452
$ 1,931
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 that may be considered in evaluating whether a decline in fair value is
other than temporary are: 1) the financial condition, near-term and long-term
prospects of the issue or issuer, including relevant industry specific market
conditions and trends, geographic location and implications of rating agency
actions and offering prices; 2) the specific reasons that a security is in an
unrealized loss position, including overall market conditions which could affect
liquidity; and 3) the length of time and extent to which the fair value has been
less than amortized cost or cost.
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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 lossesDecember 31,
2012
Fixed income
securities
U.S.
government
and agencies 6 $ 85 $ - - $ - $ - $ -
Municipal 130 1,012 (13 ) 80 717 (95 ) (108 )
Corporate 133 1,989 (33 ) 70 896 (94 ) (127 )
Foreign
government 22 190 (1 ) - - - (1 )
ABS 12 145 (1 ) 77 794 (106 ) (107 )
RMBS 117 50 (1 ) 336 638 (109 ) (110 )
CMBS 11 68 - 44 357 (77 ) (77 )
Redeemable
preferred
stock - - - 1 - - -
Total fixed
income
securities 431 3,539 (49 ) 608 3,402 (481 ) (530 )
Equity
securities 803 284 (27 ) 96 69 (7 ) (34 )
Total fixed
income and
equity
securities 1,234 $ 3,823 $ (76 ) 704 $ 3,471 $ (488 ) $ (564 )
Investment
grade fixed
income
securities 387 $ 3,141 $ (39 ) 409 $ 2,172 $ (217 ) $ (256 )
Below
investment
grade fixed
income
securities 44 398 (10 ) 199 1,230 (264 ) (274 )
Total fixed
income
securities 431 $ 3,539 $ (49 ) 608 $ 3,402 $ (481 ) $ (530 )
December 31,
2011
Fixed income
securities
U.S.
government
and agencies 4 $ 61 $ - - $ - $ - $ -
Municipal 29 135 (11 ) 303 1,886 (245 ) (256 )
Corporate 307 3,439 (113 ) 105 1,273 (266 ) (379 )
Foreign
government 11 85 (1 ) 1 1 - (1 )
ABS 89 960 (17 ) 108 1,020 (270 ) (287 )
RMBS 321 373 (11 ) 294 1,182 (510 ) (521 )
CMBS 47 378 (49 ) 68 489 (177 ) (226 )
Redeemable
preferred
stock 1 - - - - - -
Total fixed
income
securities 809 5,431 (202 ) 879 5,851 (1,468 ) (1,670 )
Equity
securities 1,397 2,120 (203 ) 32 30 (6 ) (209 )
Total fixed
income and
equity
securities 2,206 $ 7,551 $ (405 ) 911 $ 5,881 $ (1,474 ) $ (1,879 )
Investment
grade fixed
income
securities 665 $ 4,480 $ (145 ) 555 $ 3,773 $ (700 ) $ (845 )
Below
investment
grade fixed
income
securities 144 951 (57 ) 324 2,078 (768 ) (825 )
Total fixed
income
securities 809 $ 5,431 $ (202 ) 879 $ 5,851 $ (1,468 ) $ (1,670 )
As of December 31, 2012, $299 million 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 $299 million, $192 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 S&P, Fitch, Dominion, Kroll 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 December 31, 2012, the remaining $265 million 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
$64 million of these unrealized losses were evaluated based on factors such as
discounted 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 $265 million, $187 million are
related to below investment grade fixed income securities and $14 million are
related to equity securities. Of these amounts, $176 million are related to
below investment grade fixed income securities that had been in an unrealized
loss position greater than or equal to 20% of
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amortized cost for a period of twelve or more consecutive months as of
December 31, 2012. Unrealized losses on below investment grade securities are
principally related to ABS, RMBS and CMBS and were the result of wider credit
spreads resulting from higher risk premiums since the time of initial purchase.
These wider spreads are largely due to the risk associated with the underlying
collateral supporting certain ABS, RMBS and CMBS securities.
ABS, RMBS and CMBS 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 ABS and RMBS 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.
Unrealized losses on equity securities are primarily related to temporary equity
market fluctuations of securities that are expected to recover.
As of December 31, 2012, 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 December 31, 2012, 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 December 31, 2012 and 2011, the carrying value of equity method
limited partnerships totaled $3.52 billion and $3.13 billion, respectively. The
Company recognizes an impairment loss for equity method limited partnerships
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 partnerships in 2012. In 2011 and 2010, the Company had write-downs
related to equity method limited partnerships of $2 million and $1 million,
respectively.
As of December 31, 2012 and 2011, the carrying value for cost method limited
partnerships was $1.41 billion and $1.57 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. In 2012, 2011 and 2010, the Company had write-downs
related to cost method limited partnerships of $8 million, $4 million and
$45 million, respectively.
Mortgage loans
The Company's mortgage loans are commercial mortgage loans collateralized by
a variety of commercial real estate property types located throughout the United
States and totaled, net of valuation allowance, $6.57 billion and $7.14 billion
as of December 31, 2012 and 2011, respectively. Substantially all of the
commercial mortgage loans are non-recourse to the borrower. The following table
shows the principal geographic distribution of commercial real estate
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represented in the Company's mortgage loan portfolio. No other state represented
more than 5% of the portfolio as of December 31.
(% of mortgage loan portfolio carrying value) 2012 2011
California 23.6 22.6 %
Illinois 8.1 9.1
New York 6.4 5.8
Texas 6.4 6.2
New Jersey 6.2 6.5
Pennsylvania 4.9 5.3
The types of properties collateralizing the mortgage loans as of December 31
are as follows:
(% of mortgage loan portfolio carrying value) 2012 2011
Office buildings 26.6 % 27.9 %
Retail 22.7 24.8
Apartment complex 20.6 19.6
Warehouse 19.7 19.4
Other 10.4 8.3
Total 100.0 % 100.0 %
The contractual maturities of the mortgage loan portfolio as of December 31,
2012, excluding $4 million of mortgage loans in the process of foreclosure, are
as follows:
($ in millions) Number of Carrying
loans value Percent
2013 42 $ 339 5.2 %
2014 64 758 11.5
2015 67 968 14.7
2016 72 813 12.4
Thereafter 334 3,688 56.2
Total 579 $ 6,566 100.0 %
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. Valuation allowances are adjusted for subsequent
changes in the fair value of the collateral less costs to sell. Mortgage loans
are charged off against their corresponding valuation allowances 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 December 31, 2012.
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.
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The following table reflects the carrying value of non-impaired fixed rate
and variable rate mortgage loans summarized by debt service coverage ratio
distribution as of December 31:
($ in
millions) 2012 2011
Debt service
coverage Fixed rate Variable rate Fixed rate Variable rate
ratio mortgage mortgage mortgage mortgage
distribution loans loans Total loans loans Total
Below 1.0 $ 267 $ - $ 267 $ 345 $ - $ 345
1.0 - 1.25 1,208 20 1,228 1,527 44 1,571
1.26 - 1.50 1,458 46 1,504 1,573 24 1,597
Above 1.50 3,268 148 3,416 3,214 168 3,382
Total
non-impaired
mortgage
loans $ 6,201 $ 214 $ 6,415 $ 6,659 $ 236 $ 6,895
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 as of December 31 is as
follows:
($ in millions) 2012 2011
Impaired mortgage loans with a valuation allowance $ 147 $ 244
Impaired mortgage loans without a valuation allowance 8 -
Total impaired mortgage loans $ 155 $ 244
Valuation allowance on impaired mortgage loans $ 42 $ 63
The average balance of impaired loans was $202 million, $210 million and
$278 million during 2012, 2011 and 2010, respectively.
The rollforward of the valuation allowance on impaired mortgage loans for
the years ended December 31 is as follows:
($ in millions) 2012 2011 2010
Beginning balance $ 63 $ 84 $ 95
Net (decrease) increase in valuation allowance (5 ) 37 65
Charge offs (16 ) (58 ) (76 )
Ending balance $ 42 $ 63 $ 84
The carrying value of past due mortgage loans as of December 31 is as
follows:
($ in millions) 2012 2011
Less than 90 days past due $ 21 $ -
90 days or greater past due 4 43
Total past due 25 43
Current loans 6,545 7,096
Total mortgage loans $ 6,570 $ 7,139
Municipal bonds
The Company maintains a diversified portfolio of municipal bonds. The
following table shows the principal geographic distribution of municipal bond
issuers represented in the Company's portfolio as of December 31. No other state
represents more than 5% of the portfolio.
(% of municipal bond portfolio carrying value) 2012 2011
Texas 8.2 % 7.7 %
California 8.1 10.4
Florida 6.5 5.9
New York 5.9 5.3
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Concentration of credit risk
As of December 31, 2012, the Company is not exposed to any credit
concentration risk of a single issuer and its affiliates greater than 10% of the
Company's shareholders' equity.
Securities loaned
The Company's business activities include securities lending programs with
third parties, mostly large banks. As of December 31, 2012 and 2011, fixed
income and equity securities with a carrying value of $760 million and
$406 million, respectively, were on loan under these agreements. Interest income
on collateral, net of fees, was $2 million in each of 2012, 2011 and 2010.
Other investment information
Included in fixed income securities are below investment grade assets
totaling $6.62 billion and $6.01 billion as of December 31, 2012 and 2011,
respectively.
As of December 31, 2012, fixed income securities and short-term investments
with a carrying value of $280 million were on deposit with regulatory
authorities as required by law.
As of December 31, 2012, the carrying value of fixed income securities and
other investments that were non-income producing was $23 million.
6. 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 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 is responsible for the determination of fair value and the
supporting assumptions and methodologies. The Company gains assurance that
assets and liabilities are appropriately valued through the execution of various
processes and controls designed to ensure the overall reasonableness and
consistent application of valuation methodologies, including inputs and
assumptions, and compliance with accounting standards. For fair values received
from third parties or internally estimated, the Company's processes and controls
are designed to ensure that the valuation methodologies are appropriate and
consistently applied, the inputs and assumptions are reasonable and consistent
with the objective of determining fair value, and the fair values are accurately
recorded. For example, on a
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continuing basis, the Company assesses the reasonableness of individual fair
values that have stale security prices or that exceed certain thresholds as
compared to previous fair values received from valuation service providers or
brokers or derived from internal models. The Company performs procedures to
understand and assess the methodologies, processes and controls of valuation
service providers. In addition, the Company may validate the reasonableness of
fair values by comparing information obtained from valuation service providers
or brokers to other third party valuation sources for selected securities. The
Company performs ongoing price validation procedures such as back-testing of
actual sales, which corroborate the various inputs used in internal models to
market observable data. When fair value determinations are expected to be more
variable, the Company validates them through reviews by members of management
who have relevant expertise and who are independent of those charged with
executing investment transactions.
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 primarily occurs in the Company's use of broker quotes
to value certain securities where the inputs have not been corroborated to be
market observable, and the use of valuation models that use significant
non-market observable inputs.
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 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.
Summary of significant valuation techniques for assets and liabilities measured
at fair value on a recurring basis
Level 1 measurements
º •
º Fixed income securities: Comprise certain U.S. Treasuries. Valuation
is based on unadjusted quoted prices for identical assets in active
markets that the Company can access.
º •
º Equity securities: Comprise actively traded, exchange-listed equity
securities. Valuation is based on unadjusted quoted prices for
identical assets in active markets that the Company can access.
º •
º Short-term: Comprise actively traded money market funds that have daily quoted net asset values for identical assets that the Company
can access.
º •
º 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
º •
º 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.
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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.
ABS and RMBS: 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. Certain ABS are valued based on non-binding broker quotes whose inputs have been corroborated
to be market observable.
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.
º •
º 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.
º •
º 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.
º • º 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.
OTC derivatives, including interest rate swaps, foreign currency
swaps, foreign exchange forward contracts, certain options 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
º •
º 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 the anticipated date liquidity will return to the market.
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"). 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 where the inputs have not been corroborated
to be market observable. 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.
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ABS, RMBS and CMBS: Valued based on non-binding broker quotes received
from brokers who are familiar with the investments and where the
inputs have not been corroborated to be market observable.
º •
º Equity securities: The primary inputs to the valuation include quoted
prices or quoted net asset values for identical or similar assets in
markets that exhibit less liquidity relative to those markets
supporting Level 2 fair value measurements.
º • º Other investments: Certain OTC derivatives, such as interest rate caps
and floors, certain credit default swaps and certain 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.
º •
º 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.
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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, 2012:
Quoted prices
in active Significant
markets for other Significant Counterparty Balance
identical observable unobservable and cash as of
($ in assets inputs inputs collateral December 31,
millions) (Level 1) (Level 2) (Level 3) netting 2012
Assets
Fixed income
securities:
U.S.
government and
agencies $ 2,790 $ 1,915 $ 8 $ 4,713
Municipal - 12,104 965 13,069
Corporate - 46,920 1,617 48,537
Foreign
government - 2,517 - 2,517
ABS - 3,373 251 3,624
RMBS - 3,029 3 3,032
CMBS - 1,446 52 1,498
Redeemable
preferred
stock - 26 1 27
Total fixed
income
securities 2,790 71,330 2,897 77,017
Equity
securities 3,008 858 171 4,037
Short-term
investments 703 1,633 - 2,336
Other
investments:
Free-standing
derivatives - 187 3 $ (57 ) 133
Separate
account assets 6,610 - - 6,610
Other assets 5 - 1 6
Total
recurring
basis assets 13,116 74,008 3,072 (57 ) 90,139
Non-recurring
basis (1) - - 9 9
Total assets
at fair value $ 13,116 $ 74,008 $ 3,081 $ (57 ) $ 90,148
% of total
assets at fair
value 14.6 % 82.1 % 3.4 % (0.1 )% 100.0 %
Liabilities
Contractholder
funds:
Derivatives
embedded in
life and
annuity
contracts $ - $ - $ (553 ) $ (553 )
Other
liabilities:
Free-standing
derivatives - (98 ) (30 ) $ 33 (95 )
Total
liabilities at
fair value $ - $ (98 ) $ (583 ) $ 33 $ (648 )
% of total
liabilities at
fair value - % 15.1 % 90.0 % (5.1 )% 100.0 %
--------------------------------------------------------------------------------
º (1)
º Includes $4 million of mortgage loans, $4 million of limited partnership
interests and $1 million of other investments written-down to fair value in
connection with recognizing other-than-temporary impairments.
The following table summarizes quantitative information about the
significant unobservable inputs used in Level 3 fair value measurements as of
December 31, 2012.
($ in Valuation Unobservable Weighted
millions) Fair value technique input Range average
ARS backed by $ 394 Discounted Anticipated 18 - 60 months 31 - 43 months
student loans cash flow date
model liquidity
will return
to the
market
Derivatives $ (419 ) Stochastic Projected 1.0 - 2.0% 1.92%
embedded in cash flow option cost
life and model
annuity
contracts -
Equity-indexed
and forward
starting
options
If the anticipated date liquidity will return to the market is sooner
(later), it would result in a higher (lower) fair value. If the projected option
cost increased (decreased), it would result in a higher (lower) liability fair
value.
As of December 31, 2012, Level 3 fair value measurements include
$1.87 billion of fixed income securities valued based on non-binding broker
quotes where the inputs have not been corroborated to be market observable and
$395 million of municipal fixed income securities that are not rated by third
party credit rating agencies. The Company does not develop the unobservable
inputs used in measuring fair value; therefore, these are not included in the
table above. However, an increase (decrease) in credit spreads for fixed income
securities valued based on non-binding broker
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quotes would result in a lower (higher) fair value, and an increase (decrease)
in the credit rating of municipal bonds that are not rated by third party credit
rating agencies would result in a higher (lower) fair value.
The following table summarizes the Company's assets and liabilities measured
at fair value on a recurring and non-recurring basis as of December 31, 2011:
Quoted prices
in active Significant
markets for other Significant Counterparty Balance
identical observable unobservable and cash as of
($ in assets inputs inputs collateral December 31,
millions) (Level 1) (Level 2) (Level 3) netting 2011
Assets
Fixed income
securities:
U.S.
government and
agencies $ 4,707 $ 1,608 $ - $ 6,315
Municipal - 12,909 1,332 14,241
Corporate - 42,176 1,405 43,581
Foreign
government - 2,081 - 2,081
ABS - 3,669 297 3,966
RMBS - 4,070 51 4,121
CMBS - 1,724 60 1,784
Redeemable
preferred
stock - 23 1 24
Total fixed
income
securities 4,707 68,260 3,146 76,113
Equity
securities 3,433 887 43 4,363
Short-term
investments 188 1,103 - 1,291
Other
investments:
Free-standing
derivatives - 281 1 $ (114 ) 168
Separate
account assets 6,984 - - 6,984
Other assets 1 - 1 2
Total
recurring
basis assets 15,313 70,531 3,191 (114 ) 88,921
Non-recurring
basis (1) - - 35 35
Total assets
at fair value $ 15,313 $ 70,531 $ 3,226 $ (114 ) $ 88,956
% of total
assets at fair
value 17.2 % 79.3 % 3.6 % (0.1 )% 100.0 %
Liabilities
Contractholder
funds:
Derivatives
embedded in
life and
annuity
contracts $ - $ - $ (723 ) $ (723 )
Other
liabilities:
Free-standing
derivatives (1 ) (112 ) (96 ) $ 77 (132 )
Total
liabilities at
fair value $ (1 ) $ (112 ) $ (819 ) $ 77 $ (855 )
% of total
liabilities at
fair value 0.1 % 13.1 % 95.8 % (9.0 )% 100.0 %
--------------------------------------------------------------------------------
º (1)
º Includes $19 million of mortgage loans and $16 million of other investments
written-down to fair value in connection with recognizing
other-than-temporary impairments.
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The following table presents the rollforward of Level 3 assets and
liabilities held at fair value on a recurring basis during the year ended
December 31, 2012.
Total gains (losses)
($ in millions) included in:
Balance as of Transfers Transfers
December 31, Net into out of
2011 income (1) OCI Level 3 Level 3
Assets
Fixed income
securities:
U.S. government
and agencies $ - $ - $ - $ 8 $ -
Municipal 1,332 (35 ) 76 53 (28 )
Corporate 1,405 20 68 387 (92 )
ABS 297 26 61 43 (81 )
RMBS 51 - - - (47 )
CMBS 60 (4 ) 9 - (5 )
Redeemable
preferred stock 1 - - - -
Total fixed
income
securities 3,146 7 214 491 (253 )
Equity
securities 43 (7 ) 9 - -
Other
investments:
Free-standing
derivatives, net (95 ) 27 - - -
Other assets 1 - - - -
Total recurring
Level 3 assets $ 3,095 $ 27 $ 223 $ 491 $ (253 )
Liabilities
Contractholder
funds:
Derivatives
embedded in life
and annuity
contracts $ (723 ) $ 168 $ - $ - $ -
Total recurring
Level 3
liabilities $ (723 ) $ 168 $ - $ - $ -
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Balance as of
December 31,
Purchases Sales Issues Settlements 2012
Assets
Fixed income
securities:
U.S. government and
agencies $ - $ - $ - $ - $ 8
Municipal 46 (463 ) - (16 ) 965
Corporate 276 (310 ) - (137 ) 1,617
ABS 155 (217 ) - (33 ) 251
RMBS - - - (1 ) 3
CMBS 34 (27 ) - (15 ) 52
Redeemable
preferred stock 1 (1 ) - - 1
Total fixed income
securities 512 (1,018 ) - (202 ) 2,897
Equity securities 164 (38 ) - - 171
Other investments:
Free-standing
derivatives, net 27 - - 14 (27 ) (2)
Other assets - - - - 1
Total recurring
Level 3 assets $ 703 $ (1,056 ) $ - $ (188 ) $ 3,042
Liabilities
Contractholder
funds:
Derivatives
embedded in life
and annuity
contracts $ - $ - $ (79 ) $ 81 $ (553 )
Total recurring
Level 3 liabilities $ - $ - $ (79 ) $ 81 $ (553 )
--------------------------------------------------------------------------------
º (1)
º The effect to net income totals $195 million and is reported in the
Consolidated Statements of Operations as follows: $27 million in net
investment income, $132 million in interest credited to contractholder
funds and $36 million in life and annuity contract benefits.
º (2)
º Comprises $3 million of assets and $30 million of liabilities.
The following table presents the rollforward of Level 3 assets and
liabilities held at fair value on a recurring basis during the year ended
December 31, 2011.
Total gains (losses)
($ in millions) included in:
Balance as of Transfers Transfers
December 31, into out of
2010 Net income (1) OCI Level 3 Level 3
Assets
Fixed income
securities:
Municipal $ 2,016 $ (44 ) $ 54 $ 70 $ (82 )
Corporate 1,908 62 (44 ) 239 (523 )
ABS 2,417 23 (65 ) - (2,137 )
RMBS 1,794 (86 ) 107 - (1,256 )
CMBS 923 (43 ) 113 86 (966 )
Redeemable
preferred stock 1 - - - -
Total fixed
income
securities 9,059 (88 ) 165 395 (4,964 )
Equity
securities 63 (10 ) - - (10 )
Other
investments:
Free-standing
derivatives,
net (21 ) (91 ) - - -
Other assets 1 - - - -
Total recurring
Level 3 assets $ 9,102 $ (189 ) $ 165 $ 395 $ (4,974 )
Liabilities
Contractholder
funds:
Derivatives
embedded in
life and
annuity
contracts $ (653 ) $ (134 ) $ - $ - $ -
Total recurring
Level 3
liabilities $ (653 ) $ (134 ) $ - $ - $ -
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Balance as of
December 31,
Purchases Sales Issues Settlements 2011
Assets
Fixed income
securities:
Municipal $ 14 $ (689 ) $ - $ (7 ) $ 1,332
Corporate 387 (537 ) - (87 ) 1,405
ABS 504 (169 ) - (276 ) 297
RMBS 4 (378 ) - (134 ) 51
CMBS 17 (66 ) - (4 ) 60
Redeemable preferred
stock - - - - 1
Total fixed income
securities 926 (1,839 ) - (508 ) 3,146
Equity securities 1 (1 ) - - 43
Other investments:
Free-standing
derivatives, net 70 - - (53 ) (95 ) (2)
Other assets - - - - 1
Total recurring
Level 3 assets $ 997 $ (1,840 ) $ - $ (561 ) $ 3,095
Liabilities
Contractholder
funds:
Derivatives embedded
in life and annuity
contracts $ - $ - $ (100 ) $ 164 $ (723 )
Total recurring
Level 3 liabilities $ - $ - $ (100 ) $ 164 $ (723 )
--------------------------------------------------------------------------------
º (1)
º The effect to net income totals $(323) million and is reported in the
Consolidated Statements of Operations as follows: $(221) million in
realized capital gains and losses, $36 million in net investment income,
$(106) million in interest credited to contractholder funds and $(32)
million in life and annuity contract benefits.
º (2)
º Comprises $1 million of assets and $96 million of liabilities.
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The following table presents the rollforward of Level 3 assets and
liabilities held at fair value on a recurring basis during the year ended
December 31, 2010.
($ in Total gains (losses)
millions) included in:
Balance as of Purchases, sales, Transfers Transfers Balance as of
December 31, Net issues and into out of December 31,
2009 income (1) OCI settlements, net Level 3 Level 3 2010
Assets
Fixed income
securities:
Municipal $ 2,706 $ (40 ) $ 46 $ (588 ) $ 38 $ (146 ) $ 2,016
Corporate 2,241 5 115 (167 ) 444 (730 ) 1,908
Foreign
government 20 - - (20 ) - - -
ABS 2,001 55 275 553 - (467 ) 2,417
RMBS 1,671 (421 ) 736 (135 ) - (57 ) 1,794
CMBS 1,404 (233 ) 592 (526 ) 107 (421 ) 923
Redeemable
preferred
stock 2 - - (1 ) - - 1
Total fixed
income
securities 10,045 (634 ) 1,764 (884 ) 589 (1,821 ) 9,059
Equity
securities 69 8 5 (12 ) - (7 ) 63
Other
investments:
Free-standing
derivatives,
net 55 (202 ) - 126 - - (21 ) (2)
Other assets 2 (1 ) - - - - 1
Total
recurring
Level 3 assets $ 10,171 $ (829 ) $ 1,769 $ (770 ) $ 589 $ (1,828 ) $ 9,102
Liabilities
Contractholder
funds:
Derivatives
embedded in
life and
annuity
contracts $ (110 ) $ (31 ) $ - $ 3 $ (515 ) $ - $ (653 )
Total
recurring
Level 3
liabilities $ (110 ) $ (31 ) $ - $ 3 $ (515 ) $ - $ (653 )
--------------------------------------------------------------------------------
º (1)
º The effect to net income totals $(860) million and is reported in the
Consolidated Statements of Operations as follows: $(901) million in
realized capital gains and losses, $73 million in net investment income,
$(1) million in interest credited to contractholder funds and $(31) million
in life and annuity contract benefits.
º (2)
º Comprises $74 million of assets and $95 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 whose
inputs have not been corroborated to be market observable, 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.
During 2012, certain U.S. government securities were transferred into
Level 1 from Level 2 as a result of increased liquidity in the market and a
sustained increase in the market activity for these assets. There were no
transfers between Level 1 and Level 2 during 2011 or 2010.
During 2011, certain ABS, RMBS and CMBS were transferred into Level 2 from
Level 3 as a result of increased liquidity in the market and a sustained
increase in the market activity for these assets. Additionally, in 2011 certain
ABS that were valued based on non-binding broker quotes were transferred into
Level 2 from Level 3 since the inputs were corroborated to be market observable.
During 2010, certain ABS and CMBS were transferred into Level 2 from Level 3 as
a result of increased liquidity in the market and a sustained increase in market
activity for these 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 2012 and 2011 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 where the inputs have not been corroborated to be market observable
resulting in the security being
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classified as Level 3. Transfers out of Level 3 during 2012 and 2011 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.
Transfers into Level 3 during 2010 also included derivatives embedded in
equity-indexed life and annuity contracts due to refinements in the valuation
modeling resulting in an increase in significance of non-market observable
inputs.
The following table provides the change in unrealized gains and losses
included in net income for Level 3 assets and liabilities held as of
December 31.
($ in millions)
2012 2011 2010
Assets
Fixed income securities:
Municipal $ (28 ) $ (28 ) $ (33 )
Corporate 15 20 40
ABS - (33 ) 60
RMBS (1 ) - (292 )
CMBS (3 ) (11 ) (28 )
Total fixed income securities (17 ) (52 )
(253 )
Equity securities (6 ) (10 )
(3 )
Other investments:
Free-standing derivatives, net 6 (41 )
(61 )
Other assets - -
(1 )
Total recurring Level 3 assets $ (17 ) $ (103 )
$ (318 )
Liabilities
Contractholder funds:
Derivatives embedded in life and annuity contracts $ 168 $ (134 ) $ (31 )
Total recurring Level 3 liabilities $ 168 $ (134 )
$ (31 )
The amounts in the table above represent the change in unrealized 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 $151 million in
2012 and are reported as follows: $(37) million in realized capital gains and
losses, $21 million in net investment income, $131 million in interest credited
to contractholder funds and $36 million in life and annuity contract benefits.
These gains and losses total $(237) million in 2011 and are reported as follows:
$(147) million in realized capital gains and losses, $44 million in net
investment income, $(102) million in interest credited to contractholder funds
and $(32) million in life and annuity contract benefits. These gains and losses
total $(349) million in 2010 and are reported as follows: $(402) million in
realized capital gains and losses, $86 million in net investment income, $(2)
million in interest credited to contractholder funds and $(31) million in life
and annuity contract benefits.
Presented below are the carrying values and fair value estimates of
financial instruments not carried at fair value.
Financial assets
($ in millions) December 31, 2012 December 31, 2011
Carrying Fair Carrying Fair
value value value value
Mortgage loans $ 6,570 $ 6,886 $ 7,139 $ 7,350
Cost method limited partnerships 1,406 1,714 1,569 1,838
Bank loans 682 684 339 328
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 cost method limited partnerships 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
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brokers familiar with the loans and current market conditions. The fair value
measurements for mortgage loans, cost method limited partnerships and bank loans
are categorized as Level 3.
Financial liabilities
($ in millions) December 31, 2012 December 31, 2011
Carrying Fair Carrying Fair
value value value value
Contractholder funds on investment
contracts $ 27,014 $ 28,019 $ 30,192 $ 30,499
Long-term debt 6,057 7,141 5,908 6,312
Liability for collateral 808 808 462 462
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 measurements for contractholder funds
on investment contracts are categorized as Level 3.
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. The fair value measurements for long-term debt and liability
for collateral are categorized as Level 2.
7. Derivative Financial Instruments and Off-balance sheet Financial Instruments
The Company uses derivatives to manage risks with certain assets and
liabilities arising from the potential adverse impacts from changes in risk-free
interest rates, changes in equity market valuations, increases in credit spreads
and foreign currency fluctuations, and for asset replication. The Company does
not use derivatives for speculative purposes.
Property-Liability uses interest rate swaps, swaptions, futures and options
to manage the interest rate risks of existing investments and to reduce exposure
to rising or falling interest rates. 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. Equity index
futures and options 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. Property-Liability uses equity
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. 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 typically used to
mitigate the credit risk within the Allstate Financial fixed income portfolio.
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.
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The Company also 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 changes in fair value of embedded derivatives reported in net
income. The Company's primary embedded derivatives are equity options in 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.
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.
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
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 December 31, 2012, the Company pledged
$11 million of cash and securities in the form of margin deposits.
For those derivatives which qualify for fair value hedge accounting, net
income includes the changes in the fair value of both the derivative instrument
and the hedged risk, and therefore reflects any hedging ineffectiveness. For
cash flow hedges, gains and losses are amortized from accumulated other
comprehensive income and are reported in net income in the same period the
forecasted transactions being hedged impact net income.
Non-hedge accounting is generally used for "portfolio" level hedging
strategies where the terms of the individual hedged items do not meet the strict
homogeneity requirements to permit the application of hedge accounting. For
non-hedge derivatives, net income includes changes in fair value and accrued
periodic settlements, when applicable. With the exception of non-hedge
derivatives used for asset replication and non-hedge embedded derivatives, all
of the Company's derivatives are evaluated for their ongoing effectiveness as
either accounting hedge or non-hedge derivative financial instruments on at
least a quarterly basis.
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The following table provides a summary of the volume and fair value
positions of derivative instruments as well as their reporting location in the
Consolidated Statement of Financial Position as of December 31, 2012.
($ in millions,
except number of
contracts) Asset derivatives
Volume (1)
Balance Number Fair
sheet Notional of value, Gross Gross
location amount contracts net asset liability
Derivatives
designated as
accounting hedging
instruments
Foreign currency Other
swap agreements investments $ 16 n/a $ 2 $ 2 $ -
Total 16 n/a 2 2 -
Derivatives not
designated as
accounting hedging
instruments
Interest rate
contracts
Interest rate swap Other
agreements investments 5,541 n/a 19 28 (9 )
Interest rate cap
and floor Other
agreements investments 372 n/a 1 1 -
Financial futures
contracts and
options Other assets n/a 2 - - -
Equity and index
contracts
Options, futures Other
and warrants (2) investments 146 12,400 125 125 -
Options, futures
and warrants Other assets n/a 1,087 5 5 -
Foreign currency
contracts
Foreign currency
forwards and Other
options investments 258 n/a 6 6 -
Embedded derivative
financial
instruments
Fixed income
Conversion options securities 5 n/a - - -
Equity-indexed call Fixed income
options securities 90 n/a 9 9 -
Credit default Fixed income
swaps securities 12 n/a (12 ) - (12 )
Other embedded
derivative
financial Other
instruments investments 1,000 n/a - - -
Credit default
contracts
Credit default
swaps - buying Other
protection investments 209 n/a - 2 (2 )
Credit default
swaps - selling Other
protection investments 308 n/a 2 3 (1 )
Other contracts
Other contracts Other assets 4 n/a 1 1 -
Total 7,945 13,489 156 180 (24 )
Total asset
derivatives $ 7,961 13,489 $ 158 $ 182 $ (24 )
--------------------------------------------------------------------------------
º (1)
º 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)
º (2) º In addition to the number of contracts presented in the table, the Company
held 34,634 stock rights and 879,158 stock warrants. Stock rights and
warrants can be converted to cash upon sale of those instruments or
exercised for shares of common stock.
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Liability derivatives
Volume (1)
Number Fair
Balance sheet Notional of value, Gross Gross
location amount contracts net asset liabilityDerivatives
designated as
accounting
hedging
instruments
Foreign currency Other
swap agreements liabilities &
accrued
expenses $ 135 n/a $ (19 ) $ - $ (19 )
Total 135 n/a (19 ) - (19 )
Derivatives not
designated as
accounting
hedging
instruments
Interest rate
contracts
Interest rate Other
swap agreements liabilities &
accrued
expenses 1,185 n/a 16 18 (2 )
Interest rate Other
swaption liabilities &
agreements accrued
expenses 250 n/a - - -
Interest rate cap Other
and floor liabilities &
agreements accrued
expenses 429 n/a 1 1 -
Financial futures Other
contracts and liabilities &
options accrued
expenses - 357 - - -
Equity and index
contracts
Options and Other
futures liabilities &
accrued
expenses - 12,262 (58 ) - (58 )
Foreign currency
contracts
Foreign currency Other
forwards and liabilities &
options accrued
expenses 139 n/a (1 ) 1 (2 )
Embedded
derivative
financial
instruments
Guaranteed
accumulation Contractholder
benefits funds 820 n/a (86 ) - (86 )
Guaranteed
withdrawal Contractholder
benefits funds 554 n/a (39 ) - (39 )
Equity-indexed
and forward
starting options
in life and
annuity product Contractholder
contracts funds 3,916 n/a (419 ) - (419 )
Other embedded
derivative
financial Contractholder
instruments funds 85 n/a (9 ) - (9 )
Credit default
contracts
Credit default Other
swaps - buying liabilities &
protection accrued
expenses 420 n/a (3 ) 2 (5 )
Credit default Other
swaps - selling liabilities &
protection accrued
expenses 285 n/a (29 ) 1 (30 )
Total 8,083 12,619 (627 ) 23 (650 )
Total liability
derivatives 8,218 12,619 (646 ) $ 23 $ (669 )
Total derivatives $ 16,179 26,108 $ (488 )
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º (1)
º 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)
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The following table provides a summary of the volume and fair value
positions of derivative instruments as well as their reporting location in the
Consolidated Statement of Financial Position as of December 31, 2011.
($ in millions,
except number of
contracts) Asset derivatives
Volume (1)
Number Fair
Balance sheet Notional of value, Gross Gross
location amount contracts net asset liability
Derivatives
designated as
accounting hedging
instruments
Interest rate swap Other
agreements investments $ 144 n/a $ (8 ) $ - $ (8 )
Foreign currency Other
swap agreements investments 127 n/a (5 ) 3 (8 )
Total 271 n/a (13 ) 3 (16 )
Derivatives not
designated as
accounting hedging
instruments
Interest rate
contracts
Interest rate swap Other
agreements investments 8,028 n/a 122 137 (15 )
Interest rate Other
swaption agreements investments 1,750 n/a - - -
Interest rate cap Other
and floor agreements investments 1,591 n/a (12 ) - (12 )
Financial futures
contracts and
options Other assets n/a 40 - - -
Equity and index
contracts
Options, futures and Other
warrants (2) investments 163 15,180 104 104 -
Options, futures and
warrants Other assets n/a 2,132 1 1 -
Foreign currency
contracts
Foreign currency Other
swap agreements investments 50 n/a 6 6 -
Foreign currency Other
forwards and options investments 190 n/a 1 3 (2 )
Embedded derivative
financial
instruments
Fixed income
Conversion options securities 5 n/a - - -
Equity-indexed call Fixed income
options securities 150 n/a 11 11 -
Fixed income
Credit default swaps securities 172 n/a (115 ) - (115 )
Other embedded
derivative financial Other
instruments investments 1,000 n/a - - -
Credit default
contracts
Credit default
swaps - buying Other
protection investments 265 n/a 3 6 (3 )
Credit default
swaps - selling Other
protection investments 167 n/a (4 ) 1 (5 )
Other contracts
Other
Other contracts investments 5 n/a - - -
Other contracts Other assets 4 n/a 1 1 -
Total 13,540 17,352 118 270 (152 )
Total asset
derivatives $ 13,811 17,352 $ 105 $ 273 $ (168 )
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º (1)
º 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)
º (2) º In addition to the number of contracts presented in the table, the Company
held 10,798 stock rights and 4,392,937 stock warrants. Stock rights and
warrants can be converted to cash upon sale of those instruments or
exercised for shares of common stock.
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Liability derivatives
Volume (1)
Number Fair
Balance sheet Notional of value, Gross Gross
location amount contracts net asset liabilityDerivatives
designated as
accounting
hedging
instruments
Interest rate Other
swap agreements liabilities &
accrued
expenses $ 28 n/a $ (5 ) $ - $ (5 )
Foreign currency Other
swap agreements liabilities &
accrued
expenses 50 n/a (7 ) - (7 )
Total 78 n/a (12 ) - (12 )
Derivatives not
designated as
accounting
hedging
instruments
Interest rate
contracts
Interest rate Otherswap agreements liabilities &
accrued
expenses 85 n/a 8 8 -
Interest rate Other
swaption liabilities &
agreements accrued
expenses 1,250 n/a - - -
Interest rate cap Other
and floor liabilities &
agreements accrued
expenses 914 n/a (9 ) - (9 )
Equity and index
contracts
Options and Other
futures liabilities &
accrued
expenses n/a 15,677 (50 ) - (50 )
Foreign currency
contracts
Foreign currency Other
forwards and liabilities &
options accrued
expenses 96 n/a (1 ) - (1 )
Embedded
derivative
financial
instruments
Guaranteed
accumulation Contractholder
benefits funds 917 n/a (105 ) - (105 )
Guaranteed
withdrawal Contractholder
benefits funds 613 n/a (57 ) - (57 )Equity-indexed
and forward
starting options
in life and
annuity product Contractholder
contracts funds 3,996 n/a (553 ) - (553 )
Other embedded
derivative
financial Contractholder
instruments funds 85 n/a (8 ) - (8 )
Credit default
contracts
Credit default Other
swaps - buying liabilities &
protection accrued
expenses 509 n/a 7 12 (5 )
Credit default Other
swaps - selling liabilities &
protection accrued
expenses 503 n/a (77 ) 2 (79 )
Total 8,968 15,677 (845 ) 22 (867 )
Total liability
derivatives 9,046 15,677 (857 ) $ 22 $ (879 )
Total derivatives $ 22,857 33,029 $ (752 )
--------------------------------------------------------------------------------
º (1)
º 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)
The following table provides a summary of the impacts of the Company's
foreign currency contracts in cash flow hedging relationships for the years
ended December 31.
($ in millions) 2012 2011 2010
Effective portion
(Loss) gain recognized in OCI on derivatives during the period $ (6 ) $ 4 $ 3
Loss recognized in OCI on derivatives during the term of the
hedging relationship (22 )
(17 ) (22 )
(Loss) gain reclassified from AOCI into income (realized capital
gains and losses)
(1 )
(1 ) 2
Amortization of net losses from accumulated other comprehensive income
related to cash flow hedges is expected to be less than $1 million during the
next twelve months. There was no hedge ineffectiveness reported in realized
gains and losses in 2012, 2011 or 2010.
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The following tables present gains and losses from valuation, settlements
and hedge ineffectiveness reported on derivatives used in fair value hedging
relationships and derivatives not designated as accounting hedging instruments
in the Consolidated Statements of Operations for the years ended December 31.
($ in
millions) 2012
Total gain
(loss)
Realized Life and Interest recognized
Net capital annuity credited to Operating in net
investment gains and contract contractholder costs and income on
income losses benefits funds expenses derivatives
Derivatives
in fair value
accounting
hedging
relationships
Interest rate
contracts $ (1 ) $ - $ - $ - $ - $ (1 )
Subtotal (1 ) - - - - (1 )
Derivatives
not
designated as
accounting
hedging
instruments
Interest rate
contracts - (1 ) - - - (1 )
Equity and
index
contracts - (4 ) - 56 17 69
Embedded
derivative
financial
instruments - 21 36 134 - 191
Foreign
currency
contracts - (1 ) - - 7 6
Credit
default
contracts - 9 - - - 9
Other
contracts - - - 3 - 3
Subtotal - 24 36 193 24 277
Total $ (1 ) $ 24 $ 36 $ 193 $ 24 $ 276
2011
Total gain
(loss)
Realized Life and Interest recognized
Net capital annuity credited to Operating in net
investment gains and contract contractholder costs and income on
income losses benefits funds expenses derivatives
Derivatives
in fair value
accounting
hedging
relationships
Interest rate
contracts $ (2 ) $ (8 ) $ - $ (5 ) $ - $ (15 )
Foreign
currency and
interest rate
contracts - - - (32 ) - (32 )
Subtotal (2 ) (8 ) - (37 ) - (47 )
Derivatives
not
designated as
accounting
hedging
instruments
Interest rate
contracts - (304 ) - - - (304 )
Equity and
index
contracts - (43 ) - (2 ) (3 ) (48 )
Embedded
derivative
financial
instruments - (37 ) (32 ) (38 ) - (107 )
Foreign
currency
contracts - (12 ) - - 2 (10 )
Credit
default
contracts - 8 - - - 8
Other
contracts - - - 7 - 7
Subtotal - (388 ) (32 ) (33 ) (1 ) (454 )
Total $ (2 ) $ (396 ) $ (32 ) $ (70 ) $ (1 ) $ (501 )
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2010
Total gain
(loss)
Realized Life and Interest recognized
Net capital annuity credited to Operating in net
investment gains and contract contractholder costs and income on
income losses benefits funds expenses derivatives
Derivatives
in fair value
accounting
hedging
relationships
Interest rate
contracts $ (139 ) $ 9 $ - $ 11 $ - $ (119 )
Foreign
currency and
interest rate
contracts - (2 ) - (18 ) - (20 )
Subtotal (139 ) 7 - (7 ) - (139 )
Derivatives
not
designated as
accounting
hedging
instruments
Interest rate
contracts - (496 ) - - - (496 )
Equity and
index
contracts - (91 ) - 113 18 40
Embedded
derivative
financial
instruments - (3 ) (28 ) 34 - 3
Foreign
currency
contracts - (10 ) - - (3 ) (13 )
Credit
default
contracts - (8 ) - - - (8 )
Other
contracts - - - 3 - 3
Subtotal - (608 ) (28 ) 150 15 (471 )
Total $ (139 ) $ (601 ) $ (28 ) $ 143 $ 15 $ (610 )
The following table provides a summary of the changes in fair value of the
Company's fair value hedging relationships in the Consolidated Statements of
Operations for the years ended December 31.
($ in millions) Gain (loss) on derivatives Gain (loss) on hedged risk
Foreign
Interest currency &
Location of gain or (loss) recognized rate interest rate Contractholder
in net income on derivatives contracts contracts funds Investments
2012
Net investment income $ 3 $ - $ - $ (3 )
Total $ 3 $ - $ - $ (3 )
2011
Interest credited to contractholder funds $ (7 ) $ (34 ) $ 41 $ -
Net investment income
26 - - (26 )
Realized capital gains and losses (8 ) - - -
Total $ 11 $ (34 ) $ 41 $ (26 )
2010
Interest credited to contractholder funds $ - $ (48 ) $ 48 $ -
Net investment income
(33 ) - - 33
Realized capital gains and losses 9 (2 ) - -
Total $ (24 ) $ (50 ) $ 48 $ 33
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 that permit either party
to net payments due for transactions and collateral is either pledged or
obtained when certain predetermined exposure limits are exceeded. As of
December 31, 2012, counterparties pledged $29 million in cash and securities to
the Company, and the Company pledged $26 million in securities to counterparties
which includes $25 million of collateral posted under MNAs for contracts
containing credit-risk-contingent provisions that are in a liability position
and $1 million of collateral posted under MNAs for contracts without
credit-risk-contingent liabilities. The Company has not incurred any losses on
derivative financial instruments due to counterparty nonperformance. Other
derivatives, including futures and certain option contracts, are traded on
organized exchanges which require margin deposits and guarantee the execution of
trades, thereby mitigating any potential credit risk.
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Counterparty credit exposure represents the Company's potential loss if all
of the counterparties concurrently fail to perform under the contractual terms
of the contracts and all collateral, if any, becomes worthless. This exposure is
measured by the fair value of OTC derivative contracts with a positive fair
value at the reporting date reduced by the effect, if any, of legally
enforceable master netting agreements.
The following table summarizes the counterparty credit exposure as of
December 31 by counterparty credit rating as it relates to the Company's OTC
derivatives.
($ in millions) 2012 2011
Number Number
of Exposure, of Exposure,
counter- Notional Credit net of counter- Notional Credit net of
Rating (1) parties amount (2) exposure (2) collateral (2) parties amount (2) exposure (2) collateral (2)
AA- - $ - $ - $ - 1 $ 25 $ 1 $ 1
A+ 2 29 1 1 4 3,026 26 5
A 4 2,450 13 2 3 5,307 15 1
A- 3 797 8 2 2 3,815 25 -
BBB+ 1 3,617 11 - 2 57 41 41
Total 10 $ 6,893 $ 33 $ 5 12 $ 12,230 $ 108 $ 48
--------------------------------------------------------------------------------
º (1)
º Rating is the lower of S&P or Moody's ratings.
º (2)
º 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 either Moody's or 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 either Moody's or 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 of December 31, 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) 2012 2011
Gross liability fair value of contracts containing
credit-risk-contingent features
$
65 $ 153
Gross asset fair value of contracts containing credit-risk-contingent
features and subject to MNAs
(31 ) (69 )
Collateral posted under MNAs for contracts containing
credit-risk-contingent features
(25 ) (76 )
Maximum amount of additional exposure for contracts with
credit-risk-contingent features if all features were triggered
concurrently
$ 9 $ 8
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
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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.
($ in millions) Notional amount
Fair
AAA AA A BBB BB and lower Total value
December 31, 2012
Single name
Investment grade corporate debt
(1) $ 5 $ 20 $ 53 $ 80 $ 10 $ 168 $ -
Municipal - 25 - - - 25 (3 )
Subtotal 5 45 53 80 10 193 (3 )
Baskets
First-to-default
Municipal - - 100 - - 100 (26 )
Subtotal - - 100 - - 100 (26 )
Index
Investment grade corporate debt
(1) - 3 79 204 14 300 2
Total $ 5 $ 48 $ 232 $ 284 $ 24 $ 593 $ (27 )
December 31, 2011
Single name
Investment grade corporate debt
(1) $ - $ 90 $ 88 $ 160 $ 30 $ 368 $ (7 )
High yield debt - - - - 2 2 -
Municipal - 135 - - - 135 (12 )
Subtotal - 225 88 160 32 505 (19 )
Baskets
Tranche
Investment grade corporate debt
(1) - - - - 65 65 (29 )
First-to-default
Municipal - - 100 - - 100 (33 )
Subtotal - - 100 - 65 165 (62 )
Total $ - $ 225 $ 188 $ 160 $ 97 $ 670 $ (81 )
--------------------------------------------------------------------------------
º (1)
º Investment grade corporate debt categorization is based on the rating of
the underlying name(s) at initial purchase.
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 is utilized to take a position on multiple (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, 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.
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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.
Off-balance sheet financial instruments
The contractual amounts of off-balance sheet financial instruments as of
December 31 are as follows:
($ in millions) 2012 2011
Commitments to invest in limited partnership interests $ 2,080$ 2,015
Commitments to extend mortgage loans 67
84
Private placement commitments 54
83
Other loan commitments 7 26
In the preceding table, the contractual amounts represent the amount at risk
if the contract is fully drawn upon, the counterparty defaults and the value of
any underlying security becomes worthless. Unless noted otherwise, the Company
does not require collateral or other security to support off-balance sheet
financial instruments with credit risk.
Commitments to invest in limited partnership interests represent agreements
to acquire new or additional participation in certain limited partnership
investments. The Company enters into these agreements in the normal course of
business. Because the investments in limited partnerships are not actively
traded, it is not practical to estimate the fair value of these commitments.
Commitments to extend mortgage loans are agreements to lend to a borrower
provided there is no violation of any condition established in the contract. The
Company enters into these agreements to commit to future loan fundings at a
predetermined interest rate. Commitments generally have fixed expiration dates
or other termination clauses. The fair value of commitments to extend mortgage
loans, which are secured by the underlying properties, is $1 million as of
December 31, 2012, and is valued based on estimates of fees charged by other
institutions to make similar commitments to similar borrowers.
Private placement commitments represent conditional commitments to purchase
private placement debt and equity securities at a specified future date. The
Company enters into these agreements in the normal course of business. The fair
value of these commitments generally cannot be estimated on the date the
commitment is made as the terms and conditions of the underlying private
placement securities are not yet final.
Other loan commitments are agreements to lend to a borrower provided there
is no violation of any condition established in the contract. The Company enters
into these agreements to commit to future loan fundings at predetermined
interest rates. Commitments generally have fixed or varying expiration dates or
other termination clauses. The fair value of these commitments is insignificant.
8. 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 ("IBNR") 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
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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 Consolidated Statements of Operations
in the period such changes are determined.
Activity in the reserve for property-liability insurance claims and claims
expense is summarized as follows:
($ in millions) 2012 2011
2010
Balance as of January 1 $ 20,375 $ 19,468
$ 19,167
Less reinsurance recoverables 2,588 2,072 2,139
Net balance as of January 1 17,787 17,396 17,028
Esurance acquisition as of October 7, 2011 (13 ) (1) 425
-
Incurred claims and claims expense related to:
Current year 19,149 20,496 19,110
Prior years (665 ) (335 ) (159 )
Total incurred 18,484 20,161 18,951
Claims and claims expense paid related to:
Current year 12,545 13,893 12,012
Prior years 6,435 6,302 6,571
Total paid 18,980 20,195 18,583
Net balance as of December 31 17,278 17,787
17,396
Plus reinsurance recoverables 4,010 2,588 2,072
Balance as of December 31 $ 21,288 $ 20,375 $ 19,468
--------------------------------------------------------------------------------
º (1)
º The Esurance opening balance sheet reserves were reestimated in 2012
resulting in a reduction in reserves due to lower severity. The adjustment
was recorded as a reduction in goodwill and an increase in payables to the
seller under the terms of the purchase agreement and therefore had no
impact on claims expense.
Incurred claims and claims expense represents the sum of paid losses and
reserve changes in the calendar year. This expense includes losses from
catastrophes of $2.35 billion, $3.82 billion and $2.21 billion in 2012, 2011 and
2010, respectively, net of reinsurance and other recoveries (see Note 10).
Catastrophes are an inherent risk of the property-liability insurance business
that have contributed to, and will continue to contribute to, material
year-to-year fluctuations in the Company's results of operations and financial
position.
The Company calculates and records a single best reserve estimate for losses
from catastrophes, in conformance with generally accepted actuarial standards.
As a result, management believes that no other estimate is better than the
recorded amount. Due to the uncertainties involved, including the factors
described above, the ultimate cost of losses may vary materially from recorded
amounts, which are based on management's best estimates. Accordingly, management
believes that it is not practical to develop a meaningful range for any such
changes in losses incurred.
During 2012, incurred claims and claims expense related to prior years was
primarily composed of net decreases in auto reserves of $365 million primarily
due to claim severity development that was better than expected, net decreases
in homeowners reserves of $321 million due to favorable catastrophe reserve
reestimates, and net decreases in other reserves of $30 million. Incurred claims
and claims expense includes favorable catastrophe loss reestimates of
$410 million, net of reinsurance and other recoveries.
During 2011, incurred claims and claims expense related to prior years was
primarily composed of net decreases in auto reserves of $381 million primarily
due to claim severity development that was better than expected, net decreases
in homeowners reserves of $69 million due to favorable catastrophe reserve
reestimates, and net increases in other reserves of $94 million. Incurred claims
and claims expense includes favorable catastrophe loss reestimates of
$130 million, net of reinsurance and other recoveries.
During 2010, incurred claims and claims expense related to prior years was
primarily composed of net decreases in auto reserves of $179 million primarily
due to claim severity development that was better than expected partially offset
by a litigation settlement, net decreases in homeowners reserves of $23 million
due to favorable catastrophe reserve reestimates partially offset by a
litigation settlement, and net increases in other reserves of $15 million.
Incurred claims
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and claims expense includes favorable catastrophe loss reestimates of
$163 million, net of reinsurance and other recoveries.
Management believes that the reserve for property-liability insurance claims
and claims expense, net of reinsurance recoverables, is appropriately
established in the aggregate and adequate to cover the ultimate net cost of
reported and unreported claims arising from losses which had occurred by the
date of the Consolidated Statements of Financial Position based on available
facts, technology, laws and regulations.
For further discussion of asbestos and environmental reserves, see Note 14.
9. Reserve for Life-Contingent Contract Benefits and Contractholder Funds
As of December 31, the reserve for life-contingent contract benefits
consists of the following:
($ in millions) 2012 2011
Immediate fixed annuities:
Structured settlement annuities $ 7,274 $
7,075
Other immediate fixed annuities 2,386
2,350
Traditional life insurance 3,110
3,004
Accident and health insurance 2,011
1,859
Other 114
118
Total reserve for life-contingent contract benefits $ 14,895$ 14,406
The following table highlights the key assumptions generally used in
calculating the reserve for life-contingent contract benefits:
Product Mortality Interest rate Estimation method
Structured U.S. population with Interest rate Present value of
settlement projected calendar year assumptions contractually
annuities improvements; mortality rates range from specified future
adjusted for each impaired 1.3% to 9.2% benefits
life based on reduction in
life expectancy
Other 1983 group annuity mortality Interest rate Present value of
immediate table with internal assumptions expected future
fixed modifications; 1983 range from benefits based on
annuities individual annuity mortality 0.1% to 11.5% historical
table; Annuity 2000 mortality experience
table with internal
modifications; Annuity 2000
mortality table; 1983
individual annuity mortality
table with internal
modifications
Traditional Actual company experience Interest rate Net level premium
life insurance plus loading assumptions reserve method using
range from the Company's
4.0% to 11.3% withdrawal
experience rates;
includes reserves
for unpaid claims
Accident and Actual company experience Interest rate Unearned premium;
health plus loading assumptions additional contract
insurance range from reserves for
3.0% to 7.0% mortality risk and
unpaid claims
Other:
Variable Annuity 2000 mortality table Interest rate Projected benefit
annuity with internal modifications assumptions ratio applied to
guaranteed range from cumulative
minimum 4.0% to 5.8% assessments
death
benefits (1)
--------------------------------------------------------------------------------
º (1)
º In 2006, the Company disposed of substantially all of its variable annuity
business through reinsurance agreements with The Prudential Insurance
Company of America, a subsidiary of Prudential Financial, Inc.
(collectively "Prudential").
To the extent that unrealized gains on fixed income securities would result
in a premium deficiency had those gains actually been realized, a premium
deficiency reserve is recorded for certain immediate annuities with life
contingencies.
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A liability of $771 million and $594 million is included in the reserve for
life-contingent contract benefits with respect to this deficiency as of
December 31, 2012 and 2011, respectively. The offset to this liability is
recorded as a reduction of the unrealized net capital gains included in
accumulated other comprehensive income.
As of December 31, contractholder funds consist of the following:
($ in millions) 2012 2011
Interest-sensitive life insurance $ 11,011 $ 10,826
Investment contracts:
Fixed annuities 25,881 29,049
Funding agreements backing medium-term notes 1,867 1,929
Other investment contracts 560 528
Total contractholder funds $ 39,319 $ 42,332
The following table highlights the key contract provisions relating to
contractholder funds:
Withdrawal/surrender
Product Interest rate charges
Interest-sensitive life Interest rates credited Either a percentage of
insurance range from 0% to 11.0% for account balance or dollar
equity-indexed life (whose amount grading off
returns are indexed to the generally over 20 years
S&P 500) and 1.0% to 6.0%
for all other products
Fixed annuities Interest rates credited Either a declining or a
range from 0% to 9.8% for level percentage charge
immediate annuities; (8.0)% generally over ten years or
to 13.5% for equity-indexed less. Additionally,
annuities (whose returns approximately 24.3% of
are indexed to the fixed annuities are subject
S&P 500); and 0.1% to 6.3% to market value adjustment
for all other products for discretionary
withdrawals
Funding agreements Interest rates credited Not applicable
backing medium-term range from 3.0% to 5.4%
notes (excluding currency-swapped
medium-term notes)
Other investment
contracts:
Guaranteed minimum Interest rates used in Withdrawal and surrender
income, accumulation and establishing reserves range charges are based on the
withdrawal benefits on from 1.7% to 10.3% terms of the related
variable (1) and fixed interest-sensitive life
annuities and secondary insurance or fixed annuity
guarantees on contract
interest-sensitive life
insurance and fixed
annuities
--------------------------------------------------------------------------------
º (1)
º In 2006, the Company disposed of substantially all of its variable annuity
business through reinsurance agreements with Prudential.
Contractholder funds include funding agreements held by VIEs issuing
medium-term notes. The VIEs are Allstate Life Funding, LLC, Allstate Financial
Global Funding, LLC, Allstate Life Global Funding and Allstate Life Global
Funding II, and their primary assets are funding agreements used exclusively to
back medium-term note programs.
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Contractholder funds activity for the years ended December 31 is as follows:
($ in millions) 2012 2011
Balance, beginning of year $ 42,332 $ 48,195
Deposits 2,275 2,318
Interest credited 1,323 1,629
Benefits (1,463 ) (1,461 )
Surrenders and partial withdrawals (3,990 ) (4,935 )
Bank withdrawals -
(1,463 )
Maturities of and interest payments on institutional products (138 )
(867 )
Contract charges (1,066 )
(1,028 )
Net transfers from separate accounts 11
12
Fair value hedge adjustments for institutional products - (34 )
Other adjustments 35 (34 )
Balance, end of year $ 39,319 $ 42,332
The Company offered various guarantees to variable annuity contractholders.
Liabilities for variable contract guarantees related to death benefits are
included in the reserve for life-contingent contract benefits and the
liabilities related to the income, withdrawal and accumulation benefits are
included in contractholder funds. All liabilities for variable contract
guarantees are reported on a gross basis on the balance sheet with a
corresponding reinsurance recoverable asset for those contracts subject to
reinsurance. In 2006, the Company disposed of substantially all of its variable
annuity business through reinsurance agreements with Prudential.
Absent any contract provision wherein the Company guarantees either a
minimum return or account value upon death, a specified contract anniversary
date, partial withdrawal or annuitization, variable annuity and variable life
insurance contractholders bear the investment risk that the separate accounts'
funds may not meet their stated investment objectives. The account balances of
variable annuities contracts' separate accounts with guarantees included
$5.23 billion and $5.54 billion of equity, fixed income and balanced mutual
funds and $721 million and $837 million of money market mutual funds as of
December 31, 2012 and 2011, respectively.
The table below presents information regarding the Company's variable
annuity contracts with guarantees. The Company's variable annuity contracts may
offer more than one type of guarantee in each contract; therefore, the sum of
amounts listed exceeds the total account balances of variable annuity contracts'
separate accounts with guarantees.
($ in millions) December 31,
2012 2011
In the event of death
Separate account value $ 5,947 $ 6,372
Net amount at risk (1) $ 1,044 $ 1,502
Average attained age of contractholders 67 years 66 years
At annuitization (includes income benefit guarantees)
Separate account value
$ 1,416 $ 1,489
Net amount at risk (2) $ 418
$ 574
Weighted average waiting period until annuitization options
available
None 1 year
For cumulative periodic withdrawals
Separate account value $ 532 $ 587
Net amount at risk (3) $ 16 $ 27
Accumulation at specified dates
Separate account value $ 811 $ 906
Net amount at risk (4) $ 50 $ 78
Weighted average waiting period until guarantee date 6 years
6 years
--------------------------------------------------------------------------------
º (1)
º Defined as the estimated current guaranteed minimum death benefit in excess
of the current account balance as of the balance sheet date.
º (2)
º Defined as the estimated present value of the guaranteed minimum annuity
payments in excess of the current account balance.
º (3)
º Defined as the estimated current guaranteed minimum withdrawal balance
(initial deposit) in excess of the current account balance as of the
balance sheet date.
º (4)
º Defined as the estimated present value of the guaranteed minimum
accumulation balance in excess of the current account balance.
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The liability for death and income benefit guarantees is equal to a benefit
ratio multiplied by the cumulative contract charges earned, plus accrued
interest less contract excess guarantee benefit payments. The benefit ratio is
calculated as the estimated present value of all expected contract excess
guarantee benefits divided by the present value of all expected contract
charges. The establishment of reserves for these guarantees requires the
projection of future fund values, mortality, persistency and customer benefit
utilization rates. These assumptions are periodically reviewed and updated. For
guarantees related to death benefits, benefits represent the projected excess
guaranteed minimum death benefit payments. For guarantees related to income
benefits, benefits represent the present value of the minimum guaranteed
annuitization benefits in excess of the projected account balance at the time of
annuitization.
Projected benefits and contract charges used in determining the liability
for certain guarantees are developed using models and stochastic scenarios that
are also used in the development of estimated expected gross profits. Underlying
assumptions for the liability related to income benefits include assumed future
annuitization elections based on factors such as the extent of benefit to the
potential annuitant, eligibility conditions and the annuitant's attained age.
The liability for guarantees is re-evaluated periodically, and adjustments are
made to the liability balance through a charge or credit to life and annuity
contract benefits.
Guarantees related to the majority of withdrawal and accumulation benefits
are considered to be derivative financial instruments; therefore, the liability
for these benefits is established based on its fair value.
The following table summarizes the liabilities for guarantees:
($ in millions) Liability for
guarantees Liability for
related to Liability for guarantees
death benefits guarantees related to
and interest- related to accumulation
sensitive life income and withdrawal
products benefits benefits Total
Balance, December 31,
2011 (1) $ 289 $ 191 $ 164 $ 644
Less reinsurance
recoverables 116 175 162 453
Net balance as of
December 31, 2011 173 16 2 191
Incurred guarantee
benefits 25 (1 ) 2 26
Paid guarantee benefits (2 ) - - (2 )
Net change 23 (1 ) 2 24
Net balance as of
December 31, 2012 196 15 4 215
Plus reinsurance
recoverables 113 220 125 458
Balance, December 31,
2012 (2) $ 309 $ 235 $ 129 $ 673
Balance, December 31,
2010 (3) $ 236 $ 227 $ 136 $ 599
Less reinsurance
recoverables 93 210 135 438
Net balance as of
December 31, 2010 143 17 1 161
Incurred guarantee
benefits 30 (1 ) 1 30
Paid guarantee benefits - - - -
Net change 30 (1 ) 1 30
Net balance as of
December 31, 2011 173 16 2 191
Plus reinsurance
recoverables 116 175 162 453
Balance, December 31,
2011 (1) $ 289 $ 191 $ 164 $ 644
--------------------------------------------------------------------------------
º (1)
º Included in the total liability balance as of December 31, 2011 are
reserves for variable annuity death benefits of $116 million, variable
annuity income benefits of $175 million, variable annuity accumulation
benefits of $105 million, variable annuity withdrawal benefits of
$57 million and other guarantees of $191 million.
º (2)
º Included in the total liability balance as of December 31, 2012 are
reserves for variable annuity death benefits of $112 million, variable
annuity income benefits of $221 million, variable annuity accumulation
benefits of $86 million, variable annuity withdrawal benefits of
$39 million and other guarantees of $215 million.
º (3)
º Included in the total liability balance as of December 31, 2010 are
reserves for variable annuity death benefits of $85 million, variable
annuity income benefits of $211 million, variable annuity accumulation
benefits of $88 million, variable annuity withdrawal benefits of
$47 million and other guarantees of $168 million.
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10. Reinsurance
The effects of reinsurance on property-liability insurance premiums written
and earned and life and annuity premiums and contract charges for the years
ended December 31 are as follows:
($ in millions) 2012 2011
2010
Property-liability insurance premiums written
Direct $ 28,103 $ 27,066 $ 26,984
Assumed 35 22 29
Ceded (1,111 ) (1,108 ) (1,106 )
Property-liability insurance premiums written, net of
reinsurance
$ 27,027 $
25,980 $ 25,907
Property-liability insurance premiums earned
Direct $ 27,794 $ 27,016 $ 27,015
Assumed 33 24 34
Ceded (1,090 ) (1,098 ) (1,092 )
Property-liability insurance premiums earned, net of
reinsurance
$ 26,737 $
25,942 $ 25,957
Life and annuity premiums and contract charges
Direct $ 2,860 $ 2,953 $ 2,935
Assumed 55 35 37
Ceded (674 ) (750 ) (804 )
Life and annuity premiums and contract charges, net of
reinsurance $ 2,241 $ 2,238 $ 2,168
Property-Liability
The Company purchases reinsurance after evaluating the financial condition
of the reinsurer, as well as the terms and price of coverage. Developments in
the insurance and reinsurance industries have fostered a movement to segregate
asbestos, environmental and other discontinued lines exposures into separate
legal entities with dedicated capital. Regulatory bodies in certain cases have
supported these actions. The Company is unable to determine the impact, if any,
that these developments will have on the collectability of reinsurance
recoverables in the future.
Property-Liability reinsurance recoverable
Total amounts recoverable from reinsurers as of December 31, 2012 and 2011
were $4.08 billion and $2.67 billion, respectively, including $69 million and
$86 million, respectively, related to property-liability losses paid by the
Company and billed to reinsurers, and $4.01 billion and $2.59 billion,
respectively, estimated by the Company with respect to ceded unpaid losses
(including IBNR), which are not billable until the losses are paid.
With the exception of the recoverable balances from the Michigan
Catastrophic Claim Association ("MCCA"), Lloyd's of London and other industry
pools and facilities, the largest reinsurance recoverable balance the Company
had outstanding was $95 million and $98 million from Westport Insurance
Corporation (formerly Employers' Reinsurance Company) as of December 31, 2012
and 2011, respectively. No other amount due or estimated to be due from any
single property-liability reinsurer was in excess of $42 million and $36 million
as of December 31, 2012 and 2011, respectively.
The allowance for uncollectible reinsurance was $87 million and $103 million
as of December 31, 2012 and 2011, respectively, and is related to the Company's
Discontinued Lines and Coverages segment.
Industry pools and facilities
Reinsurance recoverable on paid and unpaid claims including IBNR as of
December 31, 2012 and 2011 includes $2.59 billion and $1.71 billion,
respectively, from the MCCA. The MCCA is a mandatory insurance coverage and
reinsurance reimbursement mechanism for personal injury protection losses that
provides indemnification for losses over a retention level that increases every
other MCCA fiscal year. The retention level is $500 thousand per claim for the
fiscal years ending June 30, 2013 and 2012. The MCCA is funded by assessments
from member companies who, in turn, can recover assessments from policyholders.
There have been no significant uncollectible balances from the MCCA.
Allstate sells and administers policies as a participant in the National
Flood Insurance Program ("NFIP"). The amounts recoverable as of December 31,
2012 and 2011 were $428 million and $33 million, respectively. Ceded premiums
earned include $311 million, $312 million and $306 million in 2012, 2011 and
2010, respectively. Ceded losses
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incurred include $758 million, $196 million and $50 million in 2012, 2011 and
2010, respectively. Under the arrangement, the Federal Government is obligated
to pay all claims.
Ceded premiums earned under the Florida Hurricane Catastrophe Fund ("FHCF")
agreement were $18 million, $27 million and $15 million in 2012, 2011 and 2010,
respectively. There were no ceded losses incurred in 2012. Ceded losses incurred
were $8 million and $10 million in 2011 and 2010, respectively. The Company has
access to reimbursement provided by the FHCF for 90% of qualifying personal
property losses that exceed its current retention of $89 million for the 2
largest hurricanes and $30 million for other hurricanes, up to a maximum total
of $236 million effective from June 1, 2012 to May 31, 2013. There were no
amounts recoverable from the FHCF as of December 31, 2012 or 2011.
Catastrophe reinsurance
The Company has the following catastrophe reinsurance treaties in effect as
of December 31, 2012:
º •
º Nationwide Per Occurrence Excess Catastrophe Reinsurance agreement
comprises nine contracts, placed in seven layers, incepting as of
June 1, 2011 and with one, two and three year terms. This agreement
reinsures Allstate Protection personal lines auto and property
business countrywide, in all states except Florida and New Jersey, for
excess catastrophe losses caused by multiple perils. The first five
layers, which are 95% placed and subject to reinstatement, comprise
three contracts and cover $3.25 billion in per occurrence losses
subject to a $500 million retention and after $250 million in losses "otherwise recoverable." Losses from multiple qualifying occurrences
can apply to this $250 million threshold which applies once to each
contract year and only to the agreement's first layer. The sixth
layer, which is 82.33% placed and not subject to reinstatement,
comprises five contracts: two existing contracts expiring May 31, 2013
and May 31, 2014, and three additional contracts expiring May 31,
2013, May 31, 2014, and May 31, 2015. It covers $500 million in per
occurrence losses in excess of a $3.25 billion retention. The seventh
layer, which is 83.12% placed and not subject to reinstatement,
consists of one contract expiring May 31, 2013, and covers
$475 million in per occurrence losses in excess of a $3.75 billion
retention.
º •
º Top and Drop Excess Catastrophe Reinsurance agreement comprising a
three year term contract, incepting June 1, 2011, and providing
$250 million of reinsurance limits which may be used for Coverage A,
Coverage B, or a combination of both. Coverage A reinsures 12.67% of
$500 million in limits excess of a $3.25 billion retention. Coverage B
provides 25.32% of $250 million in limits excess of a $750 million
retention and after $500 million in losses "otherwise recoverable"
under the agreement. Losses from multiple qualifying occurrences can
apply to this $500 million threshold.
Losses recoverable under the Company's New Jersey, Kentucky and Pennsylvania
reinsurance agreements, described below, are disregarded when determining
coverage under the Nationwide Per Occurrence Excess Catastrophe Reinsurance
agreement and the Top and Drop Excess Catastrophe Reinsurance agreement.
º •
º New Jersey Excess Catastrophe Reinsurance agreement, comprising three
contracts, provides coverage for Allstate Protection personal lines
property excess catastrophe losses for multiple perils in New Jersey.
Two contracts, expiring May 31, 2014 and May 31, 2015, provide 31.66%
of a $400 million limit excess of a $139 million retention and 31.67%
of a $400 million limit excess of a $150 million retention,
respectively. Each contract contains one reinstatement each year. A
third contract, expiring May 31, 2013, is placed in two layers: the
first layer provides 32% of $300 million of limits in excess of a
$171 million retention, and the second layer provides 42% of
$200 million of limits in excess of a $471 million retention. Each layer includes one reinstatement per contract year. The reinsurance
premium and retention applicable to the agreement are subject to
redetermination for exposure changes annually.
º • º Kentucky Excess Catastrophe Reinsurance agreement provides coverage
for Allstate Protection personal lines property excess catastrophe
losses in the state for earthquakes and fires following earthquakes
effective June 1, 2011 to May 31, 2014. The agreement provides three
limits of $25 million excess of a $5 million retention subject to two
limits being available in any one contract year and is 95% placed.
º •
º Pennsylvania Excess Catastrophe Reinsurance agreement provides
coverage for Allstate Protection personal lines property excess
catastrophe losses in the state for multi-perils effective June 1,
2012 through May 31, 2015. The agreement provides three limits of
$100 million excess of a $100 million retention subject to two limits
being available in any one contract year and is 95% placed.
º •
º Five separate contracts for Castle Key Insurance Company and its
subsidiary ("Castle Key") provide coverage for personal lines property
excess catastrophe losses in Florida and coordinate coverage with
Castle Key's
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participation in the FHCF, effective June 1, 2012 to May 31, 2013. The
agreement, including the contract that provides coverage through the
FHCF, provides an estimated provisional limit of $666 million excess
of a provisional retention of $30 million.
The Company ceded premiums earned of $531 million, $531 million and
$582 million under catastrophe reinsurance agreements in 2012, 2011 and 2010,
respectively.
Asbestos, environmental and other
Reinsurance recoverables include $190 million and $193 million from Lloyd's
of London as of December 31, 2012 and 2011, respectively. Lloyd's of London,
through the creation of Equitas Limited, implemented a restructuring plan in
1996 to solidify its capital base and to segregate claims for years prior to
1993.
Allstate Financial
The Company's Allstate Financial segment reinsures certain of its risks to
other insurers primarily under yearly renewable term, coinsurance, modified
coinsurance and coinsurance with funds withheld agreements. These agreements
result in a passing of the agreed-upon percentage of risk to the reinsurer in
exchange for negotiated reinsurance premium payments. Modified coinsurance and
coinsurance with funds withheld are similar to coinsurance, except that the cash
and investments that support the liability for contract benefits are not
transferred to the assuming company and settlements are made on a net basis
between the companies. Allstate Financial cedes 100% of the morbidity risk on
substantially all of its long-term care contracts.
For certain term life insurance policies issued prior to October 2009,
Allstate Financial ceded up to 90% of the mortality risk depending on the year
of policy issuance under coinsurance agreements to a pool of fourteen
unaffiliated reinsurers. Effective October 2009, mortality risk on term business
is ceded under yearly renewable term agreements under which Allstate Financial
cedes mortality in excess of its retention, which is consistent with how
Allstate Financial generally reinsures its permanent life insurance business.
The following table summarizes those retention limits by period of policy
issuance.
Period Retention limits
April 2011 through current Single life: $5 million per life,
$3 million age 70 and over, and
$10 million for contracts that meet
specific criteria
Joint life: $8 million per life, and
$10 million for contracts that meet
specific criteria
July 2007 through March 2011$5 million per life, $3 million age 70
and over, and $10 million for
contracts that meet specific criteria
September 1998 through June 2007$2 million per life, in 2006 the limit
was increased to $5 million for
instances when specific criteria were
met
August 1998 and prior Up to $1 million per life
In addition, Allstate Financial has used reinsurance to effect the
acquisition or disposition of certain blocks of business. Allstate Financial had
reinsurance recoverables of $1.69 billion and $1.68 billion as of December 31,
2012 and 2011, respectively, due from Prudential related to the disposal of
substantially all of its variable annuity business that was effected through
reinsurance agreements. In 2012, life and annuity premiums and contract charges
of $128 million, contract benefits of $91 million, interest credited to
contractholder funds of $23 million, and operating costs and expenses of
$25 million were ceded to Prudential. In 2011, life and annuity premiums and
contract charges of $152 million, contract benefits of $121 million, interest
credited to contractholder funds of $20 million, and operating costs and
expenses of $27 million were ceded to Prudential. In 2010, life and annuity
premiums and contract charges of $171 million, contract benefits of
$152 million, interest credited to contractholder funds of $29 million, and
operating costs and expenses of $31 million were ceded to Prudential. In
addition, as of December 31, 2012 and 2011 Allstate Financial had reinsurance
recoverables of $160 million and $165 million, respectively, due from
subsidiaries of Citigroup (Triton Insurance and American Health and Life
Insurance) and Scottish Re (U.S.) Inc. in connection with the disposition of
substantially all of the direct response distribution business in 2003.
As of December 31, 2012, the gross life insurance in force was
$536.04 billion of which $209.87 billion was ceded to the unaffiliated
reinsurers.
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Allstate Financial's reinsurance recoverables on paid and unpaid benefits as
of December 31 are summarized in the following table.
($ in millions) 2012 2011
Annuities $ 1,831 $ 1,827
Life insurance 1,609 1,600
Long-term care insurance 1,163 1,063
Other 85 87
Total Allstate Financial $ 4,688 $ 4,577
As of December 31, 2012 and 2011, approximately 95% and 94%, respectively,
of Allstate Financial's reinsurance recoverables are due from companies rated A-
or better by S&P.
11. Deferred Policy Acquisition and Sales Inducement Costs
Deferred policy acquisition costs for the years ended December 31 are as
follows:
2012
Allstate Property-
($ in millions) Financial Liability Total Balance, beginning of year $ 2,523 $ 1,348 $
3,871
Acquisition costs deferred 371 3,531
3,902
Amortization charged to income (401 ) (3,483 )
(3,884 )
Effect of unrealized gains and losses (268 ) -
(268 )
Balance, end of year $ 2,225 $ 1,396 $ 3,621
2011
Allstate Property-
($ in millions) Financial Liability Total
Balance, beginning of year $ 2,859 $ 1,321 $ 4,180
Esurance acquisition present value of future
profits - 42 42
Acquisition costs deferred 333 3,462 3,795
Amortization charged to income (494 ) (3,477 ) (3,971 )
Effect of unrealized gains and losses (175 ) - (175 )
Balance, end of year $ 2,523 $ 1,348 $ 3,871
2010
Allstate Property-
Financial Liability Total Balance, beginning of year $ 3,398 $ 1,355 $
4,753
Acquisition costs deferred 385 3,483
3,868
Amortization charged to income (290 ) (3,517 )
(3,807 )
Effect of unrealized gains and losses (634 ) -
(634 )
Balance, end of year $ 2,859 $ 1,321 $ 4,180
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DSI activity for Allstate Financial, which primarily relates to fixed
annuities and interest-sensitive life contracts, for the years ended December 31
was as follows:
($ in millions) 2012 2011 2010
Balance, beginning of year $ 41 $ 86 $ 195
Sales inducements deferred 22 7 14
Amortization charged to income (14 ) (23 ) (27 )
Effect of unrealized gains and losses (8 ) (29 ) (96 )
Balance, end of year $ 41 $ 41 $ 86
12. Capital Structure
Debt outstanding
Total debt outstanding as of December 31 consisted of the following:
($ in millions) 2012 2011
6.125% Senior Notes, due 2012 (1) $ - $ 350
7.50% Debentures, due 2013 250 250
5.00% Senior Notes, due 2014 (1) 650 650
6.20% Senior Notes, due 2014 (1) 300 300
6.75% Senior Debentures, due 2018 250 250
7.45% Senior Notes, due 2019 (1) 700 700
6.125% Senior Notes, due 2032 (1) 250 250
5.35% Senior Notes due 2033 (1) 400 400
5.55% Senior Notes due 2035 (1) 800 800
5.95% Senior Notes, due 2036 (1) 650 650
6.90% Senior Debentures, due 2038 250 250
5.20% Senior Notes, due 2042 (1) 500 -
6.125% Junior Subordinated Debentures, due 2067 500 500
6.50% Junior Subordinated Debentures, due 2067 500 500
Synthetic lease VIE obligations, floating rates, due 2014 44 44
Federal Home Loan Bank ("FHLB") advances, due 2018 13 14
Total long-term debt 6,057 5,908
Short-term debt (2) - -
Total debt $ 6,057 $ 5,908
--------------------------------------------------------------------------------
º (1)
º Senior Notes are subject to redemption at the Company's option in whole or
in part at any time at the greater of either 100% of the principal amount
plus accrued and unpaid interest to the redemption date or the discounted
sum of the present values of the remaining scheduled payments of principal
and interest and accrued and unpaid interest to the redemption date.
º (2)
º The Company classifies any borrowings which have a maturity of twelve
months or less at inception as short-term debt.
Total debt outstanding by maturity as of December 31, 2012 is as follows:
($ in millions)
Due within one year or less $ 250
Due after one year through 5 years 994
Due after 5 years through 10 years 963
Due after 10 years through 20 years 250
Due after 20 years 3,600
Total debt $ 6,057
On January 10, 2013, the Company issued $500 million of 5.10%
Fixed-to-Floating Rate Subordinated Debentures due 2053 ("Subordinated
Debentures"). The proceeds of this issuance will be used for general corporate
purposes,
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including the repurchase of the Company's common stock through open market
purchases from time to time or through an accelerated repurchase program.
The Subordinated Debentures may be redeemed (i) in whole at any time or in
part from time to time on or after January 15, 2023 at their principal amount
plus accrued and unpaid interest to, but excluding, the date of redemption;
provided that if the Subordinated Debentures are not redeemed in whole, at least
$25 million aggregate principal amount must remain outstanding, or (ii) in
whole, but not in part, prior to January 15, 2023, within 90 days after the
occurrence of certain tax and rating agency events, at their principal amount
or, if greater, a make-whole redemption price, plus accrued and unpaid interest
to, but excluding, the date of redemption.
Interest on the Subordinated Debentures is payable quarterly at the stated
fixed annual rate to January 14, 2023, or any earlier redemption date, and then
at an annual rate equal to the three-month LIBOR plus 3.165%. The Company may
elect to defer payment of interest on the Subordinated Debentures for one or
more consecutive interest periods that do not exceed five years. During a
deferral period, interest will continue to accrue on the Subordinated Debentures
at the then-applicable rate and deferred interest will compound on each interest
payment date. If all deferred interest on the Subordinated Debentures is paid,
the Company can again defer interest payments.
On January 11, 2012, the Company issued $500 million of 5.20% Senior Notes
due 2042. The proceeds of this issuance were used for general corporate
purposes, including the repayment of $350 million of 6.125% Senior Notes on
February 15, 2012.
The Company has outstanding $500 million of Series A 6.50% and $500 million
of Series B 6.125% Fixed-to-Floating Rate Junior Subordinated Debentures
(together the "Debentures"). The scheduled maturity dates for the Debentures are
May 15, 2057 and May 15, 2037 for Series A and Series B, respectively, with a
final maturity date of May 15, 2067. The Debentures may be redeemed (i) in whole
or in part, at any time on or after May 15, 2037 or May 15, 2017 for Series A
and Series B, respectively, at their principal amount plus accrued and unpaid
interest to the date of redemption, or (ii) in certain circumstances, in whole
or in part, prior to May 15, 2037 and May 15, 2017 for Series A and Series B,
respectively, at their principal amount plus accrued and unpaid interest to the
date of redemption or, if greater, a make-whole price.
Interest on the Debentures is payable semi-annually at the stated fixed
annual rate to May 15, 2037 and May 15, 2017 for Series A and Series B,
respectively, and then payable quarterly at an annual rate equal to the
three-month LIBOR plus 2.12% and 1.935% for Series A and Series B, respectively.
The Company may elect at one or more times to defer payment of interest on the
Debentures for one or more consecutive interest periods that do not exceed
10 years. Interest compounds during such deferral periods at the rate in effect
for each period. The interest deferral feature obligates the Company in certain
circumstances to issue common stock or certain other types of securities if it
cannot otherwise raise sufficient funds to make the required interest payments.
The Company has reserved 75 million shares of its authorized and unissued common
stock to satisfy this obligation.
In connection with the issuance of the Debentures, the Company entered into
replacement capital covenants ("RCCs"). These covenants were not intended for
the benefit of the holders of the Debentures and could not be enforced by them.
Rather, they were for the benefit of holders of one or more other designated
series of the Company's indebtedness ("covered debt"), initially the 6.90%
Senior Debentures due 2038. At the time of the issuance of the Subordinated
Debentures, the Company terminated the existing RCCs and entered into new RCCs
designating the 6.75% Senior Debentures due 2018 as the covered debt. Pursuant
to the new RCCs, the Company has agreed that it will not repay, redeem, or
purchase the Debentures on or before May 15, 2067 and May 15, 2047 for Series A
and Series B, respectively, (or such earlier date on which the new RCCs
terminate by their terms) unless, subject to certain limitations, the Company
has received net cash proceeds in specified amounts from the sale of common
stock or certain other qualifying securities. The promises and covenants
contained in the new RCC will not apply if (i) S&P upgrades the Company's issuer
credit rating to A or above, (ii) the Company redeems the Debentures due to a
tax event, (iii) after notice of redemption has been given by the Company and a
market disruption event occurs preventing the Company from raising proceeds in
accordance with the new RCCs, or (iv) if the Company repurchases or redeems up
to 10% of the outstanding principal of the Debentures in any one-year period,
provided that no more than 25% will be so repurchased, redeemed or purchased in
any ten-year period.
The new RCCs terminate in 2067 and 2047 for Series A and Series B,
respectively. The new RCCs will terminate prior to their scheduled termination
date if (i) the applicable series of Debentures is no longer outstanding and the
Company has fulfilled its obligations under the new RCCs or they are no longer
applicable, (ii) the holders of a majority of the then-outstanding principal
amount of the then-effective series of covered debt consent to agree to the
termination of the new RCCs, (iii) the Company does not have any series of
outstanding debt that is eligible to be
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treated as covered debt under the new RCCs, (iv) the applicable series of
Debentures is accelerated as a result of an event of default, (v) certain rating
agency or change in control events occur, (vi) S&P, or any successor thereto, no
longer assigns a solicited rating on senior debt issued or guaranteed by the
Company, or (vii) the termination of the new RCCs would have no effect on the
equity credit provided by S&P with respect to the Debentures. An event of
default, as defined by the supplemental indenture, includes default in the
payment of interest or principal and bankruptcy proceedings.
The Company is the primary beneficiary of a consolidated VIE used to acquire
up to 19 automotive collision repair stores ("synthetic lease"). In 2011, the
Company renewed the synthetic lease for a three-year term at a floating rate due
2014. The Company's Consolidated Statements of Financial Position include
$30 million and $32 million of property and equipment, net and $44 million and
$44 million of long-term debt as of December 31, 2012 and 2011, respectively.
To manage short-term liquidity, the Company maintains a commercial paper
program and a credit facility as a potential source of funds. These include a
$1.00 billion unsecured revolving credit facility and a commercial paper program
with a borrowing limit of $1.00 billion. The credit facility has an initial term
of five years expiring in April 2017. The Company has the option to extend the
expiration by one year at the first and second anniversary of the facility, upon
approval of existing or replacement lenders. This facility contains an increase
provision that would allow up to an additional $500 million of borrowing. This
facility has a financial covenant requiring the Company not to exceed a 37.5%
debt to capitalization ratio as defined in the agreement. 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 the Company's senior unsecured, unguaranteed long-term debt. 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. No amounts were outstanding under the
credit facility as of December 31, 2012 or 2011. The Company had no commercial
paper outstanding as of December 31, 2012 or 2011.
The Company paid $366 million, $363 million and $363 million of interest on
debt in 2012, 2011 and 2010, respectively.
During 2012, the Company filed a universal shelf registration statement with
the Securities and Exchange Commission ("SEC") that expires in 2015. The
registration statement covers an unspecified amount of securities and can be
used to issue debt securities, common stock, preferred stock, depositary shares,
warrants, stock purchase contracts, stock purchase units and securities of trust
subsidiaries.
Capital stock
The Company had 900 million shares of issued common stock of which
479 million shares were outstanding and 421 million shares were held in treasury
as of December 31, 2012. In 2012, the Company reacquired 27 million shares at an
average cost of $34.11 and reissued 5 million shares under equity incentive
plans.
13. 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. The expenses related to these
activities are included in the Consolidated Statements of Operations as
restructuring and related charges, and totaled $34 million, $44 million and
$30 million in 2012, 2011 and 2010, respectively.
The following table presents changes in the restructuring liability in 2012.
Employee Exit Total
($ in millions) costs costs liability Balance as of December 31, 2011 $ 5 $ 5 $ 10
Expense incurred 10 5 15
Adjustments to liability - - -
Payments applied against liability (9 ) (7 ) (16 )
Balance as of December 31, 2012 $ 6 $ 3 $ 9
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 December 31,
2012, the cumulative amount incurred to date for active programs totaled
$85 million for employee costs and $50 million for exit costs.
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14. Commitments, Guarantees and Contingent Liabilities
Leases
The Company leases certain office facilities and computer equipment. Total
rent expense for all leases was $243 million, $256 million and $256 million in
2012, 2011 and 2010, respectively.
Minimum rental commitments under noncancelable capital and operating leases
with an initial or remaining term of more than one year as of December 31, 2012
are as follows:
Capital Operating
($ in millions) leases leases
2013 $ 19 $ 166
2014 17 130
2015 7 99
2016 7 72
2017 2 43
Thereafter 11 70
Total $ 63 $ 580
Present value of minimum capital lease payments $ 55
Shared markets and 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.
Castle Key is subject to assessments from Citizens Property Insurance
Corporation in the state of Florida ("FL Citizens"), which was initially created
by the state of Florida to provide insurance to property owners unable to obtain
coverage in the private insurance market. FL Citizens, at the discretion and
direction of its Board of Governors ("FL Citizens Board"), can levy a regular
assessment on assessable insurers and assessable insureds for a deficit in any
calendar year up to a maximum of the greater of 2% of the deficit or 2% of
Florida property premiums industry-wide for the prior year. Prior to July 2012,
the assessment rate was 6%. The base of assessable insurers includes all
property and casualty premiums in the state, except workers' compensation,
medical malpractice, accident and health insurance and policies written under
the NFIP. An insurer may recoup a regular assessment through a surcharge to
policyholders. In order to recoup this assessment, an insurer must file for a
policy surcharge with the Florida Office of Insurance Regulation ("FL OIR") at
least fifteen days prior to imposing the surcharge on policies. If a deficit
remains after the regular assessment, FL Citizens can also levy emergency
assessments in the current and subsequent years. Companies are required to
collect the emergency assessments directly from residential property
policyholders and remit to FL Citizens as collected.
The Company is also subject to assessments from Louisiana Citizens Property
Insurance Corporation ("LA Citizens"). LA Citizens can levy a regular assessment
on participating companies for a deficit in any calendar year up to a maximum of
the greater of 10% of the calendar year deficit or 10% of Louisiana direct
property premiums industry-wide for the prior calendar year.
Florida Hurricane Catastrophe Fund
Castle Key participates in the mandatory coverage provided by the FHCF and
therefore has access to reimbursements on certain qualifying Florida hurricane
losses from the FHCF (see Note 10), has exposure to assessments and pays annual
premiums to the FHCF for this reimbursement protection. The FHCF has the
authority to issue bonds to pay its obligations to insurers participating in the
mandatory coverage in excess of its capital balances. Payment of these bonds is
funded by emergency assessments on all property and casualty premiums in the
state, except workers' compensation, medical malpractice, accident and health
insurance and policies written under the NFIP. The FHCF emergency assessments
are limited to 6% of premiums per year beginning the first year in which
reimbursements require bonding, and up to a total of 10% of premiums per year
for assessments in the second and subsequent years, if required to fund
additional bonding. The FHCF issued $625 million in bonds in 2008, and the FL
OIR ordered an emergency assessment of 1% of premiums collected for all policies
renewed after January 1, 2007. The FHCF issued
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$676 million in bonds in 2010 and the FL OIR ordered an emergency assessment of
1.3% of premiums collected for all policies written or renewed after January 1,
2011. As required, companies will collect the FHCF emergency assessments
directly from policyholders and remit them to the FHCF as they are collected.
Facilities such as FL Citizens, LA Citizens and the FHCF are generally
designed so that the ultimate cost is borne by policyholders; however, the
exposure to assessments from these facilities and the availability of
recoupments or premium rate increases may not offset each other in the Company's
financial statements. Moreover, even if they do offset each other, they may not
offset each other in financial statements for the same fiscal period due to the
ultimate timing of the assessments and recoupments or premium rate increases, as
well as the possibility of policies not being renewed in subsequent years.
California Earthquake Authority
Exposure to certain potential losses from earthquakes in California is
limited by the Company's participation in the California Earthquake Authority
("CEA"), which provides insurance for California earthquake losses. The CEA is a
privately-financed, publicly-managed state agency created to provide insurance
coverage for earthquake damage. Insurers selling homeowners insurance in
California are required to offer earthquake insurance to their customers either
through their company or by participation in the CEA. The Company's homeowners
policies continue to include coverages for losses caused by explosions, theft,
glass breakage and fires following an earthquake, which are not underwritten by
the CEA.
As of December 31, 2012, the CEA's capital balance was approximately
$4.20 billion. Should losses arising from an earthquake cause a deficit in the
CEA, additional funding would be obtained from the proceeds of revenue bonds the
CEA may issue, an existing $3.56 billion reinsurance layer, and finally, if
needed, assessments on participating insurance companies. The authority of the
CEA to assess participating insurers extends through December 1, 2018.
Participating insurers are required to pay an assessment, currently estimated
not to exceed $1.56 billion, if the capital of the CEA falls below $350 million.
Participating insurers are required to pay a second additional assessment,
currently estimated not to exceed $500 million, if aggregate CEA earthquake
losses exceed $10.14 billion and the capital of the CEA falls below
$350 million. Within the limits previously described, the assessment could be
intended to restore the CEA's capital to a level of $350 million. There is no
provision that allows insurers to recover assessments through a premium
surcharge or other mechanism. The CEA's projected aggregate claim paying
capacity is $10.14 billion as of December 31, 2012 and if an event were to
result in claims greater than its capacity, affected policyholders would be paid
a prorated portion of their covered losses.
All future assessments on participating CEA insurers are based on their CEA
insurance market share as of December 31 of the preceding year. As of April 1,
2012, the Company's share of the CEA was 15.8%. The Company does not expect its
CEA market share to materially change. At this level, the Company's maximum
possible CEA assessment would be $325 million during 2013. Accordingly,
assessments from the CEA for a particular quarter or annual period may be
material to the results of operations and cash flows, but not the financial
position of the Company. Management believes the Company's exposure to
earthquake losses in California has been significantly reduced as a result of
its participation in the CEA.
Texas Windstorm Insurance Association
The Company participates in the mandatory coverage provided by the Texas
Windstorm Insurance Association ("TWIA"), for losses relating to hurricane
activity. Amounts assessed to each company are allocated based upon its
proportion of business written. In September 2008, TWIA assessed the Company
$66 million for losses relating to Hurricane Ike. The assessment was based on
2007 direct voluntary writings in the State of Texas. The Company expects to
recoup $35 million of the assessment via premium tax offsets over a five year
period. The Company has recouped $28 million as of December 31, 2012 and expects
to recoup the remaining $7 million in 2013. The remaining $31 million of the
assessment was eligible for cession under the Company's reinsurance program. The
TWIA board has not indicated the likelihood of any possible future assessments
to insurers at this time. However, assessments from the TWIA for a particular
quarter or annual period may be material to the results of operations and cash
flows, but not the financial position of the Company. Management believes the
Company's exposure to losses in Texas has been significantly reduced as a result
of its participation in the TWIA.
Guaranty funds
Under state insurance guaranty fund laws, insurers doing business in a state
can be assessed, up to prescribed limits, for certain obligations of insolvent
insurance companies to policyholders and claimants. Amounts assessed to each
company are typically related to its proportion of business written in each
state. The Company's policy is to accrue
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assessments when the entity for which the insolvency relates has met its state
of domicile's statutory definition of insolvency, the amount of the loss is
reasonably estimable and the related premium upon which the assessment is based
is written. In most states, the definition is met with a declaration of
financial insolvency by a court of competent jurisdiction. In certain states
there must also be a final order of liquidation. As of December 31, 2012 and
2011, the liability balance included in other liabilities and accrued expenses
was $49 million and $53 million, respectively. The related premium tax offsets
included in other assets were $32 million and $35 million as of December 31,
2012 and 2011, respectively.
PMI runoff support agreement
The Company has certain limited rights and obligations under a capital
support agreement ("Runoff Support Agreement") with PMI Mortgage Insurance
Company ("PMI"), the primary operating subsidiary of PMI Group, related to the
Company's disposition of PMI in prior years. Under the Runoff Support Agreement,
the Company would be required to pay claims on PMI policies written prior to
October 28, 1994 if PMI fails certain financial covenants and fails to pay such
claims. The agreement only covers these policies and not any policies issued on
or after that date. In the event any amounts are so paid, the Company would
receive a commensurate amount of preferred stock or subordinated debt of PMI
Group or PMI. The Runoff Support Agreement also restricts PMI's ability to write
new business and pay dividends under certain circumstances. On October 20, 2011,
the Director of the Arizona Department of Insurance took control of the PMI
insurance companies; effective October 24, 2011, the Director instituted a
partial claim payment plan: claim payments will be made at 50%, with the
remaining amount deferred as a policyholder claim. The effect of these
developments to the Company is uncertain. The Company has not received any
notices or requests for payments under this agreement. Management does not
believe these developments will have a material effect on results of operations,
cash flows or financial position of the Company.
Guarantees
The Company provides residual value guarantees on Company leased
automobiles. If all outstanding leases were terminated effective December 31,
2012, the Company's maximum obligation pursuant to these guarantees, assuming
the automobiles have no residual value, would be $46 million as of December 31,
2012. 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.
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 $5 million as of December 31, 2012. 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 effect on results of operations,
cash flows or financial position of the Company.
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 December 31, 2012.
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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
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.
Background
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 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.
Accrual and disclosure policy
The Company reviews its lawsuits, regulatory inquiries, and other legal
proceedings on an ongoing basis and follows appropriate accounting guidance when
making accrual and disclosure decisions. The Company establishes accruals for
such matters at management's best estimate when the Company assesses that it is
probable that a loss has been incurred and the amount of the loss can be
reasonably estimated. The Company does not establish accruals for such matters
when the Company does not believe both that it is probable that a loss has been
incurred and the amount of the loss can be reasonably estimated. The Company's
assessment of whether a loss is reasonably possible or probable is based on its
assessment of the ultimate outcome of the matter following all appeals. The
Company does not include potential recoveries in its estimates of reasonably
possible or probable losses. Legal fees are expensed as incurred.
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The Company continues to monitor its lawsuits, regulatory inquiries, and
other legal proceedings for further developments that would make the loss
contingency both probable and estimable, and accordingly accruable, or that
could affect the amount of accruals that have been previously established. There
may continue to be exposure to loss in excess of any amount accrued. Disclosure
of the nature and amount of an accrual is made when there have been sufficient
legal and factual developments such that the Company's ability to resolve the
matter would not be impaired by the disclosure of the amount of accrual.
When the Company assesses it is reasonably possible or probable that a loss
has been incurred, it discloses the matter. When it is possible to estimate the
reasonably possible loss or range of loss above the amount accrued, if any, for
the matters disclosed, that estimate is aggregated and disclosed. Disclosure is
not required when an estimate of the reasonably possible loss or range of loss
cannot be made.
For certain of the matters described below in the "Claims related
proceedings" and "Other proceedings" subsections, the Company is able to
estimate the reasonably possible loss or range of loss above the amount accrued,
if any. In determining whether it is possible to estimate the reasonably
possible loss or range of loss, the Company reviews and evaluates the disclosed
matters, in conjunction with counsel, in light of potentially relevant factual
and legal developments.
These developments may include information learned through the discovery
process, rulings on dispositive motions, settlement discussions, information
obtained from other sources, experience from managing these and other matters,
and other rulings by courts, arbitrators or others. When the Company possesses
sufficient appropriate information to develop an estimate of the reasonably
possible loss or range of loss above the amount accrued, if any, that estimate
is aggregated and disclosed below. There may be other disclosed matters for
which a loss is probable or reasonably possible but such an estimate is not
possible. Disclosure of the estimate of the reasonably possible loss or range of
loss above the amount accrued, if any, for any individual matter would only be
considered when there have been sufficient legal and factual developments such
that the Company's ability to resolve the matter would not be impaired by the
disclosure of the individual estimate.
As of December 31, 2012, the Company estimates that the aggregate range of
reasonably possible loss in excess of the amount accrued, if any, for the
disclosed matters where such an estimate is possible is zero to $830 million,
pre-tax. This disclosure is not an indication of expected loss, if any. Under
accounting guidance, an event is "reasonably possible" if "the chance of the
future event or events occurring is more than remote but less than likely" and
an event is "remote" if "the chance of the future event or events occurring is
slight." This estimate is based upon currently available information and is
subject to significant judgment and a variety of assumptions, and known and
unknown uncertainties. The matters underlying the estimate will change from time
to time, and actual results may vary significantly from the current estimate.
The estimate does not include matters or losses for which an estimate is not
possible. Therefore, this estimate represents an estimate of possible loss only
for certain matters meeting these criteria. It does not represent the Company's
maximum possible loss exposure. Information is provided below regarding the
nature of all of the disclosed matters and, where specified, the amount, if any,
of plaintiff claims associated with these loss contingencies.
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
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 accrued,
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 effect on the financial position of the Company.
Claims related proceedings
Allstate is vigorously defending a lawsuit filed in the aftermath of
Hurricane Katrina and currently pending in the United States District Court for
the Eastern District of Louisiana ("District Court"). This matter was filed by
the Louisiana Attorney General against Allstate and every other homeowner
insurer doing business in the State of Louisiana, on behalf of the State of
Louisiana, as assignee, and on behalf of certain Road Home fund recipients.
Although this lawsuit was originally filed as a class action, the Louisiana
Attorney General moved to dismiss the class in 2011 and that motion was granted.
In this matter the State alleged that the insurers failed to pay all damages
owed under their policies. The claims currently pending in this matter are for
breach of contract and for declaratory relief on the alleged underpayment of
claims by the insurers. All other claims, including extra-contractual claims,
have been dismissed. The Company had moved to dismiss the complaint on the
grounds that the State had no standing to bring the lawsuit as an
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assignee of insureds because of anti-assignment language in the underlying
insurance policies. The Louisiana Supreme Court denied the motion.
The District Court has issued a case management order requiring the State to
produce specific detail by property supporting its allegations of breach of
contract. Additionally, the case management order requires the State to deliver
a settlement proposal to Allstate and the other defendant insurance companies.
There are many potential individual claims at issue in this matter, each of
which will require individual analysis and a number of which may be subject to
individual defenses, including release, accord and satisfaction, prescription,
waiver, and estoppel. The Company has filed a motion seeking to force the State
to provide more specificity as to its claims in this matter. The Company
believes that its adjusting practices in connection with Katrina homeowners
claims were sound and in accordance with industry standards and state law. There
remain significant questions of Louisiana law that have yet to be decided. In
the Company's judgment, given the issues discussed above, a loss is not
probable.
Allstate is vigorously defending a class action lawsuit in Montana state
court challenging aspects of its claim handling practices in Montana. The
plaintiff alleges that the Company adjusts claims made by individuals who do not
have attorneys in a manner that unfairly resulted in lower payments compared to
claimants who were represented by attorneys. In January 2012, the court
certified a class of Montana claimants who were not represented by attorneys
with respect to the resolution of auto accident claims. The court certified the
class to cover an indefinite period that commences in the mid-1990's. The
certified claims include claims for declaratory judgment, injunctive relief and
punitive damages in an unspecified amount. Injunctive relief may include a claim
process by which unrepresented claimants could request that their claims be
readjusted. No compensatory damages are sought on behalf of the class. To date
no discovery has occurred related to the potential value of the class members'
claims. The Company has asserted various defenses with respect to the
plaintiff's claims which have not been finally resolved, and has appealed the
order certifying the class. The proposed injunctive relief claim process would
be subject to defenses and offsets ordinarily associated with the adjustment of
claims. Any differences in amounts paid to class members compared to what class
members might be paid under a different process would be speculative and subject
to individual variation and determination dependent upon the individual
circumstances presented by each class claimant. In the Company's judgment a loss
is not probable.
Allstate had been vigorously defending a lawsuit in regards to certain
claims employees involving worker classification issues. This lawsuit was a
certified class action challenging a state wage and hour law. In this case,
plaintiffs sought actual damages in an amount to be proven at trial, liquidated
damages in an amount equal to an unspecified percentage of the aggregate
underpayment of wages to be proven at trial, as well as attorneys' fees and
costs. Plaintiffs did not make a settlement demand nor did they allege the
amount of damages with any specificity. In December 2009, the liability phase of
the case was tried, and, in July 2010, the trial court issued its decision
finding in favor of Allstate on all claims. The plaintiffs appealed the decision
in favor of Allstate to the first level appellate court. In May 2012, the court
heard oral argument on the plaintiffs' appeal and affirmed the trial court's
decision. The plaintiffs subsequently filed a petition for review with the
Illinois Supreme Court, asking it to review the lower courts' decisions. In
December 2012, the Supreme Court denied plaintiffs' petition for review, thereby
affirming the trial court's decision and ending this case.
Other proceedings
The Company is defending certain matters relating to the Company's agency
program reorganization announced in 1999. Although these cases have been pending
for many years, they currently are in the early stages of litigation because of
appellate court proceedings and threshold procedural issues.
º •
º These matters include a lawsuit filed in 2001 by the U.S. Equal
Employment Opportunity Commission ("EEOC") alleging retaliation under
federal civil rights laws ("EEOC I") 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 ("Romero I"). 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 was voidable at the option of the release signer. The
court also ordered that an agent who voided 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 reversed its prior ruling that the
release was voidable and granted the Company's motions for summary
judgment, ruling that the asserted claims were barred by the release
signed by most plaintiffs.
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Plaintiffs filed a notice of appeal with the U.S. Court of Appeals for
the Third Circuit ("Third Circuit"). In July 2009, the Third Circuit
vacated the trial court's entry of summary judgment in the Company's
favor and remanded the cases to the trial court for additional
discovery, including additional discovery related to the validity of
the release and waiver. In its opinion, the Third Circuit held that if the release and waiver is held to be valid, then all of the claims in
Romero I and EEOC I are barred. Thus, if the waiver and release is
upheld, then only the claims in Romero I asserted by the small group
of employee agents who did not sign the release and waiver would
remain for adjudication. In January 2010, following the remand, the
cases were assigned to a new judge for further proceedings in the
trial court. Plaintiffs filed their Second Amended Complaint on
July 28, 2010. Plaintiffs seek broad but unspecified "make whole
relief," including back pay, compensatory and punitive damages,
liquidated damages, lost investment capital, attorneys' fees and costs, and equitable relief, including reinstatement to employee agent
status with all attendant benefits for up to approximately 6,500
former employee agents. Despite the length of time that these matters
have been pending, to date only limited discovery has occurred related
to the damages claimed by individual plaintiffs, and no damages
discovery has occurred related to the claims of the putative class.
Nor have plaintiffs provided any calculations of the putative class's
alleged back pay or the alleged liquidated, compensatory or punitive
damages, instead asserting that such calculations will be provided at
a later stage during expert discovery. Damage claims are subject to
reduction by amounts and benefits received by plaintiffs and putative
class members subsequent to their employment termination. Little to no
discovery has occurred with respect to amounts earned or received by plaintiffs and putative class members in mitigation of their alleged
losses. Alleged damage amounts and lost benefits of the approximately
6,500 putative class members also are subject to individual variation
and determination dependent upon retirement dates, participation in
employee benefit programs, and years of service. Discovery limited to
the validity of the waiver and release is in process. At present, no
class is certified. Summary judgment proceedings on the validity of
the waiver and release are expected to occur in the first half of
2013.
º •
º A putative nationwide class action has also been filed by former
employee agents alleging various violations of ERISA, including a
worker classification issue ("Romero II"). 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. Romero II 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.
Plaintiffs filed a notice of appeal with the Third Circuit. In July
2009, the Third Circuit vacated the district court's dismissal of the
case and remanded the case to the trial court for additional
discovery, and directed that the case be reassigned to another trial
court judge. In its opinion, the Third Circuit held that if the
release and waiver is held to be valid, then one of plaintiffs' three
claims asserted in Romero II is barred. The Third Circuit directed the
district court to consider on remand whether the other two claims
asserted in Romero II are barred by the release and waiver. In January
2010, following the remand, the case was assigned to a new judge (the
same judge for the Romero I and EEOC I cases) for further proceedings
in the trial court. On April 23, 2010, plaintiffs filed their First
Amended Complaint. Plaintiffs seek broad but unspecified "make whole"
or other equitable relief, including losses of income and benefits as
a result of their decision to retire from the Company between
November 1, 1999 and December 31, 2000. They also seek repeal of the
challenged amendments to the Agents Pension Plan with all attendant
benefits revised and recalculated for thousands of former employee
agents, and attorney's fees and costs. Despite the length of time that
this matter has been pending, to date only limited discovery has
occurred related to the damages claimed by individual plaintiffs, and
no damages discovery has occurred related to the claims of the
putative class. Nor have plaintiffs provided any calculations of the
putative class's alleged losses, instead asserting that such
calculations will be provided at a later stage during expert
discovery. Damage claims are subject to reduction by amounts and benefits received by plaintiffs and putative class members subsequent
to their employment termination. Little to no discovery has occurred
with respect to amounts earned or received by plaintiffs and putative
class members in mitigation of their alleged losses. Alleged damage
amounts and lost benefits of the putative class members also are
subject to individual variation and determination dependent upon
retirement dates, participation in employee benefit programs, and
years of service. As in Romero I and EEOC I, discovery at this time is
limited to issues relating to the validity of the waiver and release. Class certification has not been decided. Summary judgment proceedings
on the validity of the waiver and release are expected to occur in the
first half of 2013.
In these agency program reorganization matters, the threshold issue of the
validity and scope of the waiver and release is yet to be decided and, if
decided in favor of the Company, would preclude any damages being awarded in
Romero I and EEOC I and may also preclude damages from being awarded in Romero
II. In the Company's judgment a
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loss is not probable. Allstate has been vigorously defending these lawsuits and
other matters related to its agency program reorganization.
Asbestos and environmental
Allstate's reserves for asbestos claims were $1.03 billion and
$1.08 billion, net of reinsurance recoverables of $496 million and $529 million,
as of December 31, 2012 and 2011, respectively. Reserves for environmental
claims were $193 million and $185 million, net of reinsurance recoverables of
$48 million and $40 million, as of December 31, 2012 and 2011, respectively.
Approximately 58% and 59% of the total net asbestos and environmental reserves
as of December 31, 2012 and 2011, 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 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.
15. Income Taxes
The Company and its domestic subsidiaries file a consolidated federal income
tax return. Tax liabilities and benefits realized by the consolidated group are
allocated as generated by the respective entities.
The Internal Revenue Service ("IRS") is currently examining the Company's
2009 and 2010 federal income tax returns. The IRS has completed its examinations
of the Company's federal income tax returns for 2005-2006 and 2007-2008 and the
cases are under consideration at the IRS Appeals Office. The Company's tax years
prior to 2005 have been examined by the IRS and the statute of limitations has
expired on those years. Any adjustments that may result from IRS examinations of
tax returns are not expected to have a material effect on the results of
operations, cash flows or financial position of the Company.
The reconciliation of the change in the amount of unrecognized tax benefits
for the years ended December 31 is as follows:
($ in millions) 2012 2011
2010
Balance - beginning of year $ 25 $ 25
$ 22
Increase for tax positions taken in a prior year - -
1
Decrease for tax positions taken in a prior year - -
-
Increase for tax positions taken in the current year - -
2
Decrease for tax positions taken in the current year - -
-
(Decrease) increase for settlements - -
-
Reductions due to lapse of statute of limitations - -
-
Balance - end of year $ 25 $ 25 $ 25
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The Company believes it is reasonably possible that the liability balance
will be reduced by $25 million within the next twelve months upon the resolution
of an outstanding issue resulting from the 2005-2006 and 2007-2008 IRS
examinations. Because of the impact of deferred tax accounting, recognition of
previously unrecognized tax benefits is not expected to impact the Company's
effective tax rate.
The Company recognizes interest accrued related to unrecognized tax benefits
in income tax expense. The Company did not record interest income or expense
relating to unrecognized tax benefits in income tax expense in 2012, 2011 or
2010. As of December 31, 2012 and 2011, there was no interest accrued with
respect to unrecognized tax benefits. No amounts have been accrued for
penalties.
The components of the deferred income tax assets and liabilities as of
December 31 are as follows:
($ in millions) 2012 2011
Deferred assets
Unearned premium reserves $ 666 $ 656
Difference in tax bases of invested assets 353 564
Discount on loss reserves 280 315
Pension 278 255
Other postretirement benefits 218 188
Accrued compensation 212 213
Alternative minimum tax credit carryforward 165 255
Net operating loss carryforwards 64 203
Life and annuity reserves - 10
Other assets 55 84
Total deferred assets 2,291 2,743
Valuation allowance - (67 )
Net deferred assets 2,291 2,676
Deferred liabilities
Unrealized net capital gains (1,527 ) (757 )
DAC (917 ) (897 )
Life and annuity reserves (130 ) -
Other intangible assets (107 ) (142 )
Other liabilities (207 ) (158 )
Total deferred liabilities (2,888 ) (1,954 )
Net deferred (liability) asset $ (597 ) $ 722
Although realization is not assured, management believes it is more likely
than not that the deferred tax assets, net of valuation allowance, will be
realized based on the Company's assessment that the deductions ultimately
recognized for tax purposes will be fully utilized. The valuation allowance for
deferred tax assets decreased by $67 million in 2012. The decrease was the
result of a tax election made to waive the portion of Answer Financial's net
operating loss carryforwards that were previously offset by a valuation
allowance. The purpose of this tax election was to preserve Allstate's tax basis
in Answer Financial.
As of December 31, 2012, the Company has net operating loss carryforwards of
$182 million which will expire at the end of 2014 through 2029. In addition, the
Company has an alternative minimum tax credit carryforward of $165 million which
will be available to offset future tax liabilities indefinitely.
The components of income tax expense for the years ended December 31 are as
follows:
($ in millions) 2012 2011 2010
Current $ 295 $ 14 $ 133
Deferred 705 158 56
Total income tax expense $ 1,000 $ 172 $ 189
The Company paid income taxes of $280 million and $32 million in 2012 and
2011, respectively, and received refunds of $8 million in 2010. The Company had
a current income tax receivable of $157 million as of both December 31, 2012 and
2011.
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A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income from operations for the years ended December 31 is as
follows:
2012 2011 2010
Statutory federal income tax rate 35.0 % 35.0 % 35.0 %
Tax-exempt income (3.0 ) (13.6 ) (16.1 )
Tax credits (1.4 ) (2.1 ) (0.5 )
Dividends received deduction (0.5 ) (1.8 ) (1.5 )
Adjustment to prior year tax liabilities (0.1 ) (0.8 ) (0.2 )
Other 0.3 1.2 0.5
Effective income tax rate 30.3 % 17.9 % 17.2 %
16. Statutory Financial Information and Dividend Limitations
Allstate's domestic property-liability and life insurance subsidiaries
prepare their statutory-basis financial statements in conformity with accounting
practices prescribed or permitted by the insurance department of the applicable
state of domicile. Prescribed statutory accounting practices include a variety
of publications of the NAIC, as well as state laws, regulations and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
All states require domiciled insurance companies to prepare statutory-basis
financial statements in conformity with the NAIC Accounting Practices and
Procedures Manual, subject to any deviations prescribed or permitted by the
applicable insurance commissioner and/or director. Statutory accounting
practices differ from GAAP primarily since they require charging policy
acquisition and certain sales inducement costs to expense as incurred,
establishing life insurance reserves based on different actuarial assumptions,
and valuing certain investments and establishing deferred taxes on a different
basis.
Statutory net income and capital and surplus of Allstate's domestic
insurance subsidiaries, determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory authorities are as
follows:
($ in millions) Net income Capital and surplus
2012 2011 2010 2012 2011
Amounts by major business type:
Property-Liability (1) $ 2,014 $ 213 $ 1,064 $ 13,743 $ 11,992
Allstate Financial 456 (42 ) (430 ) 3,536 3,600
Amount per statutory accounting
practices $ 2,470 $ 171 $ 634 $ 17,279 $ 15,592
--------------------------------------------------------------------------------
º (1)
º The Property-Liability statutory capital and surplus balances exclude
wholly-owned subsidiaries included in the Allstate Financial segment.
Dividend Limitations
There are no regulatory restrictions that limit the payment of dividends by
the Corporation, except those generally applicable to corporations incorporated
in Delaware. Dividends are payable only out of certain components of
shareholders' equity as permitted by Delaware law. However, the ability of the
Corporation to pay dividends is dependent on business conditions, income, cash
requirements of the Company, receipt of dividends from AIC and other relevant
factors.
The payment of shareholder dividends by AIC without the prior approval of
the Illinois Department of Insurance ("IL DOI") is limited to formula amounts
based on net income and capital and surplus, determined in conformity with
statutory accounting practices, as well as the timing and amount of dividends
paid in the preceding twelve months. AIC paid dividends of $1.51 billion in
2012. The maximum amount of dividends AIC will be able to pay without prior IL
DOI approval at a given point in time during 2013 is $1.95 billion, less
dividends paid during the preceding twelve months measured at that point in
time. The payment of a dividend in excess of this amount requires 30 days
advance written notice to the IL DOI. The dividend is deemed approved, unless
the IL DOI disapproves it within the 30 days notice period. Additionally, any
dividend or other distribution must be paid out of unassigned surplus excluding
unrealized appreciation from investments, which for AIC totaled $11.65 billion
as of December 31, 2012, and cannot result in capital and surplus being less
than the minimum amount required by law. All state insurance regulators have
adopted risk-based capital ("RBC") requirements developed by the NAIC.
Maintaining statutory capital and surplus at a level in
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excess of the company action level allows the insurance company to avoid RBC
regulatory action. AIC's total statutory capital and surplus exceeds its company
action level RBC as of December 31, 2012. These requirements do not represent a
significant constraint for the payment of dividends by AIC.
The amount of restricted net assets, as represented by the Corporation's
investment in its insurance subsidiaries, was $25 billion as of December 31,
2012.
Intercompany transactions
Notification and approval of intercompany lending activities is also
required by the IL DOI for transactions that exceed a level that is based on a
formula using statutory admitted assets and statutory surplus.
17. Benefit Plans
Pension and other postretirement plans
Defined benefit pension plans cover most full-time employees, certain
part-time employees and employee-agents. Benefits under the pension plans are
based upon the employee's length of service and eligible annual compensation. A
cash balance formula was added to the Allstate Retirement Plan effective
January 1, 2003. All eligible employees hired before August 1, 2002 were
provided with a one-time opportunity to choose between the cash balance formula
and the final average pay formula. The cash balance formula applies to all
eligible employees hired after August 1, 2002.
The Company also provides certain health care subsidies for eligible
employees hired before January 1, 2003 when they retire and their eligible
dependents and certain life insurance benefits for eligible employees hired
before January 1, 2003 when they retire ("postretirement benefits"). Qualified
employees may become eligible for these benefits if they retire in accordance
with the terms of the applicable plans and are continuously insured under the
Company's group plans or other approved plans in accordance with the plan's
participation requirements. The Company shares the cost of retiree medical
benefits with non Medicare-eligible retirees based on years of service, with the
Company's share being subject to a 5% limit on annual medical cost inflation
after retirement. During 2009, the Company decided to change its approach for
delivering benefits to Medicare-eligible retirees. The Company no longer offers
medical benefits for Medicare-eligible retirees but instead provides a fixed
Company contribution (based on years of service and other factors), which is not
subject to adjustments for inflation.
The Company has reserved the right to modify or terminate its benefit plans
at any time and for any reason.
Obligations and funded status
The Company calculates benefit obligations based upon generally accepted
actuarial methodologies using the projected benefit obligation ("PBO") for
pension plans and the accumulated postretirement benefit obligation ("APBO") for
other postretirement plans. The determination of pension costs and other
postretirement obligations are determined using a December 31 measurement date.
The benefit obligations represent the actuarial present value of all benefits
attributed to employee service rendered as of the measurement date. The PBO is
measured using the pension benefit formula and assumptions as to future
compensation levels. A plan's funded status is calculated as the difference
between the benefit obligation and the fair value of plan assets. The Company's
funding policy for the pension plans is to make annual contributions at a level
that is in accordance with regulations under the Internal Revenue Code ("IRC")
and generally accepted actuarial principles. The Company's postretirement
benefit plans are not funded.
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The components of the plans' funded status that are reflected in the
Consolidated Statements of Financial Position as of December 31 are as follows:
($ in millions) Pension Postretirement
benefits benefits
2012 2011 2012 2011
Fair value of plan assets $ 5,398 $ 4,675 $ - $ -
Less: Benefit obligation 6,727 5,831 803 716
Funded status $ (1,329 ) $ (1,156 ) $ (803 ) $ (716 )
Items not yet recognized as a component of net
periodic cost:
Net actuarial loss (gain) $ 2,892 $ 2,546 $ (115 ) $ (211 )
Prior service credit (1 ) (3 ) (129 ) (152 )
Unrecognized pension and other postretirement
benefit cost, pre-tax 2,891 2,543 (244 ) (363 )
Deferred income tax (1,012 ) (890 ) 94 137
Unrecognized pension and other postretirement
benefit cost $ 1,879 $ 1,653 $ (150 ) $ (226 )
The increase of $346 million in the pension net actuarial loss during 2012
is primarily related to a decrease in the discount rate. The majority of the
$2.89 billion net actuarial pension benefit losses not yet recognized as a
component of net periodic cost in 2012 reflects decreases in the discount rate
and the effect of unfavorable equity market conditions on the value of the
pension plan assets in prior years. The decrease of $96 million in the OPEB net
actuarial gain during 2012 is primarily related to a decrease in the discount
rate and amortization of net actuarial gains. The decrease of $23 million in the
OPEB prior service credit is related to amortization of prior service cost.
The change in 2012 in items not yet recognized as a component of net
periodic cost, which is recorded in unrecognized pension and other
postretirement benefit cost, is shown in the table below.
($ in millions) Pension
Postretirement
benefits benefits
Items not yet recognized as a component of net
periodic cost -
December 31, 2011 $ 2,543 $ (363 )
Net actuarial loss arising during the period 555
76
Net actuarial (loss) gain amortized to net periodic
benefit cost
(211 )
20
Prior service cost arising during the period -
-
Prior service credit amortized to net periodic
benefit cost 2
23
Translation adjustment and other 2
-
Items not yet recognized as a component of net
periodic cost -
December 31, 2012 $ 2,891 $ (244 )
The net actuarial loss (gain) is recognized as a component of net periodic
cost amortized over the average remaining service period of active employees
expected to receive benefits. Estimates of the net actuarial loss (gain) and
prior service credit expected to be recognized as a component of net periodic
benefit cost during 2013 are shown in the table below.
($ in millions) Pension Postretirement
benefits benefits
Net actuarial loss (gain) $ 261 $ (12 )
Prior service credit (2 ) (23 )
The accumulated benefit obligation ("ABO") for all defined benefit pension
plans was $6.09 billion and $5.16 billion as of December 31, 2012 and 2011,
respectively. The ABO is the actuarial present value of all benefits attributed
by the pension benefit formula to employee service rendered at the measurement
date. However, it differs from the PBO due to the exclusion of an assumption as
to future compensation levels.
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The PBO, ABO and fair value of plan assets for the Company's pension plans
with an ABO in excess of plan assets were $6.35 billion, $5.75 billion and
$5.02 billion, respectively, as of December 31, 2012 and $5.51 billion,
$4.85 billion and $4.33 billion, respectively, as of December 31, 2011. Included
in the accrued benefit cost of the pension benefits are certain unfunded
non-qualified plans with accrued benefit costs of $146 million and $142 million
for 2012 and 2011, respectively.
The changes in benefit obligations for all plans for the years ended
December 31 are as follows:
($ in millions) Postretirement
Pension benefits benefits
2012 2011 2012 2011
Benefit obligation, beginning of year $ 5,831 $ 5,545 $ 716 $ 628
Service cost 152 151 13 11
Interest cost 298 322 36 37
Participant contributions 1 1 20 20
Actuarial loss 756 337 76 82
Benefits paid (1) (312 ) (511 ) (59 ) (61 ) Translation adjustment and other 1 (14 )
1 (1 )
Benefit obligation, end of year $ 6,727$ 5,831$ 803$ 716
--------------------------------------------------------------------------------
º (1)
º Benefits paid include lump sum distributions, a portion of which may
trigger settlement accounting treatment.
Components of net periodic cost
The components of net periodic cost for all plans for the years ended
December 31 are as follows:
Pension benefits Postretirement benefits
($ in millions) 2012 2011 2010 2012 2011 2010
Service cost $ 152 $ 151 $ 150 $ 13 $ 11 $ 12
Interest cost 298 322 320 36 37 40
Expected return on plan assets (393 ) (367 ) (331 ) - - -
Amortization of:
Prior service credit (2 ) (2 ) (2 ) (23 ) (23 ) (22 )
Net actuarial loss (gain) 178 154 160 (20 ) (30 ) (22 )
Settlement loss 33 46 48 - 1 -
Net periodic cost (credit) $ 266 $ 304 $ 345 $ 6 $ (4 ) $ 8
Assumptions
Weighted average assumptions used to determine net pension cost and net
postretirement benefit cost for the years ended December 31 are:
Pension benefits Postretirement benefits
($ in millions) 2012 2011 2010 2012 2011 2010
Discount rate 5.25 % 6.00 % 6.25 % 5.25 % 6.00 % 6.25 %
Rate of increase in
compensation levels 4.5 4.0-4.5 4.0-4.5 n/a n/a n/a
Expected long-term rate of
return on plan assets 8.5 8.5 8.5 n/a n/a n/a
Weighted average assumptions used to determine benefit obligations as of
December 31 are listed in the following table.
Pension benefits Postretirement benefits
2012 2011 2012 2011
Discount rate 4.00 % 5.25 % 4.25 % 5.25 %
Rate of increase in compensation
levels 3.5 4.0-4.5 n/a n/a
The weighted average health care cost trend rate used in measuring the
accumulated postretirement benefit cost is 7.20% for 2013, gradually declining
to 4.5% in 2024 and remaining at that level thereafter.
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Assumed health care cost trend rates have a significant effect on the
amounts reported for the postretirement health care plans. A one
percentage-point increase in assumed health care cost trend rates would increase
the total of the service and interest cost components of net periodic benefit
cost of other postretirement benefits and the APBO by $3 million and
$28 million, respectively. A one percentage-point decrease in assumed health
care cost trend rates would decrease the total of the service and interest cost
components of net periodic benefit cost of other postretirement benefits and the
APBO by $2 million and $25 million, respectively.
Pension plan assets
The change in pension plan assets for the years ended December 31 is as
follows:
($ in millions) 2012 2011
Fair value of plan assets, beginning of year $ 4,675 $ 4,669
Actual return on plan assets 594 267
Employer contribution 439 264
Benefits paid (312 ) (511 )
Translation adjustment and other 2 (14 )
Fair value of plan assets, end of year $ 5,398 $ 4,675
In general, the Company's pension plan assets are managed in accordance with
investment policies approved by pension investment committees. The purpose of
the policies is to ensure the plans' long-term ability to meet benefit
obligations by prudently investing plan assets and Company contributions, while
taking into consideration regulatory and legal requirements and current market
conditions. The investment policies are reviewed periodically and specify target
plan asset allocation by asset category. In addition, the policies specify
various asset allocation and other risk limits. The pension plans' asset
exposure within each asset category is tracked against widely accepted
established benchmarks for each asset class with limits on variation from the
benchmark established in the investment policy. Pension plan assets are
regularly monitored for compliance with these limits and other risk limits
specified in the investment policies.
The pension plans' target asset allocation and the actual percentage of plan
assets, by asset category as of December 31, 2012 are as follows:
Target asset Actual percentage
allocation of plan assets
Asset category 2012 2012 2011
Equity securities 42 - 55 % 50 % 48 %
Fixed income securities 35 - 48 38 38
Limited partnership interests 12 - 23 9 10
Short-term investments and other 1 - 3 3 4
Total (1) 100 % 100 %
--------------------------------------------------------------------------------
º (1)
º Securities lending collateral reinvestment is excluded from target and
actual percentage of plan assets.
The target asset allocation for an asset category may be achieved either
through direct investment holdings, through replication using derivative
instruments (e.g., futures or swaps) or net of hedges using derivative
instruments to reduce exposure to an asset category. The notional amount of
derivatives used for replication net of the notional amount of hedges is limited
to 115% of total plan assets. Market performance of the different asset
categories may, from time to time, cause deviation from the target asset
allocation. The asset allocation mix is reviewed on a periodic basis and
rebalanced to bring the allocation within the target ranges.
Outside the target asset allocation, the pension plans participate in a
securities lending program to enhance returns. U.S. government fixed income
securities and U.S. equity securities are lent out and cash collateral is
invested 28% in fixed income securities and 72% in short-term investments.
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The following table presents the fair values of pension plan assets as of
December 31, 2012.
($ in millions)
Quoted prices
in active Significant
markets for other Significant Balance
identical observable unobservable as of
assets inputs inputs December 31,
(Level 1) (Level 2) (Level 3) 2012
Assets
Equity securities:
U.S. $ 13 $ 2,042 $ 68 $ 2,123
International 136 198 246 580
Fixed income
securities:
U.S. government and
agencies 799 78 - 877
Foreign government - 32 - 32
Municipal - - 129 129
Corporate - 994 10 1,004
RMBS - 95 - 95
Short-term investments 56 424 - 480
Limited partnership
interests:
Real estate funds (1) - - 214 214
Private equity
funds (2) - - 199 199
Hedge funds (3) - - 80 80
Cash and cash
equivalents 17 - - 17
Free-standing
derivatives:
Assets - - - -
Liabilities - - - -
Total plan assets at
fair value $ 1,021 $ 3,863 $ 946 5,830
% of total plan assets
at fair value 17.5 % 66.3 % 16.2 % 100.0 %
Securities lending
obligation (4) (463 )
Other net plan
assets (5) 31
Total reported plan
assets $ 5,398
--------------------------------------------------------------------------------
º (1)
º Real estate funds held by the pension plans are primarily invested in U.S.
commercial real estate.
º (2)
º Private equity funds held by the pension plans are primarily comprised of
North American buyout funds.
º (3)
º Hedge funds held by the pension plans primarily comprise fund of funds
investments in diversified pools of capital across funds with underlying
strategies such as convertible arbitrage, equity market neutral, fixed
income arbitrage, global macro, commodity trading advisors, long short
equity, short biased equity, and event driven.
º (4)
º The securities lending obligation represents the plan's obligation to return securities lending collateral received under a securities lending
program. The terms of the program allow both the plan and the counterparty
the right and ability to redeem/return the securities loaned on short
notice. Due to its relatively short-term nature, the outstanding balance of
the obligation approximates fair value.
º (5)
º Other net plan assets represent interest and dividends receivable and net
receivables related to settlements of investment transactions, such as
purchases and sales.
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The following table presents the fair values of pension plan assets as of
December 31, 2011.
($ in millions)
Quoted prices
in active Significant
markets for other Significant Balance
identical observable unobservable as of
assets inputs inputs December 31,
(Level 1) (Level 2) (Level 3) 2011
Assets
Equity securities:
U.S. $ 11 $ 817 $ 64 $ 892
International 116 986 245 1,347
Fixed income
securities:
U.S. government and
agencies 634 120 - 754
Foreign government - 26 - 26
Municipal - - 163 163
Corporate - 869 9 878
RMBS - 119 - 119
Short-term investments 33 494 - 527
Limited partnership
interests:
Real estate funds - - 192 192
Private equity funds - - 186 186
Hedge funds - - 79 79
Cash and cash
equivalents 18 - - 18
Free-standing
derivatives:
Assets 1 2 - 3
Liabilities (2 ) (4 ) - (6 )
Total plan assets at
fair value $ 811 $ 3,429 $ 938 5,178
% of total plan assets
at fair value 15.7 % 66.2 % 18.1 % 100.0 %
Securities lending
obligation (554 )
Other net plan assets 51
Total reported plan
assets $ 4,675
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The fair values of pension plan assets are estimated using the same
methodologies and inputs as those used to determine the fair values for the
respective asset category of the Company. These methodologies and inputs are
disclosed in Note 6.
The following table presents the rollforward of Level 3 plan assets for the
year ended December 31, 2012.
($ in
millions) Actual return on plan assets:
Relating to
Relating to assets still Purchases, Net transfers
Balance as of assets sold held at the sales and in and/or Balance as of
December 31, during the reporting settlements, (out) of December 31,
2011 period date net Level 3 2012
Assets
Equity
securities:
U. S. $ 64 $ - $ 7 $ (3 ) $ - $ 68
International 245 - 1 - - 246
Fixed income
securities:
Municipal 163 5 (2 ) (37 ) - 129
Corporate 9 1 - - - 10
Limited
partnership
interests:
Real estate
funds 192 16 2 4 - 214
Private
equity funds 186 8 (6 ) 11 - 199
Hedge funds 79 - 1 - - 80
Total Level 3
plan assets $ 938 $ 30 $ 3 $ (25 ) $ - $ 946
The following table presents the rollforward of Level 3 plan assets for the
year ended December 31, 2011.
($ in
millions) Actual return on plan assets:
Relating to
Relating to assets still Purchases, Net transfers
Balance as of assets sold held at the sales and in and/or Balance as of
December 31, during the reporting settlements, (out) of December 31,
2010 period date net Level 3 2011
Assets
Equity
securities:
U. S. $ 6 $ - $ (2 ) $ 60 $ - $ 64
International 253 - (5 ) (3 ) - 245
Fixed income
securities:
Municipal 222 - 1 (60 ) - 163
Corporate 10 1 - (2 ) - 9
RMBS 48 (8 ) 8 (30 ) (18 ) -
Limited
partnership
interests:
Real estate
funds 167 (1 ) 29 (3 ) - 192
Private
equity funds 166 1 22 (3 ) - 186
Hedge funds 120 43 (43 ) (41 ) - 79
Total Level 3
plan assets $ 992 $ 36 $ 10 $ (82 ) $ (18 ) $ 938
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The following table presents the rollforward of Level 3 plan assets for the
year ended December 31, 2010.
($ in
millions) Actual return on plan assets:
Relating to
Relating to assets still Purchases, Net transfers
Balance as of assets sold held at the sales and in and/or Balance as of
December 31, during the reporting settlements, (out) of December 31,
2009 period date net Level 3 2010
Assets
Equity
securities:
U. S. $ 4 $ - $ 2 $ - $ - $ 6
International 233 1 7 12 - 253
Fixed income
securities:
Municipal 344 - (2 ) (114 ) (6 ) 222
Corporate 10 - - - - 10
ABS 32 (1 ) - (31 ) - -
RMBS 61 (10 ) 23 (26 ) - 48
Limited
partnership
interests:
Real estate
funds 135 (4 ) 3 33 - 167
Private
equity funds 149 - 19 (2 ) - 166
Hedge funds 135 (59 ) 66 (22 ) - 120
Total Level 3
plan assets $ 1,103 $ (73 ) $ 118 $ (150 ) $ (6 ) $ 992
The expected long-term rate of return on plan assets reflects the average
rate of earnings expected on plan assets. The Company's assumption for the
expected long-term rate of return on plan assets is reviewed annually giving
consideration to appropriate financial data including, but not limited to, the
plan asset allocation, forward-looking expected returns for the period over
which benefits will be paid, historical returns on plan assets and other
relevant market data. Given the long-term forward looking nature of this
assumption, the actual returns in any one year do not immediately result in a
change. In giving consideration to the targeted plan asset allocation, the
Company evaluated returns using the same sources it has used historically which
include: historical average asset class returns from an independent nationally
recognized vendor of this type of data blended together using the asset
allocation policy weights for the Company's pension plans; asset class return
forecasts from a large global independent asset management firm that specializes
in providing multi-asset class investment fund products which were blended
together using the asset allocation policy weights; and expected portfolio
returns from a proprietary simulation methodology of a widely recognized
external investment consulting firm that performs asset allocation and actuarial
services for corporate pension plan sponsors. This same methodology has been
applied on a consistent basis each year. All of these were consistent with the
Company's long-term rate of return on plan assets assumption of 8.50% used for
2012 and 7.75% that will be used for 2013. The decrease in the long-term rate of
return on plan assets assumption for 2013 is primarily due to the existing
global macroeconomic environment which, while stable, has an elevated level of
risk and conditions that remain in the global financial markets and whose
resolution is expected to reduce future domestic and foreign economic growth
rates and expected investment returns. As of the 2012 measurement date, the
arithmetic average of the annual actual return on plan assets for the most
recent 10 and 5 years was 8.7% and 3.6%, respectively.
Pension plan assets did not include any of the Company's common stock as of
December 31, 2012 or 2011.
Cash flows
There was no required cash contribution necessary to satisfy the minimum
funding requirement under the IRC for the tax qualified pension plans as of
December 31, 2012. The Company currently plans to contribute $578 million to its
pension plans in 2013.
The Company contributed $39 million and $41 million to the postretirement
benefit plans in 2012 and 2011, respectively. Contributions by participants were
$20 million and $20 million in 2012 and 2011, respectively.
Estimated future benefit payments
Estimated future benefit payments expected to be paid in the next 10 years,
based on the assumptions used to measure the Company's benefit obligation as of
December 31, 2012, are presented in the table below. Effective January 1,
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2010, the Company no longer participates in the Retiree Drug Subsidy program due
to the change in the Company's retiree medical plan for Medicare-eligible
retirees.
($ in millions) Postretirement benefits
Gross
Pension benefit
benefits payments
2013 $ 318 $ 44
2014 345 45
2015 357 47
2016 383 48
2017 417 50
2018-2022 2,483 275
Total benefit payments $ 4,303 $ 509
Allstate 401(k) Savings Plan
Employees of the Company, with the exception of those employed by the
Company's international, Sterling Collision Centers ("Sterling"), Esurance and
Answer Financial subsidiaries, are eligible to become members of the Allstate
401(k) Savings Plan ("Allstate Plan"). The Company's contributions are based on
the Company's matching obligation and certain performance measures. The Company
is responsible for funding its anticipated contribution to the Allstate Plan,
and may, at the discretion of management, use the ESOP to pre-fund certain
portions. In connection with the Allstate Plan, the Company has a note from the
ESOP with a principal balance of $22 million as of December 31, 2012. The ESOP
note has a fixed interest rate of 7.9% and matures in 2019. The Company records
dividends on the ESOP shares in retained income and all the shares held by the
ESOP are included in basic and diluted weighted average common shares
outstanding.
The Company's contribution to the Allstate Plan was $52 million, $48 million
and $36 million in 2012, 2011 and 2010, respectively. These amounts were reduced
by the ESOP benefit computed for the years ended December 31 as follows:
($ in millions) 2012 2011 2010
Interest expense recognized by ESOP $ 2 $ 2 $ 2
Less: dividends accrued on ESOP shares (2 ) (2 ) (2 )
Cost of shares allocated 2 2 2
Compensation expense 2 2 2
Reduction of defined contribution due to ESOP 10 9 11
ESOP benefit $ (8 ) $ (7 ) $ (9 )
The Company made no contributions to the ESOP in 2012, 2011 and 2010. As of
December 31, 2012, total committed to be released, allocated and unallocated
ESOP shares were 0.2 million, 34 million and 5 million, respectively.
Allstate's Canadian, Sterling, Esurance and Answer Financial subsidiaries
sponsor defined contribution plans for their eligible employees. Expense for
these plans was $7 million, $7 million and $5 million in 2012, 2011 and 2010,
respectively.
18. Equity Incentive Plans
The Company currently has equity incentive plans under which the Company
grants nonqualified stock options, restricted stock units and performance stock
awards to certain employees and directors of the Company. The total compensation
expense related to equity awards was $86 million, $64 million and $68 million
and the total income tax benefits were $30 million, $21 million and $23 million
for 2012, 2011 and 2010, respectively. Total cash received from the exercise of
options was $99 million, $19 million and $28 million for 2012, 2011 and 2010,
respectively. Total tax benefit realized on options exercised and stock
unrestricted was $28 million, $10 million and $11 million for 2012, 2011 and
2010, respectively.
The Company records compensation expense related to awards under these plans
over the shorter of the period in which the requisite service is rendered or
retirement eligibility is attained. Compensation expense for performance share
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awards is based on the probable number of awards expected to vest using the
performance level most likely to be achieved at the end of the performance
period. As of December 31, 2012, total unrecognized compensation cost related to
all nonvested awards was $100 million, of which $43 million related to
nonqualified stock options which are expected to be recognized over the weighted
average vesting period of 2.15 years, $46 million related to restricted stock
units which are expected to be recognized over the weighted average vesting
period of 2.22 years and $11 million related to performance stock awards which
are expected to be recognized over the weighted average vesting period of
1.91 years.
Options are granted to employees with exercise prices equal to the closing
share price of the Company's common stock on the applicable grant date. Options
granted to employees generally vest 50% on the second anniversary of the grant
date and 25% on each of the third and fourth anniversaries of the grant date.
Options granted prior to 2010 vest ratably over a four year period. Options may
be exercised once vested and will expire ten years after the date of grant. Upon
normal retirement, which is defined as either age 60 with five years of service
or age 55 with ten years of service, all options granted more than 12 months
before retirement, and a pro-rata portion of options granted within 12 months of
retirement, continue to vest as scheduled. When the options become vested, they
may be exercised on or before the earlier of the option expiration date or the
fifth anniversary of the employee's retirement. If termination of employment is
a result of death or disability, then all options vest immediately and may be
exercised on or before the earlier of the option expiration date or the second
anniversary of the date of termination of employment. Vested options may be
exercised within three months and unvested options are forfeited following any
other type of termination of employment except termination after a change in
control.
Restricted stock units generally vest and unrestrict 50% on the second
anniversary of the grant date and 25% on each of the third and fourth
anniversaries of the grant date, except for directors whose awards vest
immediately and unrestrict after leaving the board. Restricted stock units
granted to employees prior to 2010 vest and unrestrict in full on the fourth
anniversary of the grant date. Upon normal retirement, all restricted stock
units granted more than 12 months before retirement, and a pro-rata portion of
restricted stock units granted within 12 months of retirement, continue to
unrestrict as provided for in the original grant. Upon termination of employment
as a result of death or disability, all restricted stock units vest. Unvested
restricted stock units are forfeited following any other type of termination of
employment except termination after a change in control.
Performance stock awards vest and are converted into shares of stock on the
third anniversary of the grant date. Upon normal retirement occurring 12 months
or more from the grant date, the number of performance stock awards earned based
on the attainment of performance goals for each of the performance periods
continue to vest as scheduled. Upon normal retirement occurring within 12 months
of the grant date, a pro-rata portion of the performance stock awards earned
based on the attainment of the performance goals for each of the performance
periods continue to vest as scheduled. Upon termination of employment as a
result of death or disability, the number of performance stock awards that have
been earned based on attainment of the performance goals for completed
performance periods plus the target number of performance stock awards granted
for any incomplete performance periods vest immediately. Unvested performance
stock awards are forfeited following any other type of termination of employment
except termination after a change in control.
A total of 77.8 million shares of common stock were authorized to be used
for awards under the plans, subject to adjustment in accordance with the plans'
terms. As of December 31, 2012, 16.2 million shares were reserved and remained
available for future issuance under these plans. The Company uses its treasury
shares for these issuances.
The fair value of each option grant is estimated on the date of grant using
a binomial lattice model. The Company uses historical data to estimate option
exercise and employee termination within the valuation model. In addition,
separate groups of employees that have similar historical exercise behavior are
considered separately for valuation purposes. The expected term of options
granted is derived from the output of the binominal lattice model and represents
the period of time that options granted are expected to be outstanding. The
expected volatility of the price of the underlying shares is implied based on
traded options and historical volatility of the Company's common stock. The
expected dividends were based on the current dividend yield of the Company's
stock as of the date of the grant. The
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risk-free rate for periods within the contractual life of the option is based on
the U.S. Treasury yield curve in effect at the time of grant. The assumptions
used are shown in the following table.
2012 2011 2010
Weighted average expected term 9.0 years 7.9 years 7.8 years
Expected volatility 20.2 - 53.9% 22.1 - 53.9% 23.7 - 52.3%
Weighted average volatility 34.6% 35.1% 35.1%
Expected dividends 2.2 - 3.0% 2.5 - 3.7% 2.4 - 2.8%
Weighted average expected dividends 2.8% 2.7% 2.6%
Risk-free rate 0.0 - 2.2% 0.0 - 3.5% 0.1 - 3.9%
A summary of option activity for the year ended December 31, 2012 is shown
in the following table.
Weighted
Weighted Aggregate average
average intrinsic remaining
Number exercise value contractual
(in 000s) price (in 000s) term (years)
Outstanding as of January 1, 2012 33,947 $ 39.00
Granted 3,727 31.62
Exercised (4,113 ) 24.00
Forfeited (619 ) 29.86
Expired (3,299 ) 43.81
Outstanding as of December 31,
2012 29,643 39.81 $ 193,556 5.1
Outstanding, net of expected
forfeitures 29,371 39.89 191,143 5.1
Outstanding, exercisable
("vested") 18,840 46.07 71,729 3.5
The weighted average grant date fair value of options granted was $8.69,
$9.49 and $9.89 during 2012, 2011 and 2010, respectively. The intrinsic value,
which is the difference between the fair value and the exercise price, of
options exercised was $52 million, $15 million and $16 million during 2012, 2011
and 2010, respectively.
The changes in restricted stock units are shown in the following table for
the year ended December 31, 2012.
Weighted
average
Number grant date
(in 000s) fair value
Nonvested as of January 1, 2012 4,326 $ 28.76
Granted 1,253 31.89
Vested (939 ) 40.13
Forfeited (188 ) 28.15
Nonvested as of December 31, 2012 4,452 27.27
The fair value of restricted stock units is based on the market value of the
Company's stock as of the date of the grant. The market value in part reflects
the payment of future dividends expected. The weighted average grant date fair
value of restricted stock units granted was $31.89, $31.38 and $31.32 during
2012, 2011 and 2010, respectively. The total fair value of restricted stock
units vested was $30 million, $13 million and $16 million during 2012, 2011 and
2010, respectively.
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The changes in performance stock awards are shown in the following table for
the year ended December 31, 2012.
Weighted
average
Number grant date
(in 000s) fair value
Nonvested as of January 1, 2012 - $ -
Granted 460 31.41
Vested - -
Forfeited (23 ) 31.00
Nonvested as of December 31, 2012 437 31.43
The fair value of performance stock awards is based on the market value of
the Company's stock as of the date of the grant. The market value in part
reflects the payment of future dividends expected. The weighted average grant
date fair value of performance stock awards granted was $31.41 during 2012. None
of the performance stock awards vested during 2012.
The tax benefit realized in 2012, 2011 and 2010 related to tax deductions
from stock option exercises and included in shareholders' equity was $8 million,
$3 million and $4 million, respectively. The tax benefit (expense) realized in
2012, 2011 and 2010 related to all stock-based compensation and recorded
directly to shareholders' equity was $6 million, $(0.4) million and
$0.5 million, respectively.
19. Reporting Segments
Allstate management is organized around products and services, and this
structure is considered in the identification of its four reportable segments.
These segments and their respective operations are as follows:
Allstate Protection principally sells private passenger auto and homeowners
insurance in the United States and Canada. Revenues from external customers
generated outside the United States were $992 million, $892 million and
$741 million in 2012, 2011 and 2010, respectively. The Company evaluates the
results of this segment based upon underwriting results.
Discontinued Lines and Coverages consists of business no longer written by
Allstate, including results from asbestos, environmental and other discontinued
lines claims, and certain commercial and other businesses in run-off. This
segment also includes the historical results of the commercial and reinsurance
businesses sold in 1996. The Company evaluates the results of this segment based
upon underwriting results.
Allstate Financial sells life insurance, voluntary accident and health
insurance and retirement and investment products. The principal individual
products are interest-sensitive, traditional and variable life insurance;
voluntary accident and health insurance; and fixed annuities including deferred
and immediate. The institutional product line, which the Company most recently
offered in 2008, consists primarily of funding agreements sold to unaffiliated
trusts that use them to back medium-term notes issued to institutional and
individual investors. Allstate Financial had no revenues from external customers
generated outside the United States in 2012, 2011 or 2010. The Company evaluates
the results of this segment based upon operating income.
Corporate and Other comprises holding company activities and certain
non-insurance operations.
Allstate Protection and Discontinued Lines and Coverages comprise
Property-Liability. The Company does not allocate Property-Liability investment
income, realized capital gains and losses, or assets to the Allstate Protection
and Discontinued Lines and Coverages segments. Management reviews assets at the
Property-Liability, Allstate Financial, and Corporate and Other levels for
decision-making purposes.
The accounting policies of the reportable segments are the same as those
described in Note 2. The effects of certain inter-segment transactions are
excluded from segment performance evaluation and therefore are eliminated in the
segment results.
Measuring segment profit or loss
The measure of segment profit or loss used by Allstate's management in
evaluating performance is underwriting income (loss) for the Allstate Protection
and Discontinued Lines and Coverages segments and operating income for the
Allstate Financial and Corporate and Other segments. A reconciliation of these
measures to net income (loss) is provided below.
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Underwriting income (loss) is calculated as premiums earned, less claims and
claims expenses ("losses"), amortization of DAC, operating costs and expenses,
and restructuring and related charges as determined using GAAP.
Operating income (loss) is net income (loss) excluding:
º •
º realized capital gains and losses, after-tax, except for periodic settlements and accruals on non-hedge derivative instruments, which are
reported with realized capital gains and losses but included in operating
income (loss),
º •
º valuation changes on embedded derivatives that are not hedged, after-tax,
º •
º amortization of DAC and DSI, to the extent they resulted from the
recognition of certain realized capital gains and losses or valuation
changes on embedded derivatives that are not hedged, after-tax,
º • º business combination expenses and the amortization of purchased intangible
assets, after-tax,
º •
º gain (loss) on disposition of operations, after-tax, and
º •
º adjustments for other significant non-recurring, infrequent or unusual
items, when (a) the nature of the charge or gain is such that it is
reasonably unlikely to recur within two years, or (b) there has been no
similar charge or gain within the prior two years.
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Summarized revenue data for each of the Company's reportable segments for
the years ended December 31 are as follows:
($ in millions) 2012 2011
2010
Revenues
Property-Liability
Property-liability insurance premiums
Standard auto $ 17,213 $ 16,500 $ 16,530
Non-standard auto 715 799 905
Total auto 17,928 17,299 17,435
Homeowners 6,359 6,200 6,078
Other personal lines 2,450 2,443 2,442
Allstate Protection 26,737 25,942 25,955
Discontinued Lines and Coverages -
- 2
Total property-liability insurance premiums 26,737 25,942 25,957
Net investment income 1,326 1,201 1,189
Realized capital gains and losses 335 85 (321 )
Total Property-Liability 28,398 27,228 26,825
Allstate Financial
Life and annuity premiums and contract charges
Traditional life insurance 470 441 420
Immediate annuities with life contingencies 45 106 97
Accident and health insurance 653
643 621
Total life and annuity premiums 1,168 1,190 1,138
Interest-sensitive life insurance 1,055 1,015 991
Fixed annuities 18 33 39
Total contract charges 1,073 1,048 1,030
Total life and annuity premiums and contract charges 2,241 2,238 2,168
Net investment income
2,647 2,716 2,853
Realized capital gains and losses (13 ) 388 (517 )
Total Allstate Financial 4,875 5,342 4,504
Corporate and Other
Service fees 4 7 11
Net investment income 37 54 60
Realized capital gains and losses 5
30 11
Total Corporate and Other before reclassification of
service fees
46 91 82
Reclassification of service fees (1) (4 ) (7 ) (11 )
Total Corporate and Other 42 84 71
Consolidated revenues $ 33,315 $ 32,654 $ 31,400
--------------------------------------------------------------------------------
º (1)
º For presentation in the Consolidated Statements of Operations, service fees
of the Corporate and Other segment are reclassified to operating costs and
expenses.
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Summarized financial performance data for each of the Company's reportable
segments for the years ended December 31 are as follows:
($ in millions) 2012 2011 2010
Net income
Property-Liability
Underwriting income (loss)
Allstate Protection $ 1,253 $ (857 ) $ 525
Discontinued Lines and Coverages (53 )
(25 ) (31 )
Total underwriting income (loss) 1,200 (882 ) 494
Net investment income 1,326 1,201 1,189
Income tax (expense) benefit on operations (779 ) 30 (426 )
Realized capital gains and losses, after-tax 221 54 (207 )
Gain on disposition of operations, after-tax -
- 3
Property-Liability net income 1,968 403 1,053
Allstate Financial
Life and annuity premiums and contract charges 2,241 2,238 2,168
Net investment income 2,647 2,716 2,853
Periodic settlements and accruals on non-hedge
derivative instruments 55 70 51
Contract benefits and interest credited to
contractholder funds (3,252 ) (3,378 ) (3,613 )
Operating costs and expenses and amortization of
deferred policy acquisition costs (926 ) (898 ) (804 )
Restructuring and related charges - (1 ) 3
Income tax expense on operations (236 )
(240 ) (214 )
Operating income 529 507 444
Realized capital gains and losses, after-tax (8 )
250 (337 )
Valuation changes on embedded derivatives that are not
hedged, after-tax
82
(12 ) -
DAC and DSI amortization related to realized capital
gains and losses and valuation changes on embedded
derivatives that are not hedged, after-tax
(42 )
(108 ) (29 )
DAC and DSI unlocking related to realized capital gains
and losses, after-tax
4
3 (12 )
Reclassification of periodic settlements and accruals
on non-hedge derivative instruments, after-tax
(36 ) (45 ) (33 )
Gain (loss) on disposition of operations, after-tax 12
(5 ) 9
Allstate Financial net income 541 590 42
Corporate and Other
Service fees (1) 4 7 11
Net investment income 37 54 60
Operating costs and expenses (1) (383 ) (403 ) (390 )
Income tax benefit on operations 136
126 128
Operating loss (206 ) (216 ) (191 )
Realized capital gains and losses, after-tax 3 20 7
Business combination expenses, after-tax - (10 ) -
Corporate and Other net loss (203 ) (206 ) (184 )
Consolidated net income $ 2,306 $ 787 $ 911
--------------------------------------------------------------------------------
º (1)
º For presentation in the Consolidated Statements of Operations, service fees
of the Corporate and Other segment are reclassified to operating costs and
expenses.
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Additional significant financial performance data for each of the Company's
reportable segments for the years ended December 31 are as follows:
($ in millions) 2012 2011 2010
Amortization of DAC
Property-Liability $ 3,483 $ 3,477 $ 3,517
Allstate Financial 401 494 290
Consolidated $ 3,884 $ 3,971 $ 3,807
Income tax expense
Property-Liability $ 893 $ 1 $ 314
Allstate Financial 241 289 (1 )
Corporate and Other (134 ) (118 ) (124 )
Consolidated $ 1,000 $ 172 $ 189
Interest expense is primarily incurred in the Corporate and Other segment.
Capital expenditures for long-lived assets are generally made in the
Property-Liability segment. A portion of these long-lived assets are used by
entities included in the Allstate Financial and Corporate and Other segments
and, accordingly, are charged expenses in proportion to their use.
Summarized data for total assets and investments for each of the Company's
reportable segments as of December 31 are as follows:
($ in millions) 2012 2011 2010
Assets
Property-Liability $ 52,201 $ 49,791 $ 47,536
Allstate Financial 72,368 72,526 78,732
Corporate and Other 2,378 2,876 4,232
Consolidated $ 126,947 $ 125,193 $ 130,500
Investments
Property-Liability $ 38,215 $ 35,998 $ 35,048
Allstate Financial 56,999 57,373 61,582
Corporate and Other 2,064 2,247 3,853
Consolidated $ 97,278 $ 95,618 $ 100,483
The balances above reflect the elimination of related party investments
between segments.
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20. Other Comprehensive Income
The components of other comprehensive income on a pre-tax and after-tax
basis for the years ended December 31 are as follows:
($ in millions) 2012 2011 2010
Pre- After- Pre- After- Pre- After-
tax Tax tax tax Tax tax tax Tax tax
Unrealized net
holding gains
arising during
the period, net
of related
offsets $ 2,428 $ (848 ) $ 1,580 $ 1,493 $ (524 ) $ 969 $ 2,717 $ (950 ) $ 1,767
Less:
reclassification
adjustment of
realized capital
gains and losses 225 (79 ) 146 795 (278 ) 517 (221 ) 77 (144 )
Unrealized net
capital gains
and losses 2,203 (769 ) 1,434 698 (246 ) 452 2,938 (1,027 ) 1,911
Unrealized
foreign currency
translation
adjustments 22 (8 ) 14 (18 ) 6 (12 ) 35 (12 ) 23
Unrecognized
pension and
other
postretirement
benefit cost (468 ) 166 (302 ) (371 ) 132 (239 ) 142 (48 ) 94
Other
comprehensive
income $ 1,757 $ (611 ) $ 1,146 $ 309 $ (108 ) $ 201 $ 3,115 $ (1,087 ) $ 2,028
21. Quarterly Results (unaudited)
($ in millions,
except per share
data) First Quarter Second Quarter Third
Quarter Fourth Quarter
2012 2011 2012 2011 2012 2011 2012 2011
Revenues $ 8,362 $ 8,095 $ 8,278 $ 8,081 $ 8,128 $ 8,242 $ 8,547 $ 8,236
Net income (loss) 766 524 423 (624 ) 723 175 394 712
Net income (loss)
earnings per share -
Basic 1.54 0.99 0.86 (1.19 ) 1.49 0.34 0.82 1.41
Net income (loss)
earnings per share -
Diluted 1.53 0.98 0.86 (1.19 ) 1.48 0.34 0.81 1.40
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
The Allstate Corporation
Northbrook, IL 60062
We have audited the accompanying Consolidated Statements of Financial Position
of The Allstate Corporation and subsidiaries (the "Company") as of December 31,
2012 and 2011, and the related Consolidated Statements of Operations,
Comprehensive Income, Shareholders' Equity, and Cash Flows for each of the three
years in the period ended December 31, 2012. We also have audited the Company's
internal control over financial reporting as of December 31, 2012, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Item 9A. Controls and Procedures. Our responsibility is to express
an opinion on these financial statements and an opinion on the Company's
internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel 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. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Allstate
Corporation and subsidiaries as of December 31, 2012 and 2011, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2012, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2012, based on the criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 20, 2013
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