Washington, D.C. 20549
---------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11840
THE ALLSTATE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3871531
(State of Incorporation) (I.R.S. Employer Identification No.)
2775 Sanders Road, Northbrook, Illinois 60062
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 847/402-5000
REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND
(2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES /X/ NO
AS OF OCTOBER 31, 1996, THE REGISTRANT HAD 444,672,713 COMMON SHARES, $.01
PAR VALUE, OUTSTANDING.
THE ALLSTATE CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 1996
PART 1 - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1996
and 1995 (unaudited). 1
Condensed Consolidated Statements of Financial
Position as of September 30, 1996 (unaudited)
and December 31, 1995. 2
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1996
and 1995 (unaudited). 3
Notes to Condensed Consolidated Financial
Statements (unaudited). 4
Independent Certified Public Accountants'
Review Report. 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 33
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE ALLSTATE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1996 1995 1996 1995
-------- ------- ------- -------
(Unaudited)
($ in millions except per share data)
Revenues
Property-liability insurance premiums earned $4,598 $4,442 $13,792 $13,001
Life insurance premium income and contract
charges 338 290 950 1,011
Net investment income 958 912 2,842 2,690
Realized capital gains and losses 121 55 658 241
-------- ------- ------- -------
6,015 5,699 18,242 16,943
-------- ------- ------- -------
Costs and expenses
Property-liability insurance claims and
claims expenses 3,825 3,458 11,041 10,111
Life insurance policy benefits 578 546 1,685 1,767
Amortization of deferred policy
acquisition costs 584 554 1,721 1,564
Operating costs and expenses 438 535 1,604 1,686
California Earthquake Authority assessment 150 - 150 -
Interest expense 19 18 57 54
-------- ------- ------ -------
5,594 5,111 16,258 15,182
-------- ------- ------- -------
(Loss)gain on disposition of operations (125) - (125) 159
Income from operations before income tax
expense and equity in net income
of unconsolidated subsidiary 296 588 1,859 1,920
Income tax expense 11 148 400 462
-------- --------- ------- -----
Income before equity in net income of
unconsolidated subsidiary 285 440 1,459 1,458
Equity in net income of unconsolidated
subsidiary 7 6 21 49
-------- --------- ------- ------
Net income $292 $446 $1,480 $1,507
======== ========= ======= ======
Net income per share $ 0.65 $ 1.00 $ 3.30 $ 3.36
======== ========= ======= =======
Weighted-average common and common
equivalent shares outstanding 447.4 448.1 448.7 448.7
======== ========= ======= =======
See notes to condensed consolidated financial statements.
-1-
THE ALLSTATE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
September 30, December 31,
($ in millions) 1996 1995
------------- -------------
(Unaudited)
Assets
Investments
Fixed income securities available for sale, at fair value
(amortized cost $44,364 and $41,907) $ 45,795 $ 45,272
Equity securities, at fair value (cost $4,018 and $4,716) 5,370 6,150
Mortgage loans 3,265 3,280
Real estate 719 786
Short-term 695 548
Other 502 469
---------- -----------
Total investments 56,346 56,505
Premium installment receivables, net 2,701 2,935
Deferred policy acquisition costs 2,470 2,004
Reinsurance recoverables, net 2,130 1,829
Property and equipment, net 701 724
Accrued investment income 771 750
Deferred income taxes 588 229
Cash 164 90
Other assets 1,402 1,154
Separate Accounts 4,940 3,809
---------- ----------
Total assets $ 72,213 $ 70,029
========== ==========
Liabilities
Reserve for property-liability insurance
claims and claims expense $ 17,391 $ 17,687
Reserve for life insurance policy benefits 6,014 6,071
Contractholder funds 19,864 19,146
Unearned premiums 6,231 6,188
Claim payments outstanding 521 568
Other liabilities and accrued expenses 3,114 2,663
Short-term debt 192 -
Long-term debt 1,229 1,228
Separate Accounts 4,928 3,798
---------- ----------
Total liabilities 59,484 57,349
---------- ----------
Commitments and Contingent Liabilities (Notes 2, 3, 4, and 6)
Shareholders' equity
Preferred stock, $1 par value, 25 million
shares authorized, none issued - -
Common stock, $.01 par value, 1 billion shares
authorized and 450 million issued, 444.7 million
and 447.5 million shares outstanding 5 5
Additional capital paid-in 3,133 3,134
Unrealized net capital gains 1,612 2,636
Unrealized foreign currency translation adjustments 20 20
Retained income 8,457 7,261
Deferred ESOP expense (301) (300)
Treasury stock, at cost (5.3 million and 2.5 million shares) (197) (76)
--------- ---------
Total shareholders' equity 12,729 12,680
-------- --------
Total liabilities and shareholders' equity $ 72,213 $ 70,029
========= =========
See notes to condensed consolidated financial statements.
-2-
THE ALLSTATE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
-----------------------
($ in millions) 1996 1995
--------- --------
(Unaudited)
Cash flows from operating activities
Net income $1,480 $1,507
Adjustments to reconcile net income to
net cash provided by operating activities
Realized capital gains and losses (658) (241)
Loss(gain) on disposition of operations 125 (159)
Interest credited to contractholder funds 905 889
Increase in policy benefit and other insurance reserves 587 780
Increase in unearned premiums 311 443
Increase in deferred policy acquisition costs (368) (248)
Change in premium installment receivables, net 46 (720)
Increase in reinsurance recoverables, net (374) (286)
Change in deferred income taxes 109 86
Changes in other operating assets and liabilities (65) 304
--------- --------
Net cash provided by operating activities 2,098 2,355
--------- --------
Cash flows from investing activities
Proceeds from sales
Fixed income securities available for sale 7,839 4,748
Fixed income securities held to maturity - 24
Equity securities 2,902 1,638
Investment collections
Fixed income securities available for sale 3,319 1,422
Fixed income securities held to maturity - 494
Mortgage loans 292 194
Investment purchases
Fixed income securities available for sale (14,570) (9,609)
Fixed income securities held to maturity - (428)
Equity securities (1,572) (1,696)
Mortgage loans (280) (390)
Change in short-term investments, net (148) 45
Change in other investments, net 32 51
Proceeds from disposition of operations 341 -
Purchases of property and equipment, net (82) (79)
--------- --------
Net cash used in investing activities (1,927) (3,586)
--------- --------
Cash flows from financing activities
Proceeds from issuance of short-term debt, net 192 -
Proceeds from issuance of long-term debt 3 341
Repayment of long-term debt (2) (2)
Repayment of demand note by Sears - 450
Proceeds from sale of subsidiary's stock - 784
Payment to Sears for transfer of ESOP obligation - (327)
Contractholder fund deposits 2,311 2,794
Contractholder fund withdrawals (2,196) (2,472)
Dividends paid (284) (262)
Change in treasury stock, net (121) (52)
Other - (16)
--------- --------
Net cash provided by (used in)financing activities (97) 1,238
--------- --------
Net increase in cash 74 7
Cash at beginning of period 90 56
--------- --------
Cash at end of period $ 164 $ 63
========= ========
See notes to condensed consolidated financial statements.
-3-
THE ALLSTATE CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of The Allstate Corporation and its wholly-owned subsidiary, Allstate
Insurance Company, a property-liability insurance company with various
property-liability and life insurance subsidiaries, including Allstate Life
Insurance Company (collectively referred to as the "Company" or "Allstate").
The condensed consolidated financial statements and notes as of September 30,
1996 and for the three-month and nine-month periods ended September 30, 1996 and
1995 are unaudited. The condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for the fair presentation of the financial
position, results of operations and cash flows for the interim periods. These
condensed consolidated financial statements and notes should be read in
conjunction with the consolidated financial statements and notes thereto
included in The Allstate Corporation Annual Report to Shareholders and Annual
Report on Form 10-K for 1995. The results of operations for the interim periods
should not be considered indicative of results to be expected for the full year.
Effective July 1, 1996 the Company changed the components of
property-liability acquisition costs deferred to include all forms of agent
remuneration which vary directly with premium production. This change was made
to more appropriately match the costs of acquiring business to the related
premium revenue and to increase the consistency of accounting for agent
remuneration despite differing contractual agreements with agents. The
additional costs deferred consist primarily of employer payroll taxes, benefits,
and the agents' office expense allowance, which is reimbursed based on the
percent of premiums written. Previously, only commissions paid to agents and
agency managers, premium taxes, and inspection report costs were deferred. This
change increased third quarter 1996 net income by $57 million after-tax.
2. Disposition of Operations
On July 31, 1996, Allstate completed the sale of Northbrook Holdings, Inc.
and its wholly-owned subsidiaries (collectively "Northbrook") to St. Paul Fire &
Marine Insurance Company ("St. Paul"). Northbrook writes commercial lines
insurance through its subsidiaries. Allstate recorded gross proceeds of $189
million and recognized a gain of $18 million ($51 million after-tax) on the sale
during the third quarter of 1996. The proceeds and gain are subject to a
purchase price adjustment based on the final balance sheet of Northbrook as of
July 31, 1996, expected to be completed in the fourth quarter. In connection
with the sale, Allstate entered into an agreement with St. Paul whereby Allstate
and St. Paul will share in any development of the closing net loss reserves of
Northbrook to be settled as of July 31, 2000. Under the agreement, if the
development of ultimate net loss reserves exceeds net loss reserves at closing
by more than $25 million, Allstate will be required to pay St. Paul a portion of
the difference, limited to $100 million. If the development of ultimate net loss
reserves is less than net loss reserves at closing, St. Paul will be required to
pay Allstate a portion of the difference
-4-
not to exceed $50 million. The Company does not expect unfavorable reserve
development based on current trends, conditions, and claim settlement processes.
Premiums written for Northbrook through July 31, 1996 included in the results of
operations for the three-month and nine-month periods ended September 30, 1996
were $50 million and $295 million, respectively. As a result of the sale, the
Company's liability for claims and claims expense net of reinsurance recoverable
was reduced by $1.01 billion and invested assets were reduced by $973 million.
On September 16, 1996, the Company completed the sale of Allstate's
U.S.-based reinsurance operations for policies written after 1984
("Reinsurance") to SCOR U.S. Corporation ("SCOR"). The transaction consisted of
the sale of certain non-insurance assets, liabilities and renewal rights and a
reinsurance transaction for the insurance liabilities. The Company recorded
gross proceeds of $152 million as a result of the sale and will realize an $83
million gain ($61 million after-tax). The portion of the gain relating to the
sale of the renewal rights, $19 million ($12 million after-tax), was recorded in
the third quarter of 1996. The remaining $64 million gain ($49 million
after-tax) was deferred and will be amortized through underwriting income over
the reserve run-off period, approximately five years, in accordance with
retroactive reinsurance accounting. The proceeds and gains are subject to a
purchase price adjustment based on the final statement of assets and liabilities
sold as of September 16, 1996, expected to be completed in the first quarter of
1997.
Pending regulatory approval, Allstate expects to complete the sale of the
common stock of its London-based reinsurance operations, Allstate Reinsurance
Co, Limited ("ARCO") to QBE Insurance Group Limited of Sydney, Australia ("QBE")
in the fourth quarter of 1996. The Company expects to receive proceeds of $35
million and has recognized a $38 million loss($39 million after-tax) in the
third quarter of 1996. In connection with the sale, Allstate will enter into an
agreement with QBE whereby 80% of any ultimate adverse development on ARCO's
December 31, 1995 net loss reserves will be reimbursed to QBE by Allstate. QBE
will reimburse Allstate for 70% of any ultimate favorable net loss development.
Development will be settled annually. At the closing, in addition to the $35
million cash proceeds, QBE will deposit approximately $20 million in escrow
related to this agreement, representing a contingent purchase payment. If 1996
net loss development is favorable, Allstate will receive the $20 million escrow
deposit in addition to 70% of any redundancy. Allstate would report this as a
purchase price adjustment in 1997. If 1996 net loss development is unfavorable,
the amount held in escrow will be used to satisfy any of Allstate's obligation,
with the excess, if any, paid to Allstate. In addition, the development of
accident year 1996 underwriting results for QBE is limited to a combined ratio
of 110 for contracts in place as of the closing date, and to be reviewed and
settled annually.
Premiums written for Reinsurance and ARCO for the third quarter and first
nine months of 1996, were $101 million and $292 million, respectively. As a
result of the Reinsurance sale, during the third quarter of 1996, the Company's
invested assets were reduced by $300 million.
-5-
During the third quarter of 1996, the Company increased by $87 million ($55
million after-tax) the provision for future losses provided for the run-off of
the mortgage pool business in the loss on disposition of operations line of the
income statement. The provision was established in the second quarter of 1995,
in connection with Allstate's decision to exit the mortgage guaranty insurance
business. The increase was due primarily to revised loss trend analyses based on
continued weakness in Southern California's economic conditions, including
real estate prices and unemployment. This business, which is
highly concentrated in Southern California, continues to be affected by the
factors described above, as well as interest rate volatility or a combination of
such factors. These factors are considered in the reevaluation of the provision
for future losses.
Allstate entered into an agreement to sell the renewal rights of 137,000
Florida property policies to Clarendon National Insurance Company. Beginning
with policies expiring after November 14, 1996, Allstate will no longer provide
coverage for these polices as they expire over the next twelve months. In
connection with the sale of these policies, the Company recognized a loss of $37
million ($24 million after-tax) in the third quarter of 1996. The Company is
expecting annual written premiums to decrease by approximately $78 million as a
result of this transaction.
3. California Earthquake Authority
During the third quarter of 1996, the Governor of California signed
legislation which established the terms under which the California Earthquake
Authority ("CEA") will become operational. The CEA is a privately-financed,
publicly-managed state agency created to provide coverage for earthquake damage
resulting from the movement of the earth. Insurers selling homeowners insurance
will continue to be required to offer earthquake insurance to their customers
either through their company or participation in the CEA. The CEA will become
operational when insurers representing at least 70% of the California
residential property insurance market agree to participate and the necessary
commitments from reinsurers are obtained. Assuming the required level of
participation and reinsurance commitments are obtained, the Department of
Insurance has stated that it expects the CEA to be selling policies in December,
1996. Until the CEA becomes operational, Allstate will continue to write its
earthquake mini-policy for policies renewing. The mini-policy, introduced late
in the second quarter of 1996, increases deductibles and eliminates coverage for
most non-dwelling structures and significantly reduces Allstate's exposure from
what was in place at the time of the Northridge earthquake in 1995. The CEA will
issue earthquake policies as existing policies issued by participating insurers
expire.
The capital needed to create and operate the CEA is to be obtained through
assessments on participating insurance companies, reinsurance, and funding from
the capital markets. Initially, insurance companies who elect to participate in
the CEA will be assessed approximately $1 billion based on their respective
market share of earthquake coverage. Allstate's pretax assessment, including
related expenses, of approximately $150 million was expensed in the third
quarter of 1996.
-6-
Allstate may be assessed in the future depending on the capital level of the
CEA. If the capital of the CEA drops below $350 million, participating insurers
may be assessed over a period of twelve years, based on market share, an amount
not to exceed $3 billion in total. Participating insurers are required to fund a
third assessment, not to exceed $2 billion in total, if aggregate earthquake
losses exceed $8.5 billion and the CEA's capital falls below $350 million. The
authority of the CEA to assess participating insurers expires when the CEA has
completed twelve years of operation. Allstate does not expect its portion of
these additional contingent assessments, if needed, to exceed $750 million.
4. 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. These reserve estimates are based on
known facts and interpretation of circumstances, including the Company's
experience with similar cases and historical trends involving claim payment
patterns, loss payments, pending levels of unpaid claims, product mix, and
unavailable reinsurance balances, as well as other factors including court
decisions, economic conditions and public attitudes.
The establishment of appropriate reserves, including reserves for
catastrophes, is an inherently uncertain process. Allstate regularly updates its
reserve estimates as new facts become known and further events occur which may
impact the resolution of unsettled claims. Changes in prior year reserve
estimates, which may be material, are reflected in the results of operations in
the period such changes are determined to be needed.
Catastrophes are 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. The level of catastrophe losses experienced in any year cannot be
predicted and could be material to the results of operations and financial
position. The Company has experienced two severe catastrophes in the last five
years resulting in losses of $2.33 billion relating to Hurricane Andrew (net of
reinsurance) and $1.72 billion relating to the Northridge earthquake. The
Company is exposed to similar or greater catastrophes in the future.
During the third quarter of 1996, the Company concluded a comprehensive
re-evaluation of its net loss reserves, including the process for estimating and
identifying available reinsurance, for its Discontinued Lines and Coverages
segment which resulted in an increase in net loss reserves of $318 million. The
increase in net loss reserves consisted of several components, including a $244
million net increase in environmental and asbestos net loss reserves, a $60
million net increase in other latent exposure and general liability net loss
reserves, and a $14 million increase in the provision for future insolvencies
of reinsurers.
-7-
Allstate's exposure to environmental and asbestos claims stem principally
from excess and surplus business written from 1972-1985, including substantial
excess and surplus general coverages on Fortune 500 companies, and reinsurance
coverage written during the 1960's through the 1980's, including reinsurance on
primary insurance written on large U.S. companies. Establishing net loss
reserves for environmental and asbestos claims is subject to uncertainties that
are greater than those presented by other types of claims. Among the
complications are the lack of historical data, long reporting delays,
uncertainty as to the number and identity of insureds with potential exposure,
unresolved legal issues regarding policy coverage, and the extent and timing of
any such contractual liability. The legal issues concerning the interpretation
of various insurance policy provisions and whether environmental and asbestos
losses are or were ever intended to be covered are complex. 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 insured obligation to defend; how policy limits are
determined; how policy exclusions 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.
As the industry has gained experience evaluating environmental and asbestos
exposures some actuarial firms have developed meaningful techniques and
databases to estimate environmental and asbestos liabilities. Allstate gained
access to complex databases developed by outside experts to estimate the cost of
liabilities for environmental claims. The databases contained lists of known
potentially responsible parties ("PRP"), National Priority List ("NPL") sites,
and the Environmental Protection Agency's estimate of clean-up costs. Allstate's
policy files were compared to the databases, and factors to estimate growth of
NPL sites, state sites, third party claims, natural resource damage, probability
of coverage, and PRP's being named at future sites were applied to determine an
estimate of the Company's potential environmental loss. The Company also refined
its own estimation techniques, which were tested and validated by outside
actuaries, to estimate environmental and asbestos losses. Allstate used a
combination of these resources, along with an extensive internal review of its
current claim exposures to estimate environmental and asbestos reserves. The
Company performed an in-depth analysis of its reinsurance recoverables and
refined its process for estimating and identifying available reinsurance since
some reinsurers have become insolvent or Allstate has commuted their agreements.
During the third quarter of 1996, loss reserves for asbestos exposures increased
$153 million before consideration of reinsurance recoverables and $72 million
net of reinsurance recoverables. Loss reserves for environmental exposures
decreased $10 million before consideration of reinsurance recoverables and
increased $172 million net of reinsurance recoverables during the third quarter
of 1996. For the nine months ended September 30, 1996, net loss reserves for
environmental and asbestos exposures increased by $220 million and $32 million,
respectively. Environmental and asbestos net loss reserves as of September 30,
1996 were $740 million and $533 million, respectively.
-8-
In addition to environmental and asbestos exposures, the studies also
included an assessment of current claims for other latent exposures which
primarily relate to products liability claims, such as those for medical devices
and other products, and general liabilities. Loss reserves for other latent
exposures and general liabilities increased $87 million before consideration of
reinsurance recoverables and $60 million net of reinsurance recoverables as a
result of the studies. This increase is net of the movement of $103 million of
general liability net loss reserves between 1985 and later accident years to
pre-1985 accident years.
In 1986, the general liability policy form used by Allstate and others in the
property-liability industry was amended to introduce an "absolute pollution
exclusion," which excluded coverage for environmental damage claims and added an
asbestos exclusion. Most general liability policies issued prior to 1986 contain
annual aggregate limits for products liability coverage, and policies issued
after 1986 also have an annual aggregate limit as to all coverages. Allstate's
experience to date is that these policy form changes have effectively limited
its exposure to environmental and asbestos claim risks assumed as well as
primary commercial coverages written subsequent to 1986. Allstate's reserves,
net of reinsurance recoverables of $524 million and $647 million, for
environmental and asbestos claims were $1.27 billion and $1.02 billion at
September 30, 1996 and December 31, 1995, respectively.
Management believes its net loss reserves for environmental and asbestos
coverages and other latent exposures are appropriately established based on
available facts, updated technology, laws, and regulations. However, due to the
inconsistencies of court coverage decisions, plaintiffs' expanded theories of
liability, the risks inherent in major litigation and other uncertainties, the
ultimate cost of these claims may vary materially from the amounts currently
recorded, resulting in an increase in the net loss reserves. In addition, while
the Company believes the improved actuarial techniques and databases have
assisted in its ability to estimate environmental and asbestos net loss
reserves, these refinements may subsequently prove to be inadequate indicators
of the extent of probable net loss. Due to the uncertainties and factors
described above, management believes it is not practicable to develop a
meaningful range for any such additional net loss reserves that may be required.
-9-
5. Reinsurance
Property-liability insurance premiums and life insurance premium income and
contract charges are net of reinsurance ceded as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
($ in millions)
1996 1995 1996 1995
---- ---- ---- ----
Property-liability premiums........ $119 $135 $404 $396
Life insurance premium income and
contract charges.................. 44 14 73 39
Property-liability insurance claims and claims expense and life insurance
policy benefits are net of reinsurance recoveries as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
($ in millions)
1996 1995 1996 1995
---- ---- ---- ----
Property-liability claims and
claims expense................... $11 $236 $200 $590
Life insurance policy benefits
and contract charges............. 6 6 30 17
6. Regulation and Legal Proceedings
The Company's insurance businesses are subject to the effects of a changing
social, economic and regulatory environment. Public and regulatory initiatives
have varied and have included efforts to restrict premium rates, restrict the
Company's ability to cancel policies, impose underwriting standards and expand
overall regulation. The ultimate changes and eventual effects, if any, of these
initiatives are uncertain.
Various legal and regulatory actions are currently pending that involve
Allstate and specific aspects of its conduct of business. In the opinion of
management, the ultimate liability, if any, in one or more of these actions in
excess of amounts currently reserved is not expected to have a material effect
on results of operations, liquidity or capital resources.
-10-
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders of
The Allstate Corporation:
We have reviewed the accompanying condensed consolidated statement of financial
position of The Allstate Corporation and subsidiary as of September 30, 1996,
and the related condensed consolidated statements of operations for the
three-month and nine-month periods ended September 30, 1996 and 1995, and the
condensed consolidated statements of cash flows for the nine-month periods ended
September 30, 1996 and 1995. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial position of The Allstate
Corporation and subsidiary as of December 31, 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended, not presented herein. In our report dated March 1, 1996, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated statement
of financial position as of December 31, 1995 is fairly stated, in all material
respects, in relation to the consolidated statement of financial position from
which it has been derived.
Deloitte & Touche LLP
Chicago, Illinois
November 13, 1996
-11-
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Three-Month and Nine-Month Periods Ended
September 30, 1996 and 1995
The following discussion highlights significant factors influencing results
of operations and changes in financial position of The Allstate Corporation (the
"Company" or "Allstate"). It should be read in conjunction with the condensed
consolidated financial statements and notes thereto found under Part I. Item 1
along with the discussion and analysis found under Part 2. Item 7 of The
Allstate Corporation Annual Report on Form 10-K for the year ended December 31,
1995.
Consolidated Operations
Consolidated revenues for the third quarter of 1996 increased 5.5% to $6.02
billion from $5.7 billion for the same period last year reflecting a $156
million increase in property-liability earned premiums, a $66 million increase
in net realized capital gains, a $48 million increase in life premium income and
contract charges and a $46 million increase in net investment income.
Consolidated revenues for the first nine months of 1996 increased 7.7% to $18.24
billion from $16.94 billion for the same period in 1995 reflecting a $791
million increase in property-liability earned premiums, a $417 million increase
in net realized capital gains, and a $152 million increase in net investment
income, partially offset by a $61 million decrease in life premium income and
contract charges. The increase in property-liability earned premiums for the
three-month and nine-month periods are due primarily to growth in the
non-standard auto business. Increased capital gains for the nine-month period
resulted primarily from repositioning the property-liability investment
portfolio in the second quarter of 1996. Revenue results for the Company's
primary insurance segments are discussed further in the following sections.
Net income for the third quarter of 1996 was $292 million, or 65 cents per
share, compared with $446 million, or $1.00 per share, for the same period of
1995. Net income for the first nine months of 1996 was $1.48 billion, or $3.30
per share, compared with $1.51 billion, or $3.36 per share, for the same period
of 1995. For both the three-month and nine-month periods ended September 30,
1996, increased property-liability net realized capital gains and life operating
income were more than offset by increased property-liability underwriting
losses, the California Earthquake Authority ("CEA") assessment and a net loss on
the disposition of operations. The property-liability underwriting losses
increased for both periods, as increases in earned premiums, favorable auto
injury severity trends, and a benefit due to a change in the components of
acquisition costs deferred to include all forms of agent remuneration that vary
with premium production, were more than offset by an increase to the reserves
for claims and claims expense (net loss reserves) for certain discontinued lines
and coverages and catastrophe losses.
Net income for the nine-month period ended September 30, 1995 included a $93
million after-tax gain from the sale of 70% of The PMI Group, Inc.
-12-
Property-Liability Operations
Overview
In order to focus primarily on its core strengths, during the third quarter
of 1996, the Company sold the majority of its "Business Insurance" segment which
was comprised of commercial property and casualty and reinsurance operations. As
a result, the Company's property-liability operations include two segments:
Personal Property and Casualty ("PP&C") and Discontinued Lines and Coverages
("Discontinued Lines and Coverages"). PP&C, which has historically included all
of the Company's personal property and casualty business, has been revised to
include ongoing commercial business written through the same agent distribution
channel. Discontinued Lines and Coverages consists of business no longer written
by Allstate, including results from asbestos, environmental, and other
commercial and mortgage pool business in run-off, as well as the historical
results of businesses sold in 1996.
Underwriting results for each of the property-liability segments are
discussed separately beginning on page 19.
-13-
The following table sets forth certain unaudited summarized financial data
and key operating ratios for the Company's property-liability operations for the
three-month and nine-month periods ended September 30, 1996 and 1995.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
($ in millions) 1996 1995 1996 1995
---- ---- ---- ----
Premiums written..................... $4,798 $4,647 $14,063 $13,432
===== ===== ====== ======
Premiums earned...................... $4,598 $4,442 $13,792 $13,001
Claims and claims expense............ 3,825 3,458 11,041 10,111
Other costs and expenses............. 894 963 2,952 2,899
--- --- ----- -----
Underwriting (loss) income .......... (121) 21 (201) (9)
California Earthquake
Authority assessment........ 150 - 150 -
Net investment income ............... 439 406 1,306 1,199
Realized capital gains and
losses, after-tax................... 77 33 405 129
(Loss)gain on disposition
of (55) - (55) 93
-
operations, after-tax..
Income tax (benefit) expense on
operations.......................... (4) 91 119 199
--- -- ----- -----
Income before equity in net
income of unconsolidated
subsidiary.......................... 194 369 1,186 1,213
Equity in net income of
unconsolidated subsidiary........... 7 6 21 49
-- -- -- --
Net income........................... $ 201 $ 375 $1,207 $1,262
=== === ===== =====
Catastrophe losses................... $ 304 $ 171 $ 815 $ 707
===== ===== ===== ====
Operating ratios.....................
Claims and claims expense
("loss") ratio...................... 83.2 77.8 80.1 77.8
Expense ratio........................ 19.4 21.7 21.4 22.3
---- ---- ----- -----
Combined ratio....................... 102.6 99.5 101.5 100.1
===== ==== ===== =====
Effect of catastrophe losses
on combined ratio................... 6.6 3.8 5.9 5.4
==== ==== ===== =====
-14-
Net Investment Income and Realized Capital Gains
Pretax net investment income increased 8.1% and 8.9% for the three-month and
nine-month periods of 1996, compared with the same periods in 1995. For the
quarter, increased investment income resulted from an increase in invested
balances as a result of positive cash flows over the last twelve months
partially offset by the sale of Northbrook and Reinsurance in the third quarter
of 1996. The pretax portfolio yield also increased slightly due to the
repositioning of the portfolio during the second quarter of 1996 and the
transfer of lower yielding Northbrook investments during the third quarter in
connection with the sale to St. Paul, partially offset by the negative impact of
calls and maturities of higher yielding bonds. The second quarter 1996 portfolio
repositioning is not expected to impact after-tax portfolio yields. The
increased investment income for the nine-month period was primarily due to
increased invested balances as a result of positive cash flows from operations,
and the full year impact of proceeds received from The PMI Group, Inc. and Sears
Distribution transactions in the second quarter of 1995, partially offset by the
sale of Northbrook and Reinsurance.
Realized capital gains after-tax for the third quarter of 1996 were $77
million compared with $33 million for the same period in 1995. The increase was
primarily due to the Company's sale of securities to take advantage of favorable
investment performance and market conditions. For the first nine months of 1996,
realized capital gains after-tax were $405 million compared with $129 million
for the comparable period in 1995. During the first half of 1996, the Company
reassessed the market risk associated with its property-liability fixed income
and equity securities portfolios and, as a result, sold a portion of its equity
securities and tax-exempt long-term fixed income securities. Approximately $234
million of capital gains after-tax were realized in the second quarter of 1996
as a result of this repositioning. The proceeds from the repositioning were
reinvested in taxable intermediate-term fixed income securities (see
Investments).
Increases in property-liability net investment income will be lower in the
future as a result of the sales of Northbrook and Reinsurance. These sales
resulted in a net reduction of the property-liability invested balances of
approximately $1.27 billion in the third quarter of 1996.
Catastrophe Losses
Catastrophes are an inherent risk of the property-liability insurance
business which have contributed, and will continue to contribute, to material
year-to-year fluctuations in Allstate's results of operations and financial
position. The level of catastrophe losses experienced in any year cannot be
predicted and could be material to the Company's results of operations and
financial position. The Company has experienced two severe catastrophes in the
last five years which resulted in losses of $2.33 billion related to Hurricane
Andrew (net of reinsurance) and $1.72 billion related to the Northridge
earthquake. The Company is exposed to similar or greater catastrophes in the
future.
Catastrophe losses for the third quarter of 1996 were $304 million compared
to $171 million for the same period of 1995. The increase was primarily due to
the effects of Hurricane Fran. For the nine-month period ended September
-15-
30, 1996, catastrophe losses were $815 million versus $707 million for the
same period in 1995.
The establishment of appropriate reserves for catastrophes that have
occurred, as for all property-liability claims, is an inherently uncertain
process. Catastrophe reserve estimates are regularly reviewed and updated, using
the most current information. Any resulting adjustments, which may be material,
are reflected in current period operations.
Catastrophe Management
Allstate has initiated strategies to limit, over time, its insurance
exposures in certain regions prone to catastrophes, subject to the requirements
of insurance laws and regulations and as limited by competitive considerations.
These strategies include reductions in policies in force in catastrophe prone
areas, limits on new business production, and limitations on certain policy
coverages. In addition, Allstate has requested rate increases in certain
catastrophe prone areas.
During the third quarter of 1996, the Company received approval from the
Florida Department of Insurance on key components of the Company's plan to
reorganize its Florida property business in order to reduce its exposure to
hurricanes. As part of this plan, the Company has taken the following actions.
The Allstate Floridian Insurance Company ("Floridian") was formed to sell
and service Allstate's Florida property policies. Effective September 17,
1996, all new Florida property policies were written in Floridian.
Beginning with policies expiring after October 31, 1996, Allstate's
existing Florida property policies will be transferred to Floridian as
policies are renewed.
Floridian entered into catastrophe reinsurance agreements with a
non-affiliated entity which provides access to approximately $400 million
of catastrophe reinsurance protection.
Allstate entered into an agreement to sell the renewal rights of 137,000
Florida property policies to Clarendon National Insurance Company.
Beginning with policies expiring after November 14, 1996, Allstate will no
longer provide coverage for these polices as they expire over the next
twelve months. In connection with the sale of these policies, the Company
recognized an after-tax loss of $24 million in the third quarter of 1996.
The Company is expecting annual written premiums to decrease by
approximately $78 million as a result of this transaction.
Beginning September 16, 1996, Allstate discontinued its non-renewal
program, which pertained to certain Florida counties.
Effective September 17, 1996, for new business, and November 1, 1996, for
renewal business, Florida property policies contained certain coverage and
deductible modifications and a 22% statewide average increase in premium
rates. The Company will be unable to increase property premium rates in
Florida until January of 1999.
The Company anticipates regulatory approval to transfer the wind damage
portion of approximately 67,000 Allstate property policies to the Florida
Windstorm Underwriting Association. Once approved, the
-16-
Company expects annual premium written to decrease by approximately $12
million.
Management believes as these actions are implemented the Company's exposure
to catastrophes will be reduced in Florida.
During the third quarter of 1996, the Governor of California signed
legislation which established the terms under which the California Earthquake
Authority ("CEA") will become operational. The CEA is a privately-financed,
publicly-managed state agency created to provide coverage for earthquake damage
resulting from the movement of the earth. Insurers selling homeowner insurance
will continue to be required to offer earthquake insurance to their customers
either through their company or participation in the CEA. The CEA will become
operational when insurers representing at least 70% of the California
residential property insurance market agree to participate and the necessary
commitments from reinsurers are obtained. Assuming the required level of
participation and reinsurance commitments are obtained, the Department of
Insurance has stated that it expects the CEA to be selling policies in December,
1996. Until the CEA becomes operational, Allstate will continue to write its
earthquake mini-policy for policies renewing. The mini-policy, introduced late
in the second quarter of 1996, increases deductibles and eliminates coverage for
most non-dwelling structures and significantly reduces Allstate's exposure from
what it was at the time of the Northridge earthquake in 1995. The CEA will issue
earthquake policies as existing policies issued by participating insurers
expire.
The capital needed to create and operate the CEA is to be obtained through
assessments on participating insurance companies, reinsurance, and funding from
the capital markets. Initially, insurance companies who elect to participate in
the CEA will be assessed approximately $1 billion based on their respective
market share of earthquake coverage. Allstate's pretax assessment, including
related expenses, of approximately $150 million was expensed in the third
quarter of 1996.
Allstate may be assessed in the future depending on the capital level of the
CEA. If the capital of the CEA drops below $350 million, participating insurers
may be assessed over a period of twelve years, based on market share, an amount
not to exceed $3 billion in total. Participating insurers are required to fund a
third assessment, not to exceed $2 billion in total, if aggregate earthquake
losses exceed $8.5 billion and the CEA's capital falls below $350 million. The
authority of the CEA to assess participating insurers expires when the CEA has
completed twelve years of operation. Allstate does not expect its portion of
these additional contingent assessments, if needed, to exceed $750 million.
As a result of the passage of the CEA legislation, Allstate returned to
writing new property policies in California on November 4, 1996. Management
believes Allstate's exposure to earthquake losses will be significantly reduced
in the future as a result of the CEA. However, the Company continues to be
exposed to earthquake losses for the next year until all policies expire and are
rewritten by the CEA. Assuming the CEA commences operations on December 1, 1996,
the Company will non-renew approximately $109 million in premiums written over
the following year. The homeowner policy also provides coverage for losses
caused by fires following an earthquake.
-17-
For Allstate, major areas of potential losses due to hurricanes include major
metropolitan centers near the eastern and gulf coasts of the United States. The
major areas of exposure to potential losses due to earthquakes in California
include population centers in and around Los Angeles and San Francisco. Other
areas in the United States with exposure to potential earthquake losses include
areas surrounding the New Madrid fault line and faults in and surrounding the
Seattle, Washington area. Although the Company has made progress in California
and Florida, Allstate continues to evaluate options in the reinsurance market
for appropriate coverage at acceptable rates, the financial markets, and other
business strategies to more effectively manage its exposure to catastrophic
losses in other areas.
Disposition of Operations
The (loss) gain on the disposition of operations line in the statement of
operations is comprised of the following after-tax gains and losses:
$51 million gain from the sale of the Northbrook commercial lines
operations;
$12 million gain from the sale of the U.S.-based reinsurance
operations;
$24 million loss from the sale of renewal rights of certain Florida
homeowners policies to Clarendon National Insurance Company;
$39 million expected loss from the sale of the foreign-based
reinsurance operations;
$55 million loss due to an increase in the provision for future losses
established in connection with Allstate's decision to exit the
mortgage guaranty insurance business.
The sale of certain Florida renewal rights to Clarendon National Insurance
Company is discussed in Catastrophe Management. The sales of Northbrook
commercial operations, U.S.-based reinsurance operations, foreign-based
reinsurance operations, and the increase in provision for future losses
established for mortgage guaranty business are discussed in detail in
Discontinued Lines and Coverages.
-18-
Underwriting Results
PP&C - Underwriting results and key operating ratios for the Company's
Personal Property and Casualty insurance segment for the three-month and
nine-month periods ended September 30, 1996 and 1995 are summarized in the
following table.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
($ in millions) 1996 1995 1996 1995
---- ---- ---- ----
Premiums written................ $ 4,651 $ 4,377 $ 13,480 $ 12,670
====== ===== ======= =======
Premiums earned................. $ 4,459 $ 4,186 13,164 12,258
Claims and claims expense....... 3,410 3,188 10,159 9,346
Other costs and expenses........ 837 869 2,720 2,650
--- ---- ------ ------
Underwriting income............. $ 212 $ 129 $ 285 $ 262
=== ==== ====== ======
Catastrophe losses.............. $ 303 $ 168 $ 808 $ 688
===
Operating ratios................
Claims and claims expense
("loss") ratio............... 76.5 76.1 77.2 76.3
Expense ratio................. 18.8 20.8 20.6 21.6
---- ---- ---- ----
Combined ratio................ 95.3 96.9 97.8 97.9
==== ==== ==== ====
Effect of catastrophe losses
on combined ratio............ 6.8 4.0 6.1 5.6
=== === === ===
PP&C primarily sells private-passenger auto and homeowners insurance to
individuals. The Company separates the voluntary personal auto insurance
business into two categories for underwriting purposes according to insurance
risks: the standard market and the non-standard market. The standard market
consists of drivers who meet certain criteria which classifies them as having
low to average risk of loss expectancy. The non-standard market consists of
drivers who have higher-than-average risk profiles due to their driving records
or the types of cars they own. These policies are written at rates higher than
standard auto rates. PP&C is pursuing a segmented growth strategy with respect
to geographic areas, attempting to grow more rapidly in areas where risk of loss
from catastrophes and the regulatory climate are more conducive to attractive
returns and limiting growth in markets that do not provide appropriate returns.
The ongoing commercial property and casualty insurance written through the same
agent distribution channels as auto and homeowners is also included in this
segment. Ongoing commercial business premiums written accounted for less than 3%
of PP&C premiums written for the quarter and nine-month period ended Septmber
30, 1996. Segment results for 1995 have been restated to reflect this change.
PP&C premiums written for the third quarter increased 6.3% over the third
quarter of 1995. For the nine-month period ending September 30, 1996, PP&C
premiums written increased 6.4% over the comparable period for 1995. The
Company's long term goals for premiums written are greater than the current
increases. Standard auto premiums written increased 2.3% to $2.63 billion for
the third quarter of 1996, compared with $2.57 billion for the same period in
1995. For the first nine months of 1996, standard auto premiums increased 2.5%
to $7.80 billion from $7.61 billion for the same period in 1995. The growth in
standard auto premiums written for both the three-month and nine-month periods
was driven primarily by increases in policies in force (unit sales) and average
premiums on renewals. The growth in policies in force was generally achieved in
markets that management believes will be profitable,
-19-
partially offset by a decline in policies in some of those markets that
management believes do not provide appropriate returns. Average premium
increases were primarily attributable to a shift to newer and more expensive
autos and, to a lesser extent, rate increases which in general are limited by
regulatory and competitive factors. The reduced rate of increase in standard
auto premiums written, as compared to 1995, reflects in part, the competitive
pressures currently facing this market. The Company is pursuing various
initiatives to increase the growth of Allstate's standard auto premium.
Non-standard auto premiums written increased 28.5% to $717 million in the
third quarter of 1996, from $558 million for the same period in 1995. For the
nine-month period non-standard auto premiums written increased 28.1% to $2.03
billion compared with $1.58 billion for 1995. The increase for both periods was
driven by an increase in policies in force and, to a lesser extent, average
premiums. Policies in force increased in both new and renewal business. The
increase in average premiums was primarily due to rate increases.
Homeowners premiums written for the three-month period ended September 30,
1996 were $835 million, an increase of 2.2% over third quarter 1995 premiums of
$817 million. For the first nine months of 1996 homeowners premiums written were
$2.29 billion an increase of 5.1% over the same period of 1995. For the quarter
the increase was primarily attributable to an increase in renewal policies in
force and to a lesser extent average premiums. The reduced rate of increase in
homeowners premiums written for the quarter was impacted by the issuance of the
California earthquake mini-policy. The mini-policy reduces the Company's
exposure to earthquake losses and as a result charges a lower premium. The
increase for the nine-month period was primarily due to higher average premiums
on renewals. The higher average premiums are primarily due to rate increases in
catastrophe exposure areas, principally Florida, and the effect of policy
provisions which adjust for inflation. Growth in policies in force is primarily
occurring in areas targeted for growth and is partially offset by reductions in
policies in certain catastrophe exposure areas.
For the third quarter of 1996, PP&C had underwriting income of $212 million
compared with underwriting income of $129 million for the same period in 1995.
The increase in underwriting income was primarily due to favorable auto injury
coverage severity (average cost per claim) growth trends, growth in premiums
written, an improved expense ratio, and favorable standard auto frequency trends
which were partially offset by an increase in catastrophe losses. Auto physical
damage coverage claim severities increased over the prior year, driven by
moderate inflationary pressure. Auto injury claim severities trended favorably
as compared to relevant medical cost indexes.
For the first nine months of 1996, PP&C had underwriting income of $285
million compared with $262 million for the comparable period of 1995. The
increase in underwriting income was primarily due to favorable loss trends in
auto injury coverage claim severities, premium growth, and an improved expense
ratio, which was partially offset by increases in loss frequency trends (rate of
claim occurrence) and catastrophe losses. The increase in loss frequency was
primarily due to weather-related losses from the first quarter of 1996.
The improvement in the expense ratio for the three-month and nine-month
periods was primarily the result of a change in the components of
property-liability acquisition costs deferred to include all forms of agent
remuneration which vary directly with premium production. This change was made
to more appropriately match the costs of acquiring business to the
-20-
related premium revenue and to increase the consistency of accounting for agent
remuneration despite differing contractual agreements with agents. The
additional costs deferred consist primarily of employer payroll taxes, benefits,
and the agents' office expense allowance, which is reimbursed based on the
percent of premiums written. Previously, only commissions paid to agents and
agency managers, premium taxes, and inspection report costs were deferred. This
change had a favorable impact to third quarter PP&C underwriting income of $88
million and a favorable impact of 1.9 points in the expense ratio. Management
expects this change to increase fourth quarter underwriting income by
approximately $38 million. The impact of the change will be immaterial in 1997
due to amortization periods averaging less than a year.
Management believes the favorable injury severity trends are due in part to
the redesign of the Company's bodily injury claim processes and lower than
anticipated medical cost inflation rates. The redesign of the claim processes
includes a more focused approach to settling claims involving Allstate customers
and uninsured motorists, ensuring all claims are evaluated and settled
consistently using best practices across the country, increasing investigation
of minor accidents that result from low- or moderate-impact collisions, and
aggressively defending lawsuits. During the third quarter, the Company began the
implementation of redesigned claim processes for auto physical damage claims.
-21-
Discontinued Lines and Coverages - Discontinued Lines and Coverages consist of
business no longer written by Allstate, including losses from asbestos,
environmental, and other commercial and mortgage pool business in run-off, as
well as the historical results of businesses sold in 1996. Segment results for
1995 have been restated to reflect this change.
Underwriting results for the Company's Discontinued Lines and Coverages
segment for the three-month and nine-month periods ended September 30, 1996 and
1995 are summarized in the following table.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
($ in millions) 1996 1995 1996 1995
---- ---- ---- ----
Underwriting loss from
environmental and asbestos losses
and other discontinued lines.......... $(304) $(75) $(423) $(172)
Underwriting loss from mortgage pool
business.............................. - - - (10)
Underwriting loss from certain former
Business Insurance operations
sold or in run-off.... . . . ..... (29) (33) (63) (89)
---- ---- ---- ----
Total underwriting loss............. $(333) $(108) $(486) $(271)
===== ===== ===== =====
During the third quarter of 1996, the Company concluded a comprehensive
re-evaluation of its net loss reserves, including the process for estimating and
identifying available reinsurance, for its Discontinued Lines and Coverages
segment which resulted in an increase in net loss reserves of $318 million. The
increase in net loss reserves consisted of several components, including a $244
million net increase in environmental and asbestos net loss reserves, a $60
million net increase in other latent exposure and general liability net loss
reserves, and a $14 million increase in the provision for future insolvencies of
reinsurers.
Allstate's exposure to environmental and asbestos claims stem principally
from excess and surplus business written from 1972-1985, including substantial
excess and surplus general coverages on Fortune 500 companies, and reinsurance
coverage written during the 1960's through the 1980's, including reinsurance on
primary insurance written on large U.S. companies. Establishing net loss
reserves for environmental and asbestos claims is subject to uncertainties that
are greater than those presented by other types of claims. Among the
complications are the lack of historical data, long reporting delays,
uncertainty as to the number and identity of insureds with potential exposure,
unresolved legal issues regarding policy coverage, and the extent and timing of
any such contractual liability. The legal issues concerning the interpretation
of various insurance policy provisions and whether environmental and asbestos
losses are or were ever intended to be covered are complex. 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 insured obligation to defend; how policy limits are
determined; how policy exclusions 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.
As the industry has gained experience evaluating environmental and asbestos
exposures some actuarial firms have developed meaningful techniques and
-22-
databases to estimate environmental and asbestos liabilities. Allstate gained
access to complex databases developed by outside experts to estimate the cost of
liabilities for environmental claims. The databases contained lists of known
potentially responsible parties ("PRP"), National Priority List ("NPL") sites,
and the Environmental Protection Agency's estimate of clean-up costs. Allstate's
policy files were compared to the databases, and factors to estimate growth of
NPL sites, state sites, third party claims, natural resource damage, probability
of coverage, and PRP's being named at future sites were applied to determine an
estimate of the Company's potential environmental loss. The Company also refined
its own estimation techniques, which were tested and validated by outside
actuaries, to estimate environmental and asbestos losses. Allstate used a
combination of these resources, along with an extensive internal review of its
current claim exposures to estimate environmental and asbestos reserves. The
Company performed an in-depth analysis of its reinsurance recoverables and
refined its process for estimating and identifying available reinsurance since
some reinsurers have become insolvent or Allstate has commuted their agreements.
During the third quarter of 1996, loss reserves for asbestos exposures increased
$153 million before consideration of reinsurance recoverables and $72 million
net of reinsurance recoverables. Loss reserves for environmental exposures
decreased $10 million before consideration of reinsurance recoverables and
increased $172 million net of reinsurance recoverables during the third quarter
of 1996. For the nine months ended September 30, 1996, net loss reserves for
environmental and asbestos exposures increased by $220 million and $32 million,
respectively. Environmental and asbestos net loss reserves as of September 30,
1996 were $740 million and $533 million, respectively.
In addition to environmental and asbestos exposures, the studies also
included an assessment of current claims for other latent exposures which
primarily relate to products liability claims, such as those for medical devices
and other products, and general liabilities. Loss reserves for other latent
exposures and general liabilities increased $87 million before consideration of
reinsurance recoverables and $60 million net of reinsurance recoverables as a
result of the studies. This increase is net of the movement of $103 million of
general liability net loss reserves between 1985 and later accident years to
pre-1985 accident years.
In 1986, the general liability policy form used by Allstate and others in the
property-liability industry was amended to introduce an "absolute pollution
exclusion," which excluded coverage for environmental damage claims and added an
asbestos exclusion. Most general liability policies issued prior to 1986 contain
annual aggregate limits for products liability coverage, and policies issued
after 1986 also have an annual aggregate limit as to all coverages. Allstate's
experience to date is that these policy form changes have effectively limited
its exposure to environmental and asbestos claim risks assumed as well as
primary commercial coverages written subsequent to 1986. Allstate's reserves,
net of reinsurance recoverables of $524 million and $647 million, for
environmental and asbestos claims were $1.27 billion and $1.02 billion at
September 30, 1996 and December 31, 1995, respectively.
Management believes its net loss reserves for environmental and asbestos
coverages, and other latent exposures are appropriately established based on
available facts, updated technology, laws, and regulations. However, due to the
inconsistencies of court coverage decisions, plaintiffs' expanded theories of
liability, the risks inherent in major litigation and other uncertainties, the
ultimate cost of these claims may vary materially from the amounts currently
recorded, resulting in an increase in the net loss reserves. In
-23-
addition, while the Company believes the improved actuarial techniques and
databases have assisted in its ability to estimate environmental and asbestos
net loss reserves, these refinements may subsequently prove to be inadequate
indicators of the extent of probable loss. 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.
On July 31, 1996, Allstate completed the sale of Northbrook Holdings, Inc.
and its wholly-owned subsidiaries (collectively "Northbrook") to St. Paul Fire &
Marine Insurance Company ("St. Paul"). Northbrook writes commercial lines
insurance through its subsidiaries. Allstate recorded gross proceeds of $189
million and recognized a gain of $18 million ($51 million after-tax) on the sale
during the third quarter of 1996. The proceeds and gain are subject to a
purchase price adjustment based on the final balance sheet of Northbrook as of
July 31, 1996, expected to be completed in the fourth quarter. In connection
with the sale, Allstate entered into an agreement with St. Paul whereby Allstate
and St. Paul will share in any development of the closing net loss reserves of
Northbrook to be settled as of July 31, 2000. Under the agreement, if the
development of ultimate net loss reserves exceeds net loss reserves at closing
by more than $25 million, Allstate will be required to pay St. Paul a portion of
the difference, limited to $100 million. If the development of ultimate net loss
reserves is less than net loss reserves at closing, St. Paul will be required to
pay Allstate a portion of the difference not to exceed $50 million. The Company
does not expect unfavorable reserve development based on current trends,
conditions, and claim settlement processes. Premiums written for Northbrook
through July 31, 1996 included in the results of operations for the three-month
and nine-month periods ended September 30, 1996 were $50 million and $295
million, respectively. As a result of the sale, the Company's liability for
claims and claims expense net of reinsurance was reduced by $1.01 billion and
invested assets were reduced by $973 million.
On September 16, 1996, the Company completed the sale of Allstate's
U.S.-based reinsurance operations for policies written after 1984
("Reinsurance") to SCOR U.S. Corporation ("SCOR"). The transaction consisted of
the sale of certain non-insurance assets, liabilities and renewal rights and a
reinsurance transaction for the insurance liabilities. The Company recorded
gross proceeds of $152 million as a result of the sale and will realize an $83
million gain ($61 million after-tax). The portion of the gain relating to the
sale of the renewal rights, $19 million ($12 million after-tax), was recorded in
the third quarter of 1996. The remaining $64 million gain ($49 million
after-tax) was deferred and will be amortized through underwriting income over
the reserve run-off period, approximately five years, in accordance with
retroactive reinsurance accounting. The proceeds and gains are subject to a
purchase price adjustment based on the final statement of assets and liabilities
sold as of September 16, 1996, expected to be completed in the first quarter of
1997.
Pending regulatory approval, Allstate expects to complete the sale of the
common stock of its London-based reinsurance operations, Allstate Reinsurance
Co, Limited ("ARCO") to QBE Insurance Group Limited of Sydney, Australia ("QBE")
in the fourth quarter of 1996. The Company expects to receive proceeds of $35
million and has recognized a $38 million loss ($39 million after-tax) in the
third quarter of 1996. In connection with the sale, Allstate will enter into an
agreement with QBE whereby 80% of any ultimate adverse development on ARCO's
December 31, 1995 net loss reserves will be reimbursed to QBE by Allstate. QBE
will reimburse Allstate for 70% of any ultimate favorable net loss development.
Development will be settled
-24-
annually. At the closing, in addition to the $35 million cash proceeds, QBE will
deposit approximately $20 million in escrow related to this agreement,
representing a contingent purchase payment. If 1996 net loss development is
favorable, Allstate will receive the $20 million escrow deposit in addition to
70% of any redundancy. Allstate would report this as a purchase price adjustment
in 1997. If 1996 net loss development is unfavorable, the amount held in escrow
will be used to satisfy any of Allstate's obligation, with the excess, if any,
paid to Allstate. In addition, the development of accident year 1996
underwriting results for QBE is limited to a combined ratio of 110 for
contracts in place as of the closing date, to be reviewed and settled annually.
Premiums written for Reinsurance and ARCO for the third quarter and first
nine months of 1996, were $101 million and $292 million, respectively. As a
result of the Reinsurance sale, during the third quarter of 1996, the Company's
invested assets were reduced by $300 million.
During the third quarter of 1996, the Company increased by $87 million ($55
million after-tax) the provision for future losses provided for the run-off of
the mortgage pool business in the loss on disposition of operations line of the
income statement. The provision was established in the second quarter of 1995,
in connection with Allstate's decision to exit the mortgage guaranty insurance
business. The increase was due primarily to revised loss trend analyses based on
continued weakness in Southern California's economic conditions, including real
estate prices and unemployment. This business, which is highly concentrated in
Southern California, continues to be affected by the factors described above, as
well as interest rate volatility or a combination of such factors. These factors
are considered in the reevaluation of the provision for future losses.
-25-
Life Operations
Allstate Life markets a broad line of life insurance, annuity and group
pension products through a combination of Allstate agents, banks and other
financial institutions, independent brokers and direct response marketing.
The following table sets forth certain summarized financial data for the
Company's life insurance operations and invested assets at or for the
three-month and nine-month periods ended September 30, 1996 and 1995.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
($ in millions) 1996 1995 1996 1995
---- ---- ---- ----
Statutory premiums and deposits.... $ 1,149 $ 1,050 $ 3,798 $ 3,596
===== ===== ====== ======
Invested assets(1)................ $26,546 $25,206 $26,546 $25,206
Separate Account assets (1)....... 4,940 3,421 4,940 3,421
----- ----- ------ ------
Invested assets including Separate
Account assets................... $31,486 $28,627 $31,486 $28,627
======= ====== ====== ======
Premium income and contract
charges.......................... $ 338 $ 290 $ 950 $ 1,011
Net investment income............. 516 504 1,531 1,486
Policy benefits and expenses...... 707 673 2,060 2,115
--- --- ------ ------
Income from operations............ 147 121 421 382
Income tax expense on operations.. 49 44 143 133
-- -- ------- -------
Net operating income.............. 98 77 278 249
Realized capital gains and losses,
after-tax........................ 2 3 23 28
----- ----- ------ ------
Net income........................ $ 100 $ 80 $ 301 $ 277
=== == ====== ======
(1)Fixed income securities are included in invested assets in the table above at
amortized cost and are carried at fair value in the statements of financial
position. Separate Account assets are included at fair value in both the table
above and the statements of financial position.
Life insurance statutory premiums and deposits increased 9.4% and 5.6% for
the quarter and first nine months of 1996, respectively. For the quarter the
increase was primarily due to increases in sales of new annuity and life
products, which were partially offset by decreases in sales of fixed annuity and
group pension products. For the nine-month period increased sales of new
products including proprietary variable annuities, equity indexed annuities,
fee-based group pension and individual life, were partially offset by decreases
in fixed annuity and other group pension product sales.
Premium income and contract charges under generally accepted accounting
principles ("GAAP") increased 16.6% in the third quarter and decreased 6.0% for
the first nine months. The increase in the third quarter was due to increases in
traditional life product sales, life contingent annuity sales, contract charges
on universal life products and fee-based product revenues. The decrease for the
first nine months is due to decreases in sales of life contingent annuities as a
result of maintaining margins on new business throughout the year, partially
offset by increases in traditional life sales, contract charges on universal
life products, and fee-based product revenues. Under GAAP, revenues vary with
the mix of products sold during the period because they exclude deposits on most
annuities and premiums on universal life insurance policies.
-26-
Pretax net investment income increased 2.4% and 3.0% for the three-month and
nine-month periods of 1996 respectively, compared with the same periods in 1995,
primarily due to the $1.34 billion increase in invested assets from period to
period. The overall portfolio yield declined slightly, as proceeds from calls
and maturities as well as new premiums and deposits were invested in securities
yielding less than the average portfolio rate.
Net operating income increased 27.3% during the third quarter, and increased
11.6% for the first nine months of 1996. The increases were due to growth in
both the life and annuity businesses, as well as favorable mortality margins on
existing business.
Net realized capital gains after-tax were relatively flat during the third
quarter of 1996 as compared to the same period in 1995. Net realized capital
gains decreased for the first nine months of 1996 as compared to the same period
in 1995, as higher gains on the sales of equity securities were more than offset
by losses on fixed income securities and increased writedowns on fixed income
and equity securities.
-27-
Liquidity and Capital Resources
Shareholders' equity increased $49 million to $12.73 billion at September 30,
1996 versus $12.68 billion at December 31, 1995 as net income for the period was
substantially offset by a decrease in unrealized net capital gains (see
"Investments"). The decrease in unrealized net capital gains is primarily due to
the effect of rising interest rates on the value of the fixed income securities
portfolio.
The Company maintains a line of credit of $1.5 billion as a source of
potential funds to meet short-term liquidity requirements. During the nine
months ended September 30, 1996, there were no borrowings under this line of
credit.
In early 1996 the Company launched a commercial paper program. The majority
of the proceeds from the issuance of the commercial paper have been used by the
insurance operations for general operating purposes. As of September 30, 1996,
the Company had outstanding commercial paper borrowings of $192 million. Total
borrowings under the combined commercial paper program and line of credit are
limited to $1.5 billion.
During the third quarter of 1996, the Company purchased 969,027 shares of its
common stock, for its treasury, at an average cost per share of $43.65, to
provide for the future exercise of employee and outside director stock options.
At September 30, 1996, the Company held 5,348,698 shares of treasury stock with
an average cost per share of $36.87. On November 12, 1996, The Allstate
Corporation board of directors authorized the expansion of the Company's stock
repurchase program by an amount not to exceed $750 million through the end of
1997.
The Company filed a shelf registration statement with the Securities and
Exchange Commission during the third quarter of 1996, to issue up to $1.5
billion of debt securities, preferred stock, and debt warrants. Under this shelf
registration the Company intends to issue up to $750 million of securities,
assuming favorable market conditions.
During the third quarter of 1996 the Company recorded proceeds of $341
million in connection with the sales of Northbrook and Reinsurance. Proceeds
from the sales of these operations will be used for general corporate purposes.
Surrenders and withdrawals for the life operations were $385 million and
$1.15 billion for the three-month and nine-month periods ending September 30,
1996, compared to $324 million and $1.41 billion in the respective 1995 periods.
Customers surrendering certain older fixed-rate annuities on which the surrender
period has expired, which may continue, caused the increase in the third
quarter. The decrease in the nine-month period is attributable to management
actions taken in 1995 to slow the surrender rate on certain other policies,
which included raising renewal crediting rates.
-28-
Investments
Total investments were $56.35 billion at September 30, 1996 a decrease from
$56.51 billion at December 31, 1995. Property-liability investments decreased
$201 million to $29.01 billion at September 30, 1996 from $29.21 billion at
December 31, 1995. The decrease in the property-liability investment portfolio
was primarily due to the transfer of investments related to the sale of
Northbrook and Reinsurance of $1.27 billion and a $1.01 billion decrease in the
unrealized gains on the fixed income and equity security portfolios which were
partially offset by the investment of positive cash flows generated from
operating activities. Life investments at September 30, 1996, increased $49
million to $27.31 billion from $27.26 billion at December 31, 1995 as positive
cash flows generated from operations were partially offset by a decrease of
$1.04 billion in the unrealized gain on the fixed income securities portfolio.
The decreases in unrealized gains in the fixed income portfolio were due to the
effects of rising interest rates.
The composition of the investment portfolio at September 30, 1996, at
financial statement carrying values, is presented in the table below.
Property-liability Life Total
------------------ ---- -----
Fixed income
securities (1) ....... $23,534 81.1% $22,261 81.5% $45,795 81.3%
Equity securities...... 4,580 15.8 790 2.9 5,370 9.5
Mortgage loans......... 49 .2 3,216 11.8 3,265 5.8
Real estate............ 426 1.5 293 1.1 719 1.3
Short-term............. 402 1.4 261 .9 695 1.2
Other.................. 18 - 484 1.8 502 .9
------ ---- ------ ----- ------ ----
Total............... $29,009 100.0% $27,305 100.0% $56,346 100.0%
====== ===== ====== ===== ====== =====
(1) Fixed income securities are carried at fair value. Amortized cost for these
securities was $22.86 billion and $21.5 billion for property-liability and life
operations, respectively.
Over 94% of the fixed income securities portfolio is rated "investment
grade", which is defined by the Company as a security having an NAIC rating of 1
or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company internal
rating.
The Company uses derivative financial instruments to reduce its exposure to
market and interest rate risk on its invested assets, as well as to improve
asset/liability management. The Company does not hold or issue these instruments
for trading purposes. The Company is exposed to credit-related losses in the
event of nonperformance by counterparties to financial instruments. However,
such nonperformance is not expected because the Company utilizes highly rated
counterparties, established risk control limits, and maintains ongoing
monitoring procedures. During 1996, the Company increased its use of interest
rate cap and floor agreements to hedge the interest rate risk associated with
certain deferred annuity products sold in the Life operations.
-29-
In order to more closely align the interest rate sensitivity of its
property-liability assets and liabilities (and thereby decrease the Company's
exposure to interest rate risk), during the second quarter of 1996 the Company
reduced its investment in tax-exempt long-term fixed income securities. In
addition, to reduce exposure to equity market risk in the property-liability
investment portfolio, the Company decreased its holdings of equity securities.
The proceeds from these sales were reinvested in taxable intermediate-term fixed
income securities. In addition, the Company uses futures contracts to further
reduce the interest rate risk of the property-liability fixed income portfolio,
thereby more closely aligning the interest rate sensitivity of assets and
liabilities.
There have been no significant changes in the risk profile of the Company's
derivative portfolio since December 31, 1995.
The net carrying value of problem, restructured, and potential problem fixed
income securities was $190 million and $281 million at September 30, 1996 and
December 31, 1995, respectively. The net carrying value of problem,
restructured, and potential problem commercial mortgage loans was $352 million
and $394 million at September 30, 1996 and December 31, 1995, respectively. The
carrying value of impaired commercial mortgage loans as of September 30, 1996,
and December 31, 1995 was $213 million and $193 million, respectively.
Pending Accounting Standards
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for
Stock-Based Compensation" which encourages the adoption of a fair value based
method of accounting for compensation cost of employee stock compensation plans.
The statement allows an entity to continue the application of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees".
However, pro forma disclosures of net income and earnings per share, as if the
fair value based method of accounting defined by this statement had been
applied, are required. The disclosure requirements of this statement will be
adopted in December 1996 and are expected to be immaterial. Results of
operations and financial position will not be affected by the adoption of this
statement.
In June 1996, the FASB issued Statement of FASB No. 125 "Accounting for
Transfers of Financial Assets and Extinguishments of Liabilities". This standard
distinguishes between transfers of financial assets as sales versus financing
transactions based upon relinquishment of control and addresses the accounting
for securitizations, securities lending, repurchase agreements and insubstance
defeasance transactions. The requirements of this statement will be adopted in
January 1997 and are not expected to have a material impact on the results of
operations or financial position of the Company.
-30-
Forward-Looking Statements
The statements contained in this Management's Discussion and Analysis that
are not historical information are forward-looking statements that are based on
management's estimates, assumptions and projections. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor under The Securities Act of
1933 and The Securities Exchange Act of 1934 for forward-looking statements. In
order to comply with the terms of the safe harbor, the Company notes several
important factors that could cause the Company's actual results and experience
with respect to forward-looking statements to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements:
1. The references to favorable auto injury severity trends (see "Consolidated
Operations" at page 12) and the favorable trends of auto injury claim severities
(average cost per claim) compared to medical cost indexes (see "Underwriting
Results" at page 20) merely reflect statistical data for the periods indicated.
Such data for a following period or periods could well indicate that such
average severities have increased or that they have outpaced medical cost
indexes in such subsequent period or periods. Management believes that such
favorable trends in auto bodily injury claims costs may be due in part to the
redesign of the Company's bodily injury claim processes (see "Underwriting
Results" at page 21). However, these favorable trends may be reversed in the
future because of the increased costs of settlements and adverse judgments in
cases which proceed to litigation.
2. The reference to the Company's expectation that the implementation of actions
taken in Florida and California will reduce its exposure to catastrophe losses
of the magnitude experienced from hurricane Andrew and the Northridge Earthquake
(see "Catastrophe Management" at pages 16-18) reflects the Company's belief that
the techniques and data used by the Company and designed to predict the
probability of catastrophes and the extent of losses to the Company resulting
from catastrophes, are accurate. Catastrophic events may occur in the future
which indicate that such techniques and data do not accurately predict the
Company's losses from catastrophes, and the probability and extent of such
losses may differ materially from that which would have been predicted by such
techniques and data. Management's expectation that the operations of the CEA
will significantly reduce Allstate's exposure to earthquakes in the future
depends in part on the CEA functioning as planned. As of the time this report is
written, the conditions required for the CEA to become operational have not been
satisfied, and there is no assurance that they will be satisfied. The current
CEA legislation provides that the Company may be subject to additional
assessments of up to approximately $750 million in certain events, but the
California legislature may, in the future, attempt to provide for additional
assessments against the Company beyond the current limitation.
3. Although the Company's PP&C written premium growth continues (see
"Underwriting Results" at pages 19-20), the rate of increase in such growth has
decreased in recent quarters. Moreover, the Company's segmented growth strategy
(see "Underwriting Results" at page 19) under which it intends to limit growth
in some markets, and the actions taken in Florida and California to cede
homeowner policies or earthquake coverages in an attempt to limit the Company's
exposure to catastrophe losses may offset, to some extent, written premium
growth in other areas over the near term. Consequently, the Company's PP&C
written premium growth may continue to decelerate over the near term.
-31-
4. The Northbrook sales agreement contains a provision which could require
Allstate to pay the purchaser up to $100 million should the reserves at the date
of sale be determined, four years after the sale, to have been understated (see
"Discontinued Lines and Coverages" at page 24). Although the Company states that
it does not expect unfavorable development of the Northbrook reserves, the
establishment of appropriate reserves, including Northbrook's reserves, is an
inherently uncertain process. Accordingly, the Company could be required to pay
as much as $100 million to the purchaser when the July 31, 2000 calculation is
agreed to.
5. The Company added $87 million ($55 million after-tax) to the provision for
losses for the run-off mortgage pool business (see "Discontinued Lines and
Coverages" at page 25). Although the Company believes that this provision is
appropriate, there can be no assurance that future material changes in the
provision will not be made, as the establishment of appropriate reserves is an
inherently uncertain process.
For other important risk factors generally affecting the results of operation
and financial condition of the Company, as a regulated insurance holding
company, see "Risk Factors Affecting Allstate" at page 4 of the Company's 1995
Annual Report on Form 10-K.
-32-
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
An Exhibit Index has been filed as part of this Report on Page
E-1.
(b) Reports on Form 8-K.
Registrant filed a Current Report on Form 8-K dated September
30, 1996 (Items 5 and 7).
Registrant filed a Current Report on Form 8-K dated October 8,
1996 (Items 5 and 7).
-33-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Allstate Corporation
(Registrant)
November 13, 1996
By /s/Samuel H. Pilch
------------------
Samuel H. Pilch
Controller
(Principal Accounting Officer
and duly authorized Officer of
Registrant)
-34-
EXHIBIT INDEX
THE ALLSTATE CORPORATION
QUARTER ENDED SEPTEMBER 30, 1996
Sequentially
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
4 Registrant hereby agrees to furnish the Commission, upon request,
with the instruments defining the rights of holders of each issue
of long-term debt of the Registrant and its consolidated
subsidiary.
11 Computation of earnings per common share for The
Allstate Corporation and consolidated subsidiary.
15 Acknowledgment of awareness from Deloitte & Touche LLP, dated
November 13, 1996, concerning unaudited interim financial
information.
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not
filed.
E-1
Exhibit 11
The Allstate Corporation and Subsidiary
Computation of Earnings Per Common Share
($ in millions, except for per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------
1996 1995 1996 1995
--------- --------- -------- -------
Net Income $292 $446 $1,480 $1,507
========= ========= ======== =======
Primary earnings per common share computation:
Weighted average number of common shares 444.7 448.1 446.0 448.7
Assumed exercise of dilutive stock options 2.7 1.4 2.7 0.6
--------- --------- -------- ------
Adjusted weighted number of common
shares outstanding 447.4 449.5 448.7 449.3
========= ========= ======== ======
Primary net income per share $0.65 $0.99 $3.30 $3.35
========= ========= ======== ======
Fully diluted earnings per common share computation:
Weighted average number of common shares 444.7 448.1 446.0 448.7
Assumed exercise of dilutive stock options 3.0 1.9 3.0 1.9
--------- --------- -------- ------
Adjusted weighted number of common shares
outstanding 447.7 450.0 449.0 450.6
========= ========= ======== ======
Fully diluted net income per share $0.65 $0.99 $3.30 $3.34
========= ========= ======== ======
E-2
EXHIBIT 15
To the Board of Directors and Shareholders of
The Allstate Corporation:
We have reviewed, in accordance with standards established by the American
Institute of Certified Public Accountants, the unaudited interim financial
information of The Allstate Corporation and subsidiary for the three-month and
nine-month periods ended September 30, 1996 and 1995, as indicated in our report
dated November 13, 1996; because we did not perform an audit, we expressed no
opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, is
incorporated by reference in Registration Statement Nos. 333-10857 on Form S-3
and Registration Statement No. 33-77928, 33-93758, 33-93760, 33-93762,
33-99132, 33-99136, 33-99138, and 333-04919 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
Deloitte & Touche LLP
Chicago, Illinois
November 13, 1996
E-3
7
0000899051
THE ALLSTATE CORPORATION
1,000,000
U.S. Dollars
9-MOS
DEC-31-1995
JAN-01-1996
SEP-30-1996
1
45795
0
0
5370
3265
719
56346
164
2130
2470
72213
23405
6231
0
19864
1421
0
0
5
12724
72213
14742
2842
658
0
12726
1721
1604
1859
400
1459
0
0
0
1480
3.30
3.30
0
0
0
0
0
0
0
