SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 1997
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 April 30, 1997, THE REGISTRANT HAD 435,082,479 COMMON SHARES, $.01
PAR VALUE, OUTSTANDING.
THE ALLSTATE CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 1997
PART 1 - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1997
and 1996 (unaudited). 1
Condensed Consolidated Statements of Financial
Position as of March 31, 1997 (unaudited)
and December 31, 1996. 2
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1997
and 1996 (unaudited). 3
Notes to Condensed Consolidated Financial
Statements (unaudited). 4
Independent Certified Public Accountants'
Review Report. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
--------------
1997 1996
------ -----
(Unaudited)
(In millions except per share data)
REVENUES
Property-liability insurance premiums earned $4,560 $4,544
Life and annuity premiums and contract charges 355 308
Net investment income 944 935
Realized capital gains and losses 320 116
------ -----
6,179 5,903
------ -----
COSTS AND EXPENSES
Property-liability insurance claims and
and claims expense 3,368 3,687
Life and annuity contract benefits 583 550
Amortization of deferred policy acquisition costs 667 564
Operating costs and expenses 453 558
Interest expense 24 23
------ -----
5,095 5,382
------ -----
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE,
DIVIDENDS ON PREFERRED SECURITIES, AND EQUITY
IN NET INCOME OF UNCONSOLIDATED SUBSIDIARY 1,084 521
INCOME TAX EXPENSE 317 103
------ -----
INCOME BEFORE DIVIDENDS ON PREFERRED SECURITIES AND
EQUITY IN NET INCOME OF UNCONSOLIDATED SUBSIDIARY 767 418
DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARY TRUSTS (9) -
EQUITY IN NET INCOME OF UNCONSOLIDATED SUBSIDIARY 9 6
------ -----
NET INCOME $67 $424
====== =====
NET INCOME PER SHARE $1.73 $0.94
====== =====
WEIGHTED-AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 442.3 449.8
====== =====
See notes to condensed consolidated financial statements.
-1-
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
March 31, December 31,
($ in millions) 1997 1996
----------- ----------
(Unaudited)
ASSETS
Investments
Fixed income securities, at fair value
(amortized cost $45,945 and $45,057) $ 46,909 $ 47,095
Equity securities, at fair value
(cost $3,823 and $3,999) 5,222 5,561
Mortgage loans 3,152 3,146
Real estate 732 738
Short-term 1,085 1,278
Other 516 511
----------- ----------
Total investments 57,616 58,329
Premium installment receivables, net 2,736 2,691
Deferred policy acquisition costs 2,774 2,614
Reinsurance recoverables, net 2,194 2,147
Property and equipment, net 709 714
Accrued investment income 757 715
Deferred income taxes 370 232
Cash 129 116
Other assets 1,383 1,399
Separate Accounts 5,747 5,551
----------- ----------
TOTAL ASSETS $ 74,415 $ 74,508
=========== ==========
LIABILITIES
Reserve for property-liability insurance
claims and claims expense $ 17,411 $ 17,382
Reserve for life-contingent contract benefits 6,145 6,287
Contractholder funds 20,207 20,120
Unearned premiums 6,111 6,174
Claim payments outstanding 566 594
Other liabilities and accrued expenses 2,945 2,824
Short-term debt 98 152
Long-term debt 1,234 1,234
Separate Accounts 5,735 5,539
----------- ----------
TOTAL LIABILITIES 60,452 60,306
----------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 2 AND 4)
MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS 750 750
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, 437 million
and 442 million shares outstanding 5 5
Additional capital paid-in 3,133 3,133
Unrealized net capital gains 1,406 2,003
Unrealized foreign currency translation adjustments 15 21
Retained income 9,619 8,958
Deferred ESOP expense (281) (280)
Treasury stock, at cost (13 million and 8 million shares) (684) (388)
----------- ----------
TOTAL SHAREHOLDERS' EQUITY 13,213 13,452
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 74,415 $ 74,508
=========== ==========
See notes to condensed consolidated financial statements.
-2-
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
---------------------
($ in millions) 1997 1996
-------- --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $767 $ 424
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation, amortization and other non-cash items 1 (8)
Realized capital gains and losses (320) (116)
Interest credited to contractholder funds 300 304
Increase in policy benefit and other insurance
reserves 7 233
Decrease in unearned premiums (63) (54)
Increase in deferred policy acquisition costs (67) (60)
Increase in premium installment receivables, net (45) (5)
Change in reinsurance recoverables, net (47) 11
Decrease in deferred income taxes 182 21
Changes in other operating assets and liabilities 43 272
-------- --------
Net cash provided by operating activities 758 1,022
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales
Fixed income securities 2,766 2,265
Equity securities 1,005 807
Investment collections
Fixed income securities 1,132 757
Mortgage loans 103 74
Investment purchases
Fixed income securities (4,685) (3,651)
Equity securities (577) (565)
Mortgage loans (110) (66)
Change in short-term investments, net 193 (713)
Change in other investments, net 5 4
Purchases of property and equipment, net (25) (32)
-------- --------
Net cash used in investing activities (193) (1,120)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in short-term debt, net (54) 112
Contractholder fund deposits 591 834
Contractholder fund withdrawals (687) (769)
Dividends paid (106) (95)
Treasury stock purchases (316) (37)
Treasury stock reissues 20 6
-------- --------
Net cash (used in) provided by financing
activities (552) 51
-------- --------
NET INCREASE (DECREASE) IN CASH 13 (47)
CASH AT BEGINNING OF PERIOD 116 90
-------- --------
CASH AT END OF PERIOD $129 $ 43
======== ========
See notes to condensed consolidated financial statements.
-3-
THE ALLSTATE CORPORATION AND SUBSIDIARIES
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 subsidiaries,
primarily Allstate Insurance Company ("AIC"), a property-liability insurance
company with various property-liability and life and annuity subsidiaries,
including Allstate Life Insurance Company (collectively referred to as the
"Company" or "Allstate").
The condensed consolidated financial statements and notes as of March 31,
1997 and for the three-month periods ended March 31, 1997 and 1996 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 1996. The results of operations for the interim periods
should not be considered indicative of results to be expected for the full year.
2. 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 and product mix, 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 loss experienced in any year cannot be
predicted and could be material to the results of operations and financial
position.
Reserves for environmental, asbestos and mass tort exposures are comprised
of reserves for reported claims, incurred but not reported claims and related
expenses. Establishing net loss reserves for these types of claims is subject to
uncertainties that are greater than those presented by other types of claims.
Among the complications are a lack of historical data, long reporting
-4-
delays, uncertainty as to the number and identity of insureds with potential
exposure, unresolved legal issues regarding policy coverage, availability of
reinsurance and the extent and timing of any such contractual liability. The
legal issues concerning the interpretation of various insurance policy
provisions and whether these 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 environmental and asbestos clean-up
costs represent insured property damage. Management believes these issues are
not likely to be resolved in the near future.
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 1987 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 claims risks assumed as well as
primary commercial coverages written, for most policies written in 1986 and all
policies written after 1986. Allstate's reserves, net of reinsurance
recoverables of $483 million and $489 million, for environmental and asbestos
claims were $1.18 billion and $1.23 billion at March 31, 1997 and December 31,
1996, respectively.
During 1996, Allstate gained access to complex databases developed by
outside experts to estimate the cost of liabilities for environmental claims.
The Company also refined its own estimation techniques, which were tested and
validated by outside actuaries, to estimate environmental and asbestos losses.
In addition to environmental and asbestos exposures, the studies also included
an assessment of current claims for mass tort exposures.
Management believes its net loss reserves for environmental, asbestos, and
mass tort exposures are appropriately established based on available facts,
technology, laws and regulations. However, due to the inconsistencies of court
coverage decisions, plaintiffs' expanded theories of liability, the risks
inherent in major litigation and other uncertainties, the ultimate cost of these
claims may vary materially from the amounts currently recorded, resulting in an
increase in the loss reserves. In addition, while the Company believes the
improved actuarial techniques and databases have assisted in its ability to
estimate environmental, asbestos and mass tort net loss reserves, these
refinements may subsequently prove to be inadequate indicators of the extent of
probable loss. Due to the uncertainties and factors described above, management
believes it is not practicable to develop a meaningful range for any such
additional net loss reserves that may be required.
-5-
THE ALLSTATE CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REINSURANCE
Property-liability insurance premiums and life and annuity premiums and
contract charges are net of reinsurance ceded as follows:
Three
Months Ended
March 31,
-----------
($ in millions)
1997 1996
---- ----
Property-liability premiums............................ $143 $138
Life and annuity premiums and contract charges......... 39 13
Property-liability insurance claims and claims expense and life and annuity
contract benefits are net of reinsurance recoveries as follows:
Three
Months Ended
March 31,
------------
($ in millions)
1997 1996
----- -----
Property-liability insurance claims and claims expense $82 $96
Life and annuity contract benefits..................... 11 18
4. REGULATION AND LEGAL PROCEEDINGS
The Company's insurance businesses are subject to the effects of a changing
social, economic and regulatory environment. Public 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.
-6-
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 subsidiaries as of March 31, 1997, and
the related condensed consolidated statements of operations and cash flows for
the three-month periods ended March 31, 1997 and 1996. 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 subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended, not presented herein. In our report dated February 21,
1997, 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, 1996
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
May 14, 1997
-7-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
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
and with the discussion and analysis found under Part 2. Item 7 of The Allstate
Corporation Annual Report on Form 10-K for 1996.
CONSOLIDATED REVENUES
Three months ended
March 31,
-----------------
($ in millions) 1997 1996 Change
---- ---- ------
Property-liability insurance premiums........ $4,560 $4,544 $16
Life and annuity premiums and
contract charges........................... 355 308 47
Net investment income........................ 944 935 9
Realized capital gains and losses............ 320 116 204
--- --- ---
Total revenues............................... $6,179 $5,903 $276
===== ===== ===
CONSOLIDATED NET INCOME
Net income for the first quarter of 1997 was $767 million, or $1.73 per
share, compared with $424 million, or $.94 per share, for the first quarter of
1996. The increase was primarily due to favorable property-liability claim
frequency (rate of claim occurrence), lower catastrophe losses, higher realized
capital gains and increased life and annuity premiums and contract charges. The
favorable property-liability claim frequency is primarily the result of improved
weather. Net income for the first quarter of 1996 was unfavorably impacted by
losses caused by severe winter storms.
-8-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
PROPERTY-LIABILITY OPERATIONS
OVERVIEW
The Company's property-liability operations consists of two principal areas
of business: personal property and casualty ("PP&C") and discontinued lines and
coverages ("Discontinued Lines and Coverages"). PP&C is principally engaged in
the sale of private passenger automobile and homeowners insurance. Discontinued
Lines and Coverages consists of business no longer written by Allstate.
Underwriting results for each of the property-liability areas of business
are discussed separately beginning on page 11.
The following table sets forth certain unaudited summarized financial data
and key operating ratios for the Company's property-liability operations for the
three-month periods ended March 31, 1997 and 1996.
Three Months Ended
March 31,
-----------------
($ in millions) 1997 1996
---- ----
Premiums written.................................. $4,551 $4,493
===== =====
Premiums earned................................... $4,560 $4,544
Claims and claims expense......................... 3,368 3,687
Operating costs and expenses...................... 976 1,006
----- -----
Underwriting income (loss)........................ 216 (149)
Net investment income ............................ 420 427
Realized capital gains and losses, after-tax...... 159 76
Income tax expense on operations.................. 163 19
----- -----
Income before equity in net income of
unconsolidated subsidiary....................... 632 335
Equity in net income of unconsolidated subsidiary. 9 6
----- ----
Net income........................................ $ 641 $ 341
===== =====
Catastrophe losses................................ $ 110 $ 232
===== =====
Operating ratios..................................
Claims and claims expense ("loss") ratio........ 73.9 81.2
Expense ratio................................... 21.4 22.1
----- -----
Combined ratio.................................. 95.3 103.3
===== ======
Effect of catastrophe losses on combined ratio.. 2.4 5.1
===== =====
-9-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
NET INVESTMENT INCOME AND REALIZED CAPITAL GAINS
Pretax net investment income for the three-month period ended March 31,
1997 was $420 million compared to $427 million for the same period last year as
higher investment balances were more than offset by lower investment yields,
including a decrease of $21 million resulting from changes in the fair value of
an indexed commodity derivative. The lower investment yields are also due, in
part, to the investment of proceeds from calls and maturities and the investment
of positive cash flows from operations in securities yielding less than the
average portfolio rate. In low interest rate environments, funds from maturing
investments may be reinvested at substantially lower interest rates than which
prevailed when the funds were previously invested. The higher investment
balances are primarily due to positive cash flows from operations, which were
partially offset by the reduction of $1.59 billion of investments as part of the
sale of the commercial and reinsurance operations in the second half of 1996.
Realized capital gains and losses after-tax were $159 million for the first
quarter of 1997 versus $76 million for the same period in 1996. The increase was
primarily due to the sale of approximately $250 million of equity securities in
the first quarter of 1997. Fluctuations in realized capital gains and losses are
largely a function of timing of sales decisions reflecting management's view of
individual securities and overall market conditions.
-10-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
UNDERWRITING RESULTS
PP&C - Underwriting results and key operating ratios for the Company's
personal property and casualty insurance area of business for the three-month
periods ended March 31, 1997 and 1996 are summarized in the following table.
Three Months Ended
March 31,
------------------
($ in millions) 1997 1996
---- ----
Premiums written.................................. $ 4,551 $ 4,287
====== ======
Premiums earned................................... $ 4,560 $ 4,307
Claims and claims expense......................... 3,366 3,445
Operating costs and expenses...................... 972 924
------ ------
Underwriting income (loss)........................ $ 222 $ (62)
====== =======
Catastrophe losses................................ $ 110 $ 228
====== ======
Operating ratios..................................
Claims and claims expense ("loss") ratio........ 73.8 80.0
Expense ratio................................... 21.3 21.5
------ ------
Combined ratio.................................. 95.1 101.5
===== =======
Effect of catastrophe losses on combined ratio.. 2.4 5.3
=== ===
PP&C provides primarily private-passenger auto and homeowners insurance to
individuals. PP&C also includes the ongoing commercial business written through
the Allstate agent distribution channel. 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 classify
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, lack of prior insurance or the types of vehicles they own.
These policies are written at rates higher than standard auto rates.
The Company is pursuing a segmented growth marketing strategy with respect
to geographic areas in the standard auto and homeowners markets. It is
attempting to grow standard auto business more rapidly in areas where the
regulatory climate is more conducive to attractive returns and is reducing or
limiting its homeowners business exposure in areas where the risk of loss from
catastrophes results in less than appropriate returns. The process of
designating geographic areas as growth and limited growth markets is dynamic and
may be revised as changes occur in the legal, regulatory and economic
environments, as catastrophe exposure is reduced and as new products are
approved. Less than 6.0% of the total United States population reside in areas
currently designated by the Company as standard auto limited growth markets. The
Company is attempting to reduce or limit homeowners growth in areas where
approximately 20.0% of the United States population reside. The Company is
pursuing a growth strategy throughout the United States in the non-standard auto
market by expanding through the independent agency channel and broadening the
non-standard product line. PP&C premiums written increased 6.2% for the
three-month period ended
-11-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
March 31, 1997, over the comparable period in 1996. Standard auto premiums
written increased 4.0% to $2.69 billion in the first quarter of 1997, from $2.58
billion for the same three-month period in 1996. The increase in standard auto
premiums written was primarily due to an increase in average premium and to a
lesser extent, renewal policies in force (unit sales). Average premium increases
were primarily attributable to a shift to newer and more expensive autos and, to
a lesser extent, rate increases. Rate increases generally are limited by
regulatory and competitive considerations.
Non-standard auto premiums written increased 23.4% to $792 million in the
first quarter of 1997, from $642 million for the same period in 1996. The
increase was driven by an increase in renewal policies in force and, to a lesser
extent, average premium.
Homeowners premiums written for the first quarter were $630 million, a
decrease of 2.6% from first quarter 1996 premiums of $647 million. The decrease
is primarily due to the Company's catastrophe management initiatives in
California and Florida. Excluding California and Florida, homeowners premiums
written increased 3.3%. As a result of the California Earthquake Authority
formation, the Company is non-renewing earthquake coverage in California. As a
consequence, for the year the Company will non-renew approximately $117 million
of property premiums related to earthquake coverage, $28 million of which
occurred in the first quarter. The decrease in premiums due to the non-renewal
of earthquake coverage was partially offset by increased premiums resulting from
Allstate's re-entry into the California property market. Florida homeowners
premiums decreased approximately $15 million as lower premiums resulting from
the sale of renewal rights to Clarendon National Insurance Company and policy
deductible modifications were partially offset by rate increases.
For the first quarter of 1997, PP&C had underwriting income of $222 million
versus an underwriting loss of $62 million for the first quarter of 1996. The
improved underwriting results were primarily due to favorable loss frequency
trends (rate of claim occurrence), lower catastrophe losses and increased auto
earned premiums. Improved weather conditions caused a decrease in auto and
homeowners claim frequency and lower catastrophe losses. First quarter 1996
underwriting results were impacted by severe winter weather. Auto physical
damage coverage claim severities (cost per claim) increased over prior year,
driven by moderate inflationary pressure. Auto injury claim severities were
comparable to the first quarter 1996 level and trended favorably compared to
relevant medical services indices.
CATASTROPHE LOSSES AND CATASTROPHE MANAGEMENT
Catastrophe losses for the first quarter of 1997 were $110 million compared
with $232 million for the same period in 1996. Catastrophe losses in the first
quarter of 1996 were primarily the result of losses caused by snow and ice
storms in the eastern portion of the United States.
Allstate has implemented strategies to limit, over time, subject to the
requirements of insurance laws and regulations and as limited by competitive
considerations, its insurance exposures in certain regions prone to
catastrophes. These strategies include limits on new business production,
limitations on certain policy coverages, increases in deductibles, policy
-12-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
brokering, and participation in catastrophe pools. In addition, Allstate
has requested and received rate increases in certain regions prone to
catastrophes. The Company continues to make substantial progress in reducing its
exposure to catastrophes in California and Florida as strategies initiated in
1996 continue to be implemented.
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 significant exposure to
potential earthquake losses include areas surrounding the New Madrid fault
system in the midwest and faults in and surrounding Seattle, Washington.
Allstate continues to evaluate business strategies and options in the
reinsurance market for appropriate coverage at acceptable rates and the
financial markets to more effectively manage its exposure to catastrophe losses
in these and other areas.
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 individual catastrophes in
the last five years which resulted in losses over $1.00 billion ($2.33 billion
related to Hurricane Andrew and $1.72 billion related to the Northridge
earthquake). While management believes the ongoing implementation of the
Company's catastrophe management strategies will greatly reduce the probability
of individual losses over $1.00 billion in the future, the Company will continue
to be exposed to similar or greater catastrophes.
The establishment of appropriate reserves for catastrophes, as for all
property-liability claims, is an inherently uncertain process. Catastrophe
reserve estimates are regularly reviewed and updated, using the most current
information. Any resulting adjustments, which may be material, are reflected in
current year operations.
DISCONTINUED LINES AND COVERAGES - Discontinued Lines and Coverages
consists of business no longer written by Allstate, including results from
environmental, asbestos and mass tort losses and other commercial business in
run-off, and the historical results of the mortgage pool business and the
commercial and reinsurance businesses sold in 1996.
Underwriting results for the Company's discontinued lines and coverages
area of business for the three-month periods ended March 31, 1997 and 1996 are
summarized below.
Three Months Ended
March 31,
-----------------
($ in millions) 1997 1996
---- ----
Underwriting loss......................................... $(6) $(87)
==== =====
-13-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
LIFE AND ANNUITY OPERATIONS
The life and annuity operations of Allstate ("Allstate Life") market a
broad line of life insurance, annuity and group pension products through a
combination of Allstate agents, including life specialists, banks, independent
agencies, brokers and direct response marketing.
The following table sets forth certain summarized financial data for
Allstate Life's operations and investments at or for the three-month periods
ended March 31, 1997 and 1996.
Three Months Ended
March 31,
-----------------
($ in millions) 1997 1996
---- ----
Statutory premiums and deposits..................... $ 1,115 $ 1,313
====== ======
Investments......................................... $27,716 $26,759
Separate Account assets............................. 5,747 4,251
------ -----
Investments including Separate Account assets....... $33,463 $31,010
====== ======
Premiums and contract charges....................... $ 355 $ 308
Net investment income .......................... ... 516 507
Contract benefits................................... 583 550
Operating costs and expenses........................ 150 122
------ ------
Income from operations.............................. 138 143
Income tax expense on operations.................... 47 49
------- ------
Operating income.................................... 91 94
Realized capital gains and losses, after-tax........ 49 -
------ ------
Net income.......................................... $ 140 $ 94
====== ======
Statutory premiums and deposits, which include premiums and deposits for
all products, decreased by 15.1% in the first quarter of 1997 compared with the
same period last year. The following table presents statutory premiums and
deposits by product line.
Three Months Ended
March 31,
------------------
($ in millions) 1997 1996
---- ----
Life products
Universal................................. $ 179 $ 173
Traditional............................... 69 72
Other..................................... 56 55
Annuity products
Fixed..................................... 379 416
Variable.................................. 345 243
Group pension products....................... 87 354
--- ---
Total........................................ $1,115 $1,313
====== ======
-14-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
Increased sales of variable annuities were more than offset by lower sales
of group pension and fixed annuity products. The level of pension product sales
is based on Allstate Life's assessment of market opportunities.
Life and annuity premiums and contract charges under generally accepted
accounting principles ("GAAP") increased 15.3%. Under GAAP, revenues exclude
deposits on most annuities and premiums on universal life insurance policies.
The increase in 1997 was primarily attributable to increased sales of structured
settlement annuities with life contingencies, traditional life insurance, and
growth in contract charges on universal life products. GAAP premium and contract
charges will vary with the mix of products sold during the period.
Pretax net investment income increased by 1.8% in the first quarter of 1997
from the comparable 1996 period primarily due to a 5.2% growth in investments,
excluding Separate Account assets and unrealized gains on fixed income
securities. The overall portfolio yield declined slightly, as proceeds from
calls and maturities as well as positive cash flows from operating activities
were invested in securities yielding less than the average portfolio rate. In
low interest rate environments, funds from maturing investments may be
reinvested at lower interest rates than those which prevailed when the funds
were previously invested.
Operating income decreased 3.2% during the first quarter of 1997 compared
with the first quarter of 1996 as profitability from growth of new business and
increased investment income was more than offset by increased amortization of
deferred policy acquisition costs. Increased capital gains impacted the
recognition of gross profits and, consequently, caused an acceleration of the
amortization of deferred policy acquisition costs.
Net realized capital gains after-tax were $49 million for the three months
ended March 31, 1997 primarily due to trading gains which arose principally from
the sale of equity securities. In addition, Allstate Life realized capital gains
on fixed income securities primarily as a result of prepayments of
privately-placed corporate obligations.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
The Company has a commercial paper program under which it may borrow up to
$1.00 billion for short term cash needs. At March 31, 1997, the Company had
outstanding commercial paper of $98 million with a weighted average interest
rate of 5.48%.
The Company maintains a $1.50 billion, five-year revolving line of credit
as a potential source of funds to meet short-term liquidity requirements. The
line of credit expires December 20, 2001 and allows for borrowings by The
Allstate Corporation, AIC, and Allstate Life Insurance Company. During the three
months ended March 31, 1997, there were no borrowings under this line of credit.
Total borrowings under the combined commercial paper program and line of credit
are limited to $1.50 billion.
The Allstate Corporation has entered into a revolving line of credit
agreement, which would allow the American Banking Association, a consortium of
female and minority owned banks, to provide loans of up to $50 million for
-15-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
general corporate purposes. This agreement is for a term of one year, beginning
April 15, 1997, and is renewable thereafter.
During the first quarter of 1997, the Company purchased approximately 5
million shares of its common stock, for its treasury, at a cost of $316 million.
At March 31, 1997, the Company held approximately 13 million shares of treasury
stock with an average cost per share of $52.87.
Liquidity
Cash from operating activities decreased $264 million from the same period
last year as increases in cash collected from operating activities were more
than offset by increased payments on prior year accrued costs and expenses,
including the California Earthquake Authority assessment. Cash at the end of the
period increased as additional cash from operations was partially offset by the
purchase of investments, contractholder withdrawals and the repurchase of the
Company's stock for its treasury.
Surrenders and withdrawals for Allstate Life were $431 million for the
first three months of 1997 compared with $386 million in 1996. As the Company's
interest-sensitive life and annuity contracts in-force policies grow and age,
the dollar amount of surrenders and withdrawals could generally increase.
INVESTMENTS
The composition of the investment portfolio at March 31, 1997, at financial
statement carrying values, is presented in the table below.
Property-Liability Allstate Life Total
------------------ ------------- -----
Fixed income securities (1) $23,965 81.0% $22,944 82.8% $46,909 81.4%
Equity securities 4,514 15.3 708 2.6 5,222 9.0
Mortgage loans 92 .3 3,060 11.0 3,152 5.5
Real estate 453 1.5 279 1.0 732 1.3
Short-term (2) 525 1.8 226 .8 1,085 1.9
Other 17 .1 499 1.8 516 .9
------ ----- ------ ----- ------ ----
Total $29,566 100.0% $27,716 100.0% $57,616 100.0%
====== ===== ====== ===== ====== =====
(1) Fixed income securities are carried at fair value. Amortized cost for these
securities was $23.51 billion and $22.44 billion for property-liability and
Allstate Life operations, respectively. (2) Total short-term investments
includes $334 million of Corporate short-term investments.
Total investments decreased to $57.62 billion at March 31, 1997 from $58.33
billion at December 31, 1996. Property-liability investments decreased $144
million to $29.57 billion at March 31, 1997 from $29.71 billion at December 31,
1996. Allstate Life investments at March 31, 1997, decreased $321 million to
$27.72 billion from $28.04 billion at December 31, 1996. The decrease in
investments was primarily attributable to a decrease of $544 million and $694
million in the unrealized gains on the fixed income and equity securities
portfolios for property-liability and Allstate Life, respectively. These
decreases were primarily due to the effect of rising interest rates and were
-16-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
partially offset by increases in amounts invested from positive cash flows
generated from operations.
Nearly 94.0% of the Company's 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 primarily uses derivative financial instruments to reduce its
exposure to market risk (principally interest rate and equity price risk)in
conjunction with asset/liability management in its life and annuity operations.
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, establishes
risk control limits and measures, and maintains ongoing monitoring procedures.
There have been no significant changes in the risk profile of the Company's
derivative portfolio since December 31, 1996.
PENDING ACCOUNTING AND REPORTING STANDARDS
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release No. 48 ("FRR 48") "Disclosure of Accounting Policies for
Derivative Financial Instruments and Derivative Commodity Instruments and
Disclosure of Quantitative and Qualitative Information about Market Risk
Inherent in Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments".
Effective in the second quarter of 1997, FRR 48 requires additional
disclosures in the footnotes to the financial statements about the Company's
accounting policies for derivative financial instruments. The Company
substantially adopted this requirement at December 31, 1996. In addition, FRR 48
requires annual disclosure of quantitative and qualitative information about the
market risk inherent in the Company's market risk sensitive instruments,
including but not limited to, equity and fixed income securities and derivative
financial instruments. The quantitative and qualitative disclosures are
effective for the Company's year-end 1997 reporting, but recent Congressional
events may ultimately impact the nature and effective date of FRR 48.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" and SFAS
No. 129 "Disclosure of Information about Capital Structure".
SFAS No. 128 is intended to simplify the existing procedures of computing
earnings per share ("EPS") currently prescribed by Accounting Principles Board
("APB") Opinion No. 15, "Earnings Per Share". This standard eliminates the
concept of primary EPS and requires dual presentation of basic and diluted EPS.
Diluted EPS defined by SFAS No. 128 is similar to primary EPS prescribed by APB
Opinion No. 15. The requirements of this statement will be adopted in December
1997 and are not expected to materially impact the Company's earnings per share
calculation.
-17-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
SFAS No. 129 clarifies the disclosure requirements related to the type and
nature of securities contained in an entity's capital structure. The Company
will adopt SFAS No. 129 effective December 31, 1997.
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:
2. The reference to the management's belief that the implementation of the
Company's catastrophe management strategies will greatly reduce the probability
of individual losses over $1 billion in the future (see "Catastrophe Losses and
Catastrophe Management" at page 13) depends in large measure upon the
reliability of the catastrophe simulation models used by the Company to estimate
the probability and the levels of losses which may result from catastrophes.
These models are subject to uncertainties due to continual updating and revision
to reflect the most current available information on climatology and seismology,
building codes, and policyholder demographics. Use of the models has not enabled
the Company to predict the level of losses associated with a specific
catastrophe in the past, and the predictive value of such models with regard to
future catastrophes is subject to challenge. Consequently, these models could
fail to accurately predict the level of losses associated with any future major
catastrophe, and the Company could sustain losses from such catastrophe which
materially exceed $1 billion.
See, generally, the Company's 1996 Annual Report on Form 10-K (the "1996 10-K")
for other important risk factors which may affect the results of operation and
financial condition of the Company. For those risk factors affecting the Company
as a regulated insurance holding company, see "Risk Factors Affecting Allstate"
at pages 4-5 of the 1996 10-K.
-18-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
An Exhibit Index has been filed as part of this Report on Page
E-1.
(b) Reports on Form 8-K.
None.
-19-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Allstate Corporation
(Registrant)
May 14, 1997 By /s/Samuel H. Pilch
------------------
Samuel H. Pilch
Controller
(Principal Accounting Officer and
duly authorized Officer of Registrant)
-20-
EXHIBIT INDEX
THE ALLSTATE CORPORATION
QUARTER ENDED MARCH 31, 1997
--------------------------------
Sequentially
Exhibit No. Description Numbered Page
- ---------- ------------ -------------
4 Registrant hereby agrees to furnish the Commission, upon
request, with the instruments defining the rights of holders
of each issue of long-term debt of the Registrant and its
consolidated subsidiary.
11 Computation of earnings per common share for The Allstate
Corporation and consolidated subsidiary.
15 Acknowledgment of awareness from Deloitte & Touche LLP, dated
May 14, 1997, concerning unaudited interim financial
information.
27 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and not filed.
-E1-
EXHIBIT 11
THE ALLSTATE CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
($ in millions, except for per share data) Three Months Ended March 31,
--------------------------------
1997 1996
------- ------
Net Income $767 $424
======= ======
Primary earnings per common share computation:
Weighted average number of common shares 440.0 447.2
Assumed exercise of dilutive stock 2.3 2.6
options
------- ------
Adjusted weighted number of common 442.3 449.8
shares outstanding
======== =======
Primary net income per share $ 1.73 $ 0.94
======= ======
Fully diluted earnings per common share computation:
Weighted average number of common shares 440.0 447.2
Assumed exercise of dilutive stock 2.3 2.6
options
------- ------
Adjusted weighted number of common 442.3 449.8
shares outstanding
======= =======
Fully diluted net income per $ 1.73 $ 0.94
share
======= =======
-E2-
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 subsidiaries for the three-month
periods ended March 31, 1997 and 1996, as indicated in our report dated May 14,
1997; because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred above, which is included in your Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997, is incorporated by
reference in Registration Statement Nos. 33-88540 and 333-10857 on Form S-3 and
Registration Statement Nos. 33-77928, 33-93758, 33-93760, 33-93762, 33-99132,
33-99136, 33-99138, 333-04919, 333-16129 and 333-23309 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
May 14, 1997
-E3-
7
899051
THE ALLSTATE CORPORATION
1,000,000
U.S. Dollars
3-MOS
DEC-31-1996
JAN-01-1997
MAR-31-1997
1
0
0
46909
5222
3152
732
57616
129
2194
2774
74415
23556
6111
0
20207
1332
0
0
5
13208
74415
4915
944
320
0
3951
667
453
1084
317
767
0
0
0
767
1.73
1.73
0
0
0
0
0
0
0
