UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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, 1998, THE REGISTRANT HAD 820,487,958 COMMON SHARES, $.01 PAR
VALUE, OUTSTANDING.
THE ALLSTATE CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 1998
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations for the
Three and Nine Month Periods Ended September 30, 1998
and 1997 (unaudited). 1
Condensed Consolidated Statements of Financial Position as
of September 30, 1998 (unaudited) and December 31, 1997. 2
Condensed Consolidated Statements of Cash Flows for the Nine
Month Periods Ended September 30, 1998 and 1997 (unaudited). 3
Notes to Condensed Consolidated Financial Statements
(unaudited). 4
Independent Accountants' Review Report. 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 24
1
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
(UNAUDITED)
(IN MILLIONS EXCEPT PER SHARE DATA)
REVENUES
Property-liability insurance premiums earned $ 4,866 $ 4,685 $ 14,431 $ 13,877
Life and annuity premiums and contract charges 381 356 1,122 1,077
Net investment income 977 995 2,916 2,906
Realized capital gains and losses 212 348 956 776
----------- ---------- ----------- -----------
6,436 6,384 19,425 18,636
----------- ---------- ----------- -----------
COSTS AND EXPENSES
Property-liability insurance claims and claims expense 3,476 3,395 10,235 10,137
Life and annuity contract benefits 604 584 1,775 1,765
Amortization of deferred policy acquisition costs 784 712 2,262 2,060
Operating costs and expenses 501 475 1,487 1,419
Interest expense 28 26 88 74
----------- ---------- ----------- -----------
5,393 5,192 15,847 15,455
----------- ---------- ----------- -----------
GAIN (LOSS) ON DISPOSITION OF OPERATIONS - (8) 87 (8)
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE,
DIVIDENDS ON PREFERRED SECURITIES, AND EQUITY
IN NET INCOME OF UNCONSOLIDATED SUBSIDIARY 1,043 1,184 3,665 3,173
INCOME TAX EXPENSE 320 359 1,112 936
----------- ---------- ----------- -----------
INCOME BEFORE DIVIDENDS ON PREFERRED SECURITIES AND
EQUITY IN NET INCOME OF UNCONSOLIDATED SUBSIDIARY 723 825 2,553 2,237
DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARY TRUSTS (10) (10) (29) (29)
EQUITY IN NET INCOME OF UNCONSOLIDATED SUBSIDIARY - 9 10 26
----------- ---------- ----------- -----------
NET INCOME $ 713 $ 824 $ 2,534 $ 2,234
=========== ========== =========== ===========
EARNINGS PER SHARE:
NET INCOME PER SHARE - BASIC $ 0.87 $ 0.95 $ 3.03 $ 2.56
=========== ========== =========== ===========
WEIGHTED AVERAGE SHARES - BASIC 826.5 865.6 836.3 871.9
=========== ========== =========== ===========
NET INCOME PER SHARE - DILUTED $ 0.86 $ 0.95 $ 3.01 $ 2.55
=========== ========== =========== ===========
WEIGHTED AVERAGE SHARES - DILUTED 830.7 871.3 840.8 877.4
=========== ========== =========== ===========
See notes to condensed consolidated financial statements.
2
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
SEPTEMBER 30, DECEMBER 31,
(In millions) 1998 1997
------------ -------------
(UNAUDITED)
ASSETS
Investments
Fixed income securities, at fair value
(amortized cost $49,142 and $47,715) $ 53,439 $ 50,860
Equity securities, at fair value (cost $4,350 and $4,587) 5,842 6,765
Mortgage loans 3,182 3,002
Short-term 2,586 687
Other 595 1,234
------------ -------------
TOTAL INVESTMENTS 65,644 62,548
Premium installment receivables, net 3,205 2,959
Deferred policy acquisition costs 2,877 2,826
Reinsurance recoverables, net 1,941 2,048
Property and equipment, net 775 741
Accrued investment income 786 711
Cash 260 220
Other assets 1,070 1,283
Separate Accounts 8,839 7,582
------------ -------------
TOTAL ASSETS $ 85,397 $ 80,918
============ =============
LIABILITIES
Reserve for property-liability insurance
claims and claims expense $ 17,267 $ 17,403
Reserve for life-contingent contract benefits 7,652 7,082
Contractholder funds 20,682 20,389
Unearned premiums 6,505 6,233
Claim payments outstanding 720 599
Other liabilities and accrued expenses 4,493 3,193
Deferred income taxes 326 381
Short-term debt 224 199
Long-term debt 1,341 1,497
Separate Accounts 8,839 7,582
------------ -------------
TOTAL LIABILITIES 68,049 64,558
------------ -------------
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, 2 billion shares
authorized and 900 million issued, 822 million
and 850 million shares outstanding 9 9
Additional capital paid-in 3,108 3,116
Retained income 13,840 11,646
Deferred ESOP expense (252) (281)
Treasury stock, at cost (78 million and 50 million shares) (2,905) (1,665)
Accumulated other comprehensive income:
Unrealized net capital gains 2,834 2,821
Unrealized foreign currency translation adjustments (36) (36)
------------ -------------
Total accumulated other comprehensive income 2,798 2,785
------------ -------------
TOTAL SHAREHOLDERS' EQUITY 16,598 15,610
------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 85,397 $ 80,918
============ =============
See notes to condensed consolidated financial statements.
3
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
(In millions) 1998 1997
------------- ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,534 $ 2,234
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation, amortization and other non-cash items (8) (13)
Realized capital gains and losses (956) (776)
(Gain)Loss on disposition of operations (87) 8
Interest credited to contractholder funds 930 910
Changes in:
Policy benefit and other insurance reserves (325) 145
Unearned premiums 218 161
Deferred policy acquisition costs (171) (240)
Premium installment receivables, net (210) (193)
Reinsurance recoverables, net 171 1
Deferred income taxes (52) 283
Other operating assets and liabilities 218 187
------------- ------------
Net cash provided by operating activities 2,262 2,707
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales
Fixed income securities 11,420 9,474
Equity securities 3,667 2,632
Real estate 813 88
Investment collections
Fixed income securities 4,919 3,545
Mortgage loans 329 425
Investment purchases
Fixed income securities (17,202) (15,344)
Equity securities (2,879) (2,204)
Mortgage loans (483) (323)
Change in short-term investments, net (710) 672
Change in other investments, net (82) (80)
Acquisition of subsidiary (275) -
Proceeds from disposition of operations 49 -
Purchases of property and equipment, net (137) (104)
------------- ------------
Net cash used in investing activities (571) (1,219)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in short-term debt, net 10 83
Repayment of long-term debt (300) -
Proceeds from issuance of long-term debt 501 4
Contractholder fund deposits 2,285 1,867
Contractholder fund withdrawals (2,571) (2,291)
Dividends paid (331) (315)
Treasury stock purchases (1,311) (827)
Other 66 42
------------- ------------
Net cash used in financing activities (1,651) (1,437)
------------- ------------
NET INCREASE IN CASH 40 51
CASH AT BEGINNING OF PERIOD 220 116
------------- ------------
CASH AT END OF PERIOD $ 260 $ 167
============= ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION
Conversion of Automatically Convertible Equity
Securities to common shares of The PMI Group, Inc. $ 357 $ -
============= ============
See notes to condensed consolidated financial statements.
4
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 September
30, 1998 and for the three month and nine month periods ended September 30, 1998
and 1997 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 Appendix A of the 1998 Proxy Statement and the Annual Report on Form
10-K for 1997. The results of operations for the interim periods should not be
considered indicative of results to be expected for the full year.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities", under the guidance of
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." As a result, the Company has recorded an asset and
corresponding liability representing the collateral received in connection with
the Company's securities lending program. The cash collateral received is
recorded in short-term investments with the offsetting liability being reflected
in other liabilities in the condensed consolidated statements of financial
position. In accordance with SFAS No. 127, the condensed consolidated statements
of financial position for prior periods have not been restated.
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income is a measurement of certain changes
in shareholders' equity that result from transactions and other economic events
other than transactions with shareholders. For Allstate, these consist of
changes in unrealized gains and losses on the investment portfolio and
unrealized foreign currency translation adjustments. These amounts, presented as
other comprehensive income, net of related taxes, are combined with net income
which results in comprehensive income. The required disclosures are presented in
Note 5.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP provides guidance on accounting for the costs of computer
software developed or obtained for internal use. Specifically, certain external,
payroll and payroll-related costs should be capitalized during the application
development stage of a software development project and depreciated over the
computer software's useful life. The Company has adopted the SOP effective
January 1, 1998.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 redefines how segments are determined and requires additional
segment disclosures for both annual and quarterly reporting. Under this SFAS,
segments are determined using the "management approach" for financial statement
reporting. The management approach is based on the way an enterprise makes
operating decisions and assesses performance of its businesses. The Company's
reportable segments are not expected to change as a result of the adoption of
SFAS No. 131. The requirements of this SFAS will be adopted effective December
31, 1998.
5
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes
employers' disclosures about pension and other postretirement benefit plans,
requires additional information on changes in the benefit obligation and fair
value of plan assets and eliminates certain previously required disclosures. The
disclosure requirements of this SFAS will be adopted effective December 31,
1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 replaces existing
pronouncements and practices with a single, integrated accounting framework for
derivatives and hedging activities. The requirements are effective for fiscal
years beginning after June 15, 1999. Earlier application is encouraged but is
only permitted as of the beginning of any fiscal quarter after issuance. This
SFAS requires that all derivatives be recognized on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. Additionally, the change in fair value of a
derivative which is not effective as a hedge will be immediately recognized in
earnings. The Company is currently reviewing these requirements and has not yet
determined the impact or the expected date of adoption.
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued SOP 97-3, "Accounting
by Insurance and Other Enterprises for Insurance-Related Assessments." The SOP
is required to be adopted in 1999. The SOP provides guidance concerning when to
recognize a liability for insurance-related assessments and how those
liabilities should be measured. Specifically, insurance-related assessments
should be recognized as liabilities when all of the following criteria have been
met: 1) an assessment has been imposed or it is probable that an assessment will
be imposed, 2) the event obligating an entity to pay an assessment has occurred
and 3) the amount of the assessment can be reasonably estimated. The Company is
currently evaluating the effects of this SOP on its accounting for
insurance-related assessments. Certain information required for compliance is
not currently available and therefore the Company is studying alternatives for
estimating the accrual. In addition, industry groups are working to improve the
information available. While it is possible that the cumulative effect of
adoption could be material to results of operations, the impact of this standard
is not expected to be material to the results of operations, liquidity or
financial position of the Company. The Company expects to adopt the SOP as of
January 1, 1999.
To conform with the 1998 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
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.
6
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, liquidity 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 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 product 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, for most policies written in 1986 and all
policies written after 1986. Allstate's reserves for environmental and asbestos
claims were $1.12 billion and $1.10 billion at September 30, 1998 and December
31, 1997, net of reinsurance recoverables of $441 million and $388 million,
respectively.
Management believes its net loss reserves for environmental, asbestos and
mass tort claims 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 that
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.
7
3. REINSURANCE
Property-liability insurance premiums and life and annuity premiums and
contract charges are net of the following reinsurance ceded:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
(IN MILLIONS) 1998 1997 1998 1997
---- ---- ---- ----
Property-liability premiums $109 $89 $333 $343
Life and annuity premiums and contract charges 49 36 138 109
Property-liability insurance claims and claims expense and life and
annuity contract benefits are net of the following reinsurance recoveries:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
(IN MILLIONS) 1998 1997 1998 1997
---- ---- ---- ----
Property-liability insurance claims and claims expense $75 $75 $218 $240
Life and annuity contract benefits 21 13 50 36
4. 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 adversely influence and 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.
In April 1998, Federal Bureau of Investigation agents executed search
warrants at three offices of Allstate for documents relating to the handling of
some claims for losses resulting from the 1994 earthquake in Northridge,
California. Allstate received a subpoena issued on April 24, 1998, from the U.S.
District Court of the Central District of California, in connection with a Los
Angeles grand jury proceeding, for the production of documents and records
relating to the Northridge earthquake. Allstate is cooperating with the
investigation. At present, the company cannot determine the impact of resolving
these matters.
Allstate and plaintiffs' representatives have agreed to settle certain
civil suits filed in California, including a class action, related to the
Northridge earthquake. The plaintiffs in these civil suits have challenged
licensing and engineering practices of certain firms Allstate retained and have
alleged that Allstate systamatically pressured engineering firms to improperly
alter their reports to reduce the loss amounts paid to some insureds with
earthquake claims. Under the terms of the proposed settlement, and subject to
court approval, Allstate will begin a court-administered program to enable up to
approximately 10,000 homeowner customers to potentially seek review of their
claims by an independent engineer and an independent adjusting firm to ensure
that they have been compensated for all earthquake damage under the terms of
their Allstate policies. Allstate will also retain an independent consultant to
review Allstate's practices and procedures for handling catastrophe claims, and
will establish a charitable foundation devoted to consumer education on loss
prevention and consumer protection and other insurance issues. The company does
not expect that the effect of the proposed settlement on Allstate's financial
position, liquidity and results of operations will be material.
8
Various other 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 the results of operations, liquidity or financial position of the
Company.
5. COMPREHENSIVE INCOME
The components of other comprehensive income on a pretax and after-tax
basis are as follows:
THREE MONTHS ENDED SEPTEMBER 30,
(IN MILLIONS) 1998 1997
-----------------------------------------------------------------
Income Income
tax tax
Pretax effect After-tax Pretax effect After-tax
------ ------ --------- ------ ------ ---------
Unrealized capital gains and losses:
Unrealized holding gains (losses) arising
during the period $ (3) $ 1 $ (2) $ 1,168 $ (409) $ 759
Less: reclassification adjustment for realized
net capital gains included in net income 89 (31) 58 336 (118) 218
----- ---- ----- ----- ------ =-----
Unrealized net capital gains (losses) (92) 32 (60) 832 (291) 541
Unrealized foreign currency translation
adjustments (8) 3 (5) (2) 1 (1)
------ ------ ------ ------- ------ ------
Other comprehensive income (loss) $ (100) $ 35 $ (65) $ 830 $ (290) $ 540
====== ====== ------ ======= ====== ------
Net income 713 824
--- ------
Comprehensive income $ 648 $ 1,364
=== ======
NINE MONTHS ENDED SEPTEMBER 30,
(IN MILLIONS) 1998 1997
------------------------------- ---------------------------------
Income Income
tax tax
Pretax effect After-tax Pretax effect After-tax
------ ------ --------- ------ ------ ---------
Unrealized capital gains and losses:
Unrealized holding gains arising during the
period $ 787 $ (275) $ 512 $ 1,829 $ (640) $ 1,189
Less: reclassification adjustment for realized
net capital gains included in net income 767 (268) 499 732 (256) 476
----- ------ ----- ------ ------- -----
Unrealized net capital gains 20 (7) 13 1,097 (384) 713
Unrealized foreign currency translation
adjustments - - - (11) 4 (7)
----- ------ ------- ------ ------- ------
Other comprehensive income $ 20 $ (7) $ 13 $ 1,086 $ (380) $ 706
===== ====== ------- ====== ======= ------
Net income 2,534 2,234
------- ------
Comprehensive income $2,547 $ 2,940
======= ======
6. ACQUISITION OF PEMBRIDGE INC.
On April 14, 1998, the Company completed the purchase of Pembridge Inc.
("Pembridge") for approximately $275 million. Pembridge primarily sells
non-standard auto insurance in Canada through its wholly-owned subsidiary Pafco
Insurance Company. Pembridge's results were included in the Company's
consolidated results from the date of purchase.
9
7. COMMON STOCK
An increase in the number of authorized shares of common stock of the
Company from 1 billion to 2 billion was approved at the annual meeting of
shareholders on May 19, 1998. Also, the Board of Directors approved a
two-for-one stock split which was paid on July 1, 1998. Common stock, additional
capital paid-in, weighted average shares and per share amounts have been
retroactively adjusted to reflect the stock split.
8. DEBT
In April 1998, $357 million of 6.76% Automatically Convertible Equity
Securities were converted into approximately 8.6 million common shares of The
PMI Group, Inc. ("PMI"). The number of shares tendered was based upon the
average market price of the PMI common stock on the 20 days immediately prior to
maturity. The Company recognized an after-tax gain on the conversion of these
securities of $56 million.
In May 1998, the Company issued $250 million of 6.75% senior debentures due
2018, and $250 million of 6.90% senior debentures due 2038, utilizing the
remainder of the shelf registration filed with the Securities and Exchange
Commission in October 1996. The net proceeds from the issuance were used to fund
the maturity of $300 million of 5.875% notes due June 15, 1998, and for general
corporate purposes.
The Company filed a shelf registration statement with the Securities and
Exchange Commission in August 1998, under which up to $2 billion of debt
securities, preferred stock or debt warrants may be issued. No securities have
been issued under this registration statement.
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 subsidiaries as of September
30, 1998, and the related condensed consolidated statements of operations for
the three-month and nine-month periods ended September 30, 1998 and 1997 and the
condensed consolidated statements of cash flows for the nine-month periods ended
September 30, 1998 and 1997. 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, 1997, 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 20,
1998, 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, 1997
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, 1998
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,
1998 AND 1997
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
contained herein and with the discussion, analysis, consolidated financial
statements and notes thereto in Part I. Item 1 and Part II. Item 7 and Item 8 of
The Allstate Corporation Annual Report on Form 10-K for 1997.
CONSOLIDATED REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN MILLIONS) 1998 1997 1998 1997
---- ---- ---- ----
Property-liability insurance premiums $ 4,866 $ 4,685 $ 14,431 $ 13,877
Life and annuity premiums and contract charges 381 356 1,122 1,077
Net investment income 977 995 2,916 2,906
Realized capital gains and losses 212 348 956 776
------ ------ ------ ------
Total revenues $ 6,436 $ 6,384 $ 19,425 $ 18,636
====== ====== ====== ======
Consolidated revenues increased slightly for the third quarter of 1998 and
4.2% for the first nine months of 1998 compared to the same periods in 1997. The
increases were primarily the result of growth in property-liability premiums.
CONSOLIDATED NET INCOME
Net income for the third quarter of 1998 was $713 million, or $0.86 per
diluted share, compared with $824 million, or $0.95 per diluted share, for the
third quarter of 1997. Earnings per share amounts reflect the July 1, 1998,
two-for-one stock split. Growth in property-liability earned premiums and
favorable non-catastrophe loss trends were more than offset by lower realized
capital gains and higher catastrophe losses. The favorable property-liability
non-catastrope loss experience was due to lower claim frequency (rate of
occurrence) and improved auto severity loss trends (average cost per claim).
Net income for the first nine months of 1998 was $2.53 billion, or $3.01
per diluted share, compared with $2.23 billion, or $2.55 per diluted share, for
the same period in 1997. The results for the first nine months of 1998 were
favorably impacted by higher realized capital gains and increased
property-liability underwriting income. Property-liability results benefited
from favorable auto claim frequency and auto severity loss trends, which were
partially offset by higher catastrophe losses.
12
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,
1998 AND 1997
PROPERTY-LIABILITY OPERATIONS
OVERVIEW
The Company's property-liability operations consist 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 insurance, homeowners insurance and
commercial business written primarily through the Allstate agent distribution
channel. Discontinued Lines and Coverages consists of business no longer written
by Allstate, including results from environmental, asbestos and mass tort
losses, mortgage pool business and other commercial business in run-off.
Underwriting results for each of the property-liability areas of business
are discussed separately beginning on page 13.
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, are set forth in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN MILLIONS, EXCEPT RATIOS) 1998 1997 1998 1997
---- ---- ---- ----
Premiums written $ 5,067 $ 4,881 $ 14,736 $ 14,158
====== ===== ======= =======
Premiums earned $ 4,866 $ 4,685 $ 14,431 $ 13,877
Claims and claims expense 3,476 3,395 10,235 10,137
Operating costs and expenses 1,103 1,045 3,233 3,050
----- ----- ----- -----
Underwriting income 287 245 963 690
Net investment income 444 463 1,313 1,324
Income tax expense on operations 198 195 617 539
----- ----- ----- -----
Operating income 533 513 1,659 1,475
Realized capital gains and losses, after-tax 76 193 405 418
Gain on disposition of operations, after-tax - - 25 -
Equity in net income of unconsolidated subsidiary - 9 10 26
------ ----- ----- -----
Net income $ 609 $ 715 $ 2,099 $ 1,919
======= ======= ======== =========
Catastrophe losses $ 192 $ 121 $ 614 $ 352
======= ======= ========= =========
Operating ratios
Claims and claims expense ("loss") ratio 71.4 72.5 70.9 73.0
Expense ratio 22.7 22.3 22.4 22.0
------ ---- ----- ----
Combined ratio 94.1 94.8 93.3 95.0
====== ==== ===== ====
Effect of catastrophe losses on combined ratio 3.9 2.6 4.3 2.5
====== ==== ===== =====
13
NET INVESTMENT INCOME AND REALIZED CAPITAL GAINS
The effects of lower investment yields continued to offset higher
investment balances resulting in a decrease in pretax net investment income of
4.1% from the same period in 1997 to $444 million for the third quarter, and a
slight decrease to $1.31 billion for the nine month period ended September 30,
1998, as compared to the same period in 1997. The increase in investment
balances resulting from positive cash flows from PP&C operations was offset by
the impact of increased dividends paid to The Allstate Corporation from Allstate
Insurance Company ("AIC"). The lower investment yields are 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 relatively low interest rate environments, funds from
maturing investments may be reinvested at interest rates lower than those which
prevailed when the funds were previously invested.
Net realized capital gains for the third quarter of 1998 were $76 million
after-tax versus $193 million after-tax for the same period in 1997. For the
first nine months of 1998, realized capital gains were $405 million after-tax
compared with $418 million after-tax for the same period in 1997. The decreases
were primarily due to the existence of less favorable market conditions during
the periods, partially offset by a realized gain on the sale of real estate.
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.
UNDERWRITING RESULTS
PP&C - Summarized financial data and key operating ratios for Allstate's
PP&C operations for the three month and nine month periods ended September 30,
are presented in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN MILLIONS, EXCEPT RATIOS) 1998 1997 1998 1997
---- ---- ---- ----
Premiums written $ 5,067 $ 4,881 $ 14,736 $ 14,157
===== ===== ====== ======
Premiums earned $ 4,866 $ 4,686 $ 14,431 $ 13,876
Claims and claims expense 3,450 3,403 10,205 10,140
Operating costs and expenses 1,097 1,037 3,213 3,034
----- ----- ------ -----
Underwriting income $ 319 $ 246 $ 1,013 $ 702
===== ===== ====== =====
Catastrophe losses $ 192 $ 121 $ 614 $ 352
===== ===== ====== =====
Operating ratios
Claims and claims expense ("loss") ratio 70.9 72.6 70.7 73.1
Expense ratio 22.5 22.1 22.3 21.9
---- ---- ---- ----
Combined ratio 93.4 94.7 93.0 95.0
==== ==== ==== ====
Effect of catastrophe losses on combined ratio 3.9 2.6 4.3 2.5
==== ==== ==== ====
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.
14
The Company's marketing strategy for standard auto and homeowners varies by
geographic area. The strategy for standard auto is to grow business more rapidly
in areas where the regulatory climate is more conducive to attractive returns.
The strategy for homeowners is to manage exposure on policies in areas where the
potential loss from catastrophes exceeds acceptable levels. The process to
designate geographic areas as growth and limited growth 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 and introduced.
Less than 6% of the total United States population resides in areas designated
by the Company as standard auto limited growth markets. As a result of the
Company's success in introducing policy changes and purchasing catastrophe
reinsurance coverage, the homeowners limited growth markets have been reduced to
areas where approximately 11% of the United States population resides. The
Company is pursuing a growth strategy throughout the United States and Canada in
the non-standard auto market.
PP&C premiums written for the third quarter of 1998 increased 3.8%, and for
the first nine months of 1998 increased 4.1%, compared to the same periods in
1997. The increase for both periods was primarily due to an increase in renewal
policies in force (unit sales) and, to a lesser extent, average premiums.
Management believes favorable loss trends, competitive considerations and
regulatory pressures in some states will continue to impact the Company's
ability to maintain auto rates at historical levels.
Standard auto premiums written increased 2.5% to $2.83 billion in the third
quarter of 1998, from $2.76 billion for the same three month period in 1997. For
the nine month period ending September 30, 1998, standard auto premiums
increased 3.5% to $8.39 billion from $8.10 billion in 1997. The increase for
both periods was primarily due to an increase in renewal policies in force and
average premiums. Average premium increases were primarily attributable to a
shift to newer and more expensive autos and, to a lesser extent, rate increases.
Non-standard auto premiums written increased 6.7% to $861 million in the
third quarter of 1998, from $807 million for the same period in 1997. For the
nine month period, non-standard auto premiums written increased 6.7% to $2.54
billion compared with $2.38 billion for 1997. The increase for both periods was
driven by an increase in renewal policies in force, average premiums and
Deerbrook premiums written through the independent agency channel. Management
believes non-standard auto premiums written for the first nine months of 1998
continued to be adversely impacted by competitive pressures and administrative
requirements, which were intended to improve retention and decrease expenses
related to the collection of premiums.
Homeowners premiums written for the third quarter were $906 million, an
increase of 6.1% from third quarter 1997 premiums of $854 million. For the first
nine months of 1998, homeowners premiums written were $2.42 billion, an increase
of 6.4% compared to the same period last year. The increase for both periods was
driven by an increase in policies in force and, to a lesser extent, average
premiums. The higher average premiums were primarily due to rate increases.
For the third quarter of 1998, PP&C had underwriting income of $319 million
versus $246 million for the third quarter of 1997. Underwriting income for the
nine month period ended September 30, 1998 was $1.01 billion compared to $702
million for the first nine months of last year. Improved underwriting results
for both periods were primarily due to earned premium growth and favorable
non-catastrophe loss experience, partially offset by increased catastrophe
losses. Favorable non-catastrophe loss experience resulted from lower auto and
homeowners claim frequency and favorable auto severity loss trends. Auto injury
claim severities improved slightly compared to the third quarter 1997 level, and
trended favorably compared to relevant medical services cost indices. Auto
physical damage coverage claim severities improved compared to the prior year
and were below relevant body work and used car price indices.
15
CATASTROPHE LOSSES AND CATASTROPHE MANAGEMENT - Catastrophe losses for the
third quarter of 1998 were $192 million compared with $121 million for the same
period in 1997. For the first nine months of 1998, catastrophe losses were $614
million, an increase of $262 million compared to the same period last year. The
level of catastrophe losses experienced in any year cannot be predicted and
could be material to results of operations and financial position. The Company
has experienced two severe catastrophes in recent years which resulted in losses
of $2.33 billion (net of reinsurance) relating to Hurricane Andrew in 1992 and
$1.78 billion relating to the Northridge earthquake in 1994. While management
believes the Company's catastrophe management initiatives will greatly reduce
the severity of future losses, the Company continues to be exposed to
catastrophes which could be of similar or greater magnitude.
Catastrophe reserve estimates are regularly reviewed and updated, using the
most current information. Any resulting adjustments, which may be material, are
reflected in current operations. The establishment of appropriate reserves for
catastrophes, as for all outstanding property-liability claims, is an inherently
uncertain process.
The Company, in the normal course of business, may supplement its claims
processes by utilizing third party adjusters, appraisers, engineers, inspectors,
other professionals and information sources to assess and settle catastrophe and
non-catastrophe related claims.
Allstate has implemented initiatives 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 initiatives include limits on new business production,
limitations on certain policy coverages, increases in deductibles, policy
brokering and participation in catastrophe pools. In addition, Allstate has
requested and received rate increases and expanded its use or the level of
deductibles in certain regions prone to catastrophes.
For Allstate, major areas of potential losses due to hurricanes include
major metropolitan centers near the eastern and gulf coasts of the United
States. Exposure to potential earthquake losses in California is limited by the
Company's participation in the California Earthquake Authority ("CEA"), except
for losses incurred on coverages not covered by the CEA. Other areas in the
United States for which Allstate faces 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
alternative business strategies to more effectively manage its exposure to
catastrophe losses in these and other areas.
DISCONTINUED LINES AND COVERAGES - Underwriting results for Discontinued
Lines and Coverages for the three month and nine month periods ended September
30, are summarized below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN MILLIONS) 1998 1997 1998 1997
---- ---- ---- ----
Underwriting loss $ (32) $ (1) $ (50) $ (12)
==== === ==== ====
Discontinued Lines and Coverages consists of business no longer written by
Allstate, including results from environmental, asbestos and mass tort losses,
mortgage pool business and other commercial business in run-off.
16
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 (which include life specialists), banks,
independent agents, brokers and direct response marketing.
Summarized financial data for Allstate Life's operations and investments at
or for the three month and nine month periods ended September 30, are
illustrated in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN MILLIONS) 1998 1997 1998 1997
---- ---- ---- ----
Statutory premiums and deposits $ 1,433 $ 1,106 $ 4,313 $ 3,569
======= ======= ======= =======
Investments $ 31,597 $ 29,360 $ 31,597 $ 29,360
Separate Account assets 8,839 7,332 8,839 7,332
------- ------- ------- ------
Investments including Separate Account assets $ 40,436 $ 36,692 $ 40,436 $ 36,692
======= ======= ======= ======
Premiums and contract charges $ 381 $ 356 $1,122 $ 1,077
Net investment income 524 526 1,571 1,564
Contract benefits 604 584 1,775 1,765
Operating costs and expenses 138 147 463 444
------- ------- ------- ------
Income from operations 163 151 455 432
Income tax expense on operations 63 52 159 148
------- ------- ------- ------
Operating income 100 99 296 284
Realized capital gains and losses, after-tax (1) 15 33 147 86
Loss on disposition of operations, after-tax - (5) - (5)
------- ------- -------- --------
Net income $ 115 $ 127 $ 443 $ 365
======= ======= ======== ========
(1) Net of the effect of related amortization of deferred policy acquisition
costs in 1998.
17
Statutory premiums and deposits, which include premiums and deposits for
all products, increased 29.6% in the third quarter and 20.8% for the first nine
months of 1998 compared with the same periods of last year. Statutory premiums
and deposits by product line for the three month and nine month periods ended
September 30, are presented in the following table:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN MILLIONS) 1998 1997 1998 1997
---- ---- ---- ----
Life products
Universal $ 180 $ 184 $ 626 $ 540
Traditional 75 76 230 225
Other 63 62 176 175
Annuity products
Fixed 471 373 1,197 1,182
Variable 389 373 1,247 1,065
Group pension products 255 38 837 382
------- ------ ------ ------
Total $ 1,433 $ 1,106 $ 4,313 $ 3,569
======= ====== ====== ======
For the three month period ended September 30, 1998, sales of group pension
products, as well as fixed and variable annuity products increased. During the
nine month period, sales of all products increased. The increases in premiums
for both periods are reflective of the Company's multitude of product choices
available to customers in varying interest rate environments. Group pension
product sales are expected to fluctuate as they are based on management's
assessment of current market conditions.
Life and annuity premiums and contract charges under generally accepted
accounting principles ("GAAP") increased 7.0% in the third quarter and 4.2% for
the first nine months of 1998. Under GAAP, revenues exclude deposits on most
annuities and premiums on universal life insurance policies and will vary with
the mix of products sold during the period. The increase in the three months
ended September 30, 1998, is primarily attributable to higher revenues from
universal life products, an increase in premiums for traditional and other life
products, and increased fee revenue for variable annuity products. The increase
in the first nine months of 1998 is due to additional revenues from universal
life and variable annuity products, offset partially by a decline in premiums
for traditional and other life products on a GAAP basis.
Pretax net investment income in the third quarter and first nine months of
1998 was comparable to the 1997 periods as investment income earned on higher
investment balances was offset by lower portfolio yields. Investments, excluding
Separate Account assets and unrealized gains on fixed income securities, grew by
4.0%. 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
relatively low interest rate environments, funds from maturing investments may
be reinvested at interest rates lower than those which prevailed when the funds
were previously invested.
Operating income increased slightly during the third quarter and 4.2%
during the first nine months of 1998 compared with the same periods in 1997. The
increases for these periods were attributable to increased revenues from
variable annuity products and growth in mortality margins.
18
Net realized capital gains after-tax decreased to $15 million in the third
quarter as gains from the sale of real estate were offset by losses from equity
and fixed income securities. The increase to $147 million for the first nine
months of 1998 was due primarily to gains from the sale of equity and fixed
income securities, as well as from sales of real estate.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
The Company maintains two credit facilities totaling $1.55 billion as a
potential source of funds to meet short-term liquidity requirements, including a
$1.50 billion, five-year revolving line of credit, expiring in 2001 and a $50
million, one-year revolving line of credit expiring in 1999. In order to borrow
on the five-year line of credit, AIC is required to maintain a specified
statutory surplus level, and the Company's debt to equity ratio (as defined in
the agreement) must not exceed a designated level. These requirements are
currently being met, and management expects to continue to meet them in the
future. Allstate also has a commercial paper program with an authorized
borrowing limit of up to $1.00 billion to cover its short-term cash needs. Total
borrowings under the combined commercial paper program and line of credit are
limited to $1.55 billion.
In April 1998, $357 million of 6.76% Automatically Convertible Equity
Securities were converted into approximately 8.6 million common shares of The
PMI Group, Inc. ("PMI"). The number of shares tendered was based upon the
average market price of the PMI common stock for the 20 days immediately prior
to maturity. The Company recognized an after-tax gain on conversion of these
securities of $56 million.
In May 1998, the Company issued $250 million of 6.75% senior debentures due
2018 and $250 million of 6.90% senior debentures due 2038, utilizing the
remainder of the shelf registration filed with the Securities and Exchange
Commission in October 1996. The net proceeds from the issuance were used to fund
the maturity of $300 million of 5.875% notes due June 15, 1998, and for general
corporate purposes.
The Company filed a shelf registration statement with the Securities and
Exchange Commission in August 1998, under which up to $2 billion of debt
securities, preferred stock or debt warrants may be issued. No securities have
been issued under this registration statement.
During the third quarter of 1998, the Company purchased approximately 10.3
million shares of its common stock, for its treasury, at a cost of $426.3
million. At September 30, 1998, the Company held approximately 78 million shares
of treasury stock with an average cost per share of $37.12. During the third
quarter, the Company completed a $2 billion stock repurchase program started
during August of 1997. In August 1998, the Company announced an additional $2
billion stock repurchase program to be completed on or before December 31, 2000.
On April 14, 1998, the Company completed the purchase of Pembridge Inc.
("Pembridge") for approximately $275 million. Pembridge primarily sells
non-standard auto insurance in Canada through its wholly-owned subsidiary, Pafco
Insurance Company.
An increase in the number of authorized shares of common stock of the
Company from 1 billion to 2 billion was approved at the annual meeting of
shareholders on May 19, 1998. Also, the Board of Directors approved a
two-for-one stock split which was paid on July 1, 1998.
19
The ability of the Company to pay dividends is dependent on business
conditions, income, cash requirements of the Company, receipt of dividends from
AIC and other relevant factors. The payment of shareholder dividends by AIC
without the prior approval of the state insurance regulator is limited to
formula amounts based on net income and capital and surplus, determined in
accordance with statutory accounting practices, as well as the timing and amount
of dividends paid in the preceding twelve months. The maximum amount of
dividends that AIC can distribute during 1998 without prior approval of the
Illinois Department of Insurance is $2.56 billion. In the past twelve months,
AIC has paid approximately $2.53 billion in dividends to The Allstate
Corporation. AIC intends to continue to pay dividends in advance of Corporate
funding requirements and up to the maximum amount allowed without requiring
prior approval. AIC has the capacity to pay up to $28 million of dividends as of
October 31, 1998. The dividends are used for general corporate purposes
including the Company's stock repurchase programs.
Financial Ratings and Strength
The following table summarizes the Company and its major subsidiaries' debt
ratings, which were affirmed by Moody's during the third quarter of 1998:
The Allstate Corporation (debt) A-1
The Allstate Corporation (commercial paper) P-1
Allstate Insurance Company (claim-paying ability) Aa2
Allstate Life Insurance Company (claim-paying ability) Aa2
Liquidity
Surrenders and withdrawals for Allstate Life were $504 million and $1.59
billion for the three month and nine month periods ended September 30, 1998,
respectively, compared to $520 million and $1.42 billion in the respective 1997
periods. As the Company's interest-sensitive life policies and annuity contracts
in-force grow and age, the dollar amount of surrenders and withdrawals could
increase.
INVESTMENTS
The composition of the investment portfolio at September 30, 1998, at
financial statement carrying values, is presented in the table below:
PROPERTY-LIABILITY LIFE AND ANNUITY CORPORATE TOTAL
-----------------------------------------------------------------------------------
(IN MILLIONS) Percent Percent Percent Percent
to total to total to total to total
-------- -------- -------- --------
Fixed income securities (1) $26,834 79.2% $26,534 84.0% $ 71 50.3% $53,439 81.4%
Equity securities 5,095 15.0 705 2.2 42 29.8 5,842 8.9
Mortgage loans 117 .3 3,065 9.7 - - 3,182 4.9
Short-term 1,849 5.5 709 2.2 28 19.9 2,586 3.9
Other 11 - 584 1.9 - - 595 .9
------- ------ ------ ------ ------ ------- ----- ------
Total $33,906 100.0% $31,597 100.0% $ 141 100.0% $65,644 100.0%
======= ====== ====== ====== ====== ======= ====== =======
(1) Fixed income securities are carried at fair value. amortized cost for
these securities was $25.24 billion, $23.84 billion and $67 million for
property-liability, life and annuity, and corporate, respectively.
20
Total investments increased to $65.64 billion at September 30, 1998 from
$62.55 billion at December 31, 1997. Property-liability investments increased
$1.63 billion to $33.91 billion at September 30, 1998 from $32.28 billion at
December 31, 1997. Allstate Life investments at September 30, 1998, increased
$1.84 billion to $31.60 billion from $29.76 billion at December 31, 1997. The
increase in investments was primarily attributable to amounts invested from
positive cash flows generated from operations and the addition to short-term
investments of approximately $1.04 billion of collateral resulting from a change
in accounting treatment for securities lending programs.
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.
YEAR 2000
The Company is heavily dependent upon complex computer systems for all
phases of its operations, including customer service, insurance processing,
underwriting, loss reserving, investments and other enterprise systems. Since
many of the Company's older computer software programs recognize only the last
two digits of the year in any date, some software may fail to operate properly
in or after the year 1999, if the software is not reprogrammed, remediated, or
replaced ("Year 2000"). Also, many systems and equipment that are not typically
thought of as computer-related (referred to as "non-IT") contain embedded
hardware or software that may have a Year 2000 sensitive component. Allstate
believes that many of its counterparties and suppliers also have Year 2000
issues and non-IT issues which could affect the Company.
In 1995, the Company commenced a plan consisting of four phases which are
intended to mitigate and/or prevent the adverse affects of the Year 2000 issues
on its systems: 1) assessment and analysis of affected systems and equipment, 2)
remediation and compliance of systems and equipment through strategies that
include the enhancement of new and existing systems, upgrades to operating
systems already covered by maintenance agreements and modifications to existing
systems to make them Year 2000 compliant, 3) testing of systems using
clock-forward testing for both current and future dates and for dates which
trigger specific processing, and 4) contingency planning which will address
possible adverse scenarios and the potential financial impact to the Company's
results of operations, liquidity or financial position.
The Company believes that the first step of this plan, assessment, is
complete, and is currently in the remediation phase for all systems and
equipment. In April 1998, the Company announced its main premium application
system, ALERT, which manages more than 20 million auto and property policies is
Year 2000 compliant. The Company is relying on other remediation techniques for
its midrange and personal computer environments, and certain mainframe
applications. Management believes the majority of Allstate's computer systems
will be remediated by the end of 1998, with the investment processing systems
and certain midrange computers to be remediated by the middle of 1999.
The third phase of the plan which includes clock-forward testing of the
Company's systems and non-IT, is scheduled to be largely complete by the end of
1998. The Company is currently in the process of identifying key processes and
developing contingency plans in the event that the systems supporting these
processes are not Year 2000 compliant at the end of 1999. Management believes
these contingency plans should be completed by mid-1999. Until these plans are
complete, management is unable to determine an estimate of the most reasonably
possible worst case scenario due to issues relating to the Year 2000.
In addition, the Company is actively working with its major external
counterparties and suppliers to assess their compliance efforts and the
Company's exposure to both their Year 2000 issues and non-IT issues. The Company
is currently soliciting its key external counterparties and suppliers to certify
that they are Year 2000 compliant or are taking actions they believe will
adequately prepare them for the Year 2000. Allstate will continue its efforts to
receive responses on Year 2000 compliance from these parties. If key vendors are
unable to meet the Year 2000 requirement, Allstate intends to prepare
21
contingency plans that will allow the Company to continue to sell its products
and to service its customers. Management believes these contingency plans should
be completed by mid-1999. The Company, however, does not have sufficient
information at the current time to determine whether or not its external
counterparties and suppliers will be Year 2000 ready.
The Company also has investments which have been publicly and privately
placed. The Company may also be exposed to the risk that the issuers of these
investments will be adversely impacted by Year 2000 issues. The Company assesses
the impact which Year 2000 issues have on the Company's investments as part of
due diligence for proposed new investments and in its ongoing review of current
portfolio holdings. Any recommended investment actions with respect to
individual investments are determined by taking into account the potential
impact of Year 2000 on the issuer.
The Company presently believes that it will resolve the Year 2000 issue in
a timely manner, and the costs incurred to achieve Year 2000 compliance of
Company systems are not expected to be material to the Company's results of
operations, liquidity or financial position. Year 2000 costs are expensed as
incurred.
OTHER DEVELOPMENTS
In 1997, the Company formed a new company, Allstate New Jersey Insurance
Company ("ANJ"), which will be dedicated to serving property and casualty
insurance consumers in New Jersey. At the beginning of 1998, ANJ started
offering coverage to customers and began receiving property and assigned risk
policies from AIC. During the fourth quarter of 1998, ANJ expects to start
receiving voluntary auto policies from AIC and Allstate Indemnity Company.
The financial services industry has experienced a substantial increase in
merger and acquisition activity which is leading to a consolidation of certain
industry segments and a broadening of the business scope of some competitors.
While the ultimate impact to the Company is not determinable, Allstate is
considering mergers, acquisitions, and business alliances in both the United
States and internationally in the pursuit of its business strategy.
PENDING ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 redefines how
segments are determined and requires additional segment disclosures for both
annual and quarterly reporting. Under this SFAS, segments are determined using
the "management approach" for financial statement reporting. The management
approach is based on the way an enterprise makes operating decisions and
assesses performance of its businesses. The Company's reportable segments are
not expected to change as a result of the adoption of SFAS No. 131. The
requirements of this SFAS will be adopted effective December 31, 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes
employers' disclosures about pension and other postretirement benefit plans,
requires additional information on changes in the benefit obligation and fair
value of plan assets and eliminates certain previously required disclosures. The
disclosure requirements of this SFAS will be adopted effective December 31,
1998.
22
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 replaces existing
pronouncements and practices with a single, integrated accounting framework for
derivatives and hedging activities. The requirements are effective for fiscal
years beginning after June 15, 1999. Earlier application is encouraged but is
only permitted as of the beginning of any fiscal quarter after issuance. This
SFAS requires that all derivatives be recognized on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. Additionally, the change in fair value of a
derivative which is not effective as a hedge will be immediately recognized in
earnings. The Company is currently reviewing these requirements and has not yet
determined the impact or the expected date of adoption.
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." The SOP is required to be adopted in 1999. The
SOP provides guidance concerning when to recognize a liability for
insurance-related assessments and how those liabilities should be measured.
Specifically, insurance-related assessments should be recognized as liabilities
when all of the following criteria have been met: 1) an assessment has been
imposed or it is probable that an assessment will be imposed, 2) the event
obligating an entity to pay an assessment has occurred and 3) the amount of the
assessment can be reasonably estimated. The Company is currently evaluating the
effects of this SOP on its accounting for insurance-related assessments. Certain
information required for compliance is not currently available and therefore the
Company is studying alternatives for estimating the accrual. In addition,
industry groups are working to improve the information available. While it is
possible that the cumulative effect of adoption could be material to results of
operations, the impact of this standard is not expected to be material to the
results of operations, liquidity or financial position of the Company. The
Company expects to adopt the SOP as of January 1, 1999.
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 auto severity loss trends (see "Consolidated Net Income" at
page 11 and "Underwriting Results" at page 13) as compared to medical services
cost indices and body work and used car price indices reflect statistical data
for the period indicated. Also, the references to severity trends and claim
frequency trends (see "Consolidated Net Income" at page 11 and "Underwriting
Results" at page 13) reflect statistical data for the period indicated. Such
data for a following period or periods could well indicate that such trends have
ceased or reversed.
2. Management believes that the initiatives implemented by Allstate to manage
its exposure to catastrophes will greatly reduce the severity of future losses
(see "Underwriting Results" at page 13 and "Catastrophe Losses and Catastrophe
Management" at page 15). These beliefs are based in part on the efficacy of
techniques adopted by Allstate and the accuracy of the data used by Allstate
which are designed to predict the probability of catastrophes and the extent of
losses to Allstate resulting from catastrophes. Catastrophic events may occur in
the future which indicate that such techniques and data do not accurately
predict Allstate's losses from catastrophes. In that event, the probability and
extent of such losses may differ materially from that which would have been
predicted by such techniques and data.
23
The Company, in the normal course of business, may supplement its claims
processes by utilizing third party adjusters, appraisers, engineers, inspectors,
other professionals and information sources to assess and settle catastrophe and
non-catastrophe related claims. While management believes that the Company has
implemented the appropriate procedures to evaluate the quality and monitor the
performance of these third parties and information sources, they may prove to be
unreliable, inaccurate or misrepresented.
3. In order to borrow on the five-year line of credit (see "Liquidity and
Capital Resources" at page 18), AIC is required to maintain a specified
statutory surplus level and the Allstate debt to equity ratio (as defined in the
credit agreement) must not exceed a designated level. Management expects to
continue to meet such borrowing requirements in the future. However, the ability
of AIC and Allstate to meet these requirements is dependent upon the economic
well-being of AIC. Should AIC sustain significant losses from catastrophes, its
and Allstate's ability to continue to meet these credit agreement requirements
could be lessened. Consequently, Allstate's right to draw upon the five-year
line of credit could be diminished or eliminated during a period when it would
be most in need of financial resources.
4. The Company believes that it will resolve the Year 2000 issue in a timely
manner and that the costs incurred to achieve Year 2000 compliance of Company
systems and equipment will not be material to the Company's results of
operations, liquidity or financial position (see "Year 2000" at page 20). In
particular, management believes:
- that the majority of Allstate's computer systems and equipment will
be remediated by December 31, 1998, and its investment processing
systems and equipment and certain midrange computers will be remediated by
mid-1999.
- that clock-forward testing of the Company's systems and equipment is
scheduled for completion by December 31, 1998.
- that the Company's contingency plans for addressing possible adverse
scenarios should be completed by mid-1999.
Although these statements reflect management's good faith beliefs regarding the
completion of the various phases of its program for Year 2000 compliance,
unforeseen problems could delay completion of the Company's plan. For example,
clock-forward testing may identify problems that were not detected during the
assessment phase of the Company's Year 2000 plan. Moreover, the extent to which
the computer operations of the Company's external counterparties and suppliers
are adversely affected could, in turn, affect the Company's ability to
communicate with such counterparties and suppliers and could materially affect
the Company's results of operations in any period or periods. In addition, the
extent to which Year 2000 issues have an impact on the operations of businesses
in which the Company has invested could affect the performance of the Company's
investment portfolio and could materially affect the Company's results of
operations in any period or periods.
5. Management believes favorable loss trends, competitive considerations and
regulatory pressures in some states will continue to impact the Company's
ability to maintain rates at historical levels (see "Underwriting Results" at
page 13). However, other factors that affect the average premium growth rate,
such as loss ratio deterioration, could accelerate the rate.
See the Company's 1997 Annual Report on Form 10-K (the "1997 10-K") for
other important risk factors which may affect the results of operations 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 page 2 of the 1997 10-K.
24
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 on September 11,
1998 (Item 5).
25
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, 1998
By /s/ Samuel H. Pilch
Samuel H. Pilch, Controller
(Principal Accounting Officer and duly
authorized Officer of Registrant)
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 subsidiaries.
15 Acknowledgment of awareness from Deloitte & Touche LLP,
dated November 13, 1998, 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 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 and
nine-month periods ended September 30, 1998 and 1997, as indicated in our report
dated November 13, 1998; 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, 1998, is
incorporated by reference in Registration Statement Nos. 333-34583 and 333-61817
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, 333-23309,
333-40283, 333-40285 and 333-40289 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, 1998
E-2
7
899051
THE ALLSTATE CORPORATION
1,000,000
U.S. DOLLARS
9-MOS
DEC-31-1998
JAN-31-1998
SEP-30-1998
1
0
53439
53439
5842
3182
0
65644
260
1941
2877
85397
24919
6505
0
20682
1565
0
0
9
16589
85397
15553
2916
956
0
12010
2262
1575
3665
1112
2553
0
0
0
2534
3.03
3.01
0
0
0
0
0
0
0
