UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 Number)
2775 Sanders Road, Northbrook, Illinois 60062
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 402-5000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, par value $0.01 New York Stock Exchange
per share Chicago Stock Exchange
7.95% Cumulative Quarterly New York Stock Exchange
Income Preferred Securities, Series A
(issued by a wholly-owned trust of the Registrant)
7.125% Senior Quarterly Interest Bonds New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
On January 31, 1999, Registrant had 813,386,882 shares of common stock
outstanding. Approximately 754,000,000 of these shares, having an aggregate
market value (based on closing prices on January 29, 1999 reported in the New
York Stock Exchange Composite listing) of approximately $28.28 billion, were
owned by stockholders other than the Registrant's directors and executive
officers and Northern Trust Corporation, which is the trustee for The Savings
and Profit Sharing Fund of Allstate Employees.
The Registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Documents Incorporated By Reference
Portions of the following documents are incorporated by reference as
follows:
Parts I, II and III of this Form 10-K incorporate by reference certain
information from the Registrant=s Proxy Statement for its Annual Meeting of
Stockholders to be held on May 18, 1999 (the "Proxy Statement").
TABLE OF CONTENTS
PART I PAGE
Item 1. Business..........................................................1
Recent Developments...........................................2
Risk Factors Affecting Allstate as an Insurer.................3
Allstate Strategy.............................................3
Property-Liability Insurance Business.........................6
Catastrophe Exposure and Catastrophe Management............9
Property-Liability Claims and Claims Expense Reserves.....12
Discontinued Lines and Coverages.............................20
Life and Savings Segment.....................................21
Year 2000....................................................22
Capital Requirements.........................................24
Investments..................................................25
Regulation...................................................25
Geographic Distribution of Insurance.........................30
Seasonality..................................................30
Employees....................................................30
Service Marks................................................30
Forward-Looking Statements...................................30
Executive Officers...........................................32
Item 2. Properties........................................................33
Item 3. Legal Proceedings.................................................33
Item 4. Submission of Matters to a Vote of Security Holders...............34
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders
Matters...........................................................34
Item 6. Selected Financial Data...........................................34
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........35
Item 8. Financial Statements and Supplementary Data.......................35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.........................................35
i
PART III PAGE
Item 10. Directors and Executive Officers of the Registrant...............35
Item 11. Executive Compensation...........................................35
Item 12. Security Ownership of Certain Beneficial Owners and Management...36
Item 13. Certain Relationships and Related Transactions...................36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...36
Signatures....................................................................37
Index to Financial Statement Schedules.......................................S-1
Exhibit Index................................................................E-1
ii
Part I
ITEM 1. BUSINESS
The Allstate Corporation (the "Company") was incorporated under the laws of
the State of Delaware on November 5, 1992 to serve as the holding company for
Allstate Insurance Company ("AIC"). The Company's business is conducted
principally through AIC and AIC's subsidiaries (collectively, including the
Company, "Allstate"). Allstate is engaged, principally in the United States and
Canada, in the property-liability insurance and life insurance and savings
businesses. Allstate is the country's second largest property-liability insurer
on the basis of 1997 statutory premiums written and is a major life insurer.
Allstate's life insurance and savings operations are conducted through Allstate
Life Insurance Company ("ALIC"), a wholly-owned subsidiary of AIC, and through
various ALIC subsidiaries ("Life and Savings").
Allstate's primary business is the sale of private passenger auto and
homeowners insurance. In 1997, Allstate maintained estimated national market
shares in these lines of approximately 12.3% and 11.3%, respectively. Allstate's
Property-Liability operations consist of two business segments: personal
property and casualty ("PP&C") and Discontinued Lines and Coverages. PP&C is
principally engaged in the sale of private passenger auto insurance and
homeowners insurance to individuals in both the United States and in other
countries. Discontinued Lines and Coverages consists of business no longer
written by Allstate. Allstate markets its products through a variety of
distribution channels, with the core of its PP&C distribution system being a
broad-based network of approximately 15,500 exclusive agents (employee and
non-employee) in the United States and Canada, and over 3,000 independent agents
who offer Allstate products primarily in rural areas not served by Allstate
agents. Allstate also uses independent and specialized brokers to expand market
reach, including approximately 13,000 independent agents appointed to market
non-standard auto business.
Life and Savings markets a broad line of life insurance, savings and group
pension products. Life and Savings distributes its products through Allstate
agents (including life specialists), banks, independent agents and brokers and
through direct response marketing.
Allstate's Corporate and Other business segment is comprised of holding
company activities and certain non-insurance operations.
Information regarding the last three years' revenues and operating profit
or loss, and the last two years' identifiable assets attributable to each of
Allstate's four business segments is contained in note 15 of the Notes to
Consolidated Financial Statements on pages C-62 to C-64 of the Proxy Statement,
incorporated herein by reference in response to Item 8 hereof.
1
RECENT DEVELOPMENTS
On March 3, 1999, ALIC and Putnam Investments, a leading investment
management company, announced a joint venture to create and distribute a
co-branded variable insurance product line. A joint venture executive committee
consisting of executives from ALIC and Putnam will manage the partnership.
Putnam's portfolio managers will oversee the mutual fund investments and ALIC
will manage the insurance assets. The products will be distributed via Putnam's
wholesaling force, and through its partnerships with banks, broker-dealers and
financial advisors.
On February 12, 1999, the Company announced a Rights Agreement under which
shareholders of record on February 26, 1999 will receive a dividend distribution
of one preferred share purchase right (a "Right") on each outstanding share of
the Company's common stock. The Rights become exercisable ten days after it is
publicly announced that a person or group has acquired 15% or more of the
Company's common stock or ten business days after the beginning of a tender or
exchange offer to acquire 15% or more of the Company's common stock. Then the
Rights become exercisable at a price of $150 for a number of shares of the
Company's common stock having a market value equal to $300. The Company may
redeem the Rights at a price of $.01 per Right. The Rights expire on February
12, 2009. The Rights are intended to protect shareholders from unsolicited
takeover attempts that may unfairly pressure shareholders and deprive them of
the full value of their shares. Management is not aware of any such attempt at
this time.
On September 21, 1998, the Company's Board of Directors announced that
Jerry D. Choate, the Company's Chairman and Chief Executive Officer, would
retire at the end of 1998, and that Edward M. Liddy had been elected, effective
January 1, 1999, to replace Mr. Choate. Mr. Liddy had been the Company's
President and Chief Operating Officer since August 1994. As of January 1, 1999,
Mr. Liddy became the Company's Chairman, President and Chief Executive Officer.
During 1998, the Company received a charter from the Office of Thrift
Supervision to operate a federal savings bank, Allstate Federal Savings Bank
("AFSB"). AFSB offers electronic commerce services to AIC specifically for
pre-authorized payments of customers' premiums and other consumer transactions.
AFSB is also committed to investing $15 million annually in the redevelopment of
urban communities, and plans to form strategic alliances with community
organizations and other groups in connection with these investments. During
1999, AFSB plans to introduce personal trust, financial planning services and
other products based on customer needs and regulatory approvals.
2
RISK FACTORS AFFECTING ALLSTATE AS AN INSURER
In addition to the normal risks of business, Allstate is subject to
significant risk factors, including those applicable to it as an insurance
company, such as: (i) the inherent uncertainty in the process of establishing
property-liability loss reserves, particularly reserves for the cost of
environmental, asbestos and mass tort claims, and the fact that ultimate losses
could materially exceed established loss reserves and have a material adverse
effect on results of operations and financial condition; (ii) the fact that
Allstate has experienced, and can be expected in the future to experience,
catastrophe losses which could have a material adverse impact on its financial
condition, results of operations and cash flows; (iii) the inherent uncertainty
in the process of establishing property-liability loss reserves due to the
change in loss payment patterns caused by new claims settlement practices; (iv)
the need for Allstate=s insurance company subsidiaries to maintain appropriate
levels of statutory capital and surplus, particularly in light of continuing
scrutiny by rating organizations and state insurance regulatory authorities, and
to maintain acceptable financial strength or claims-paying ability ratings; (v)
the extensive regulation and supervision to which Allstate=s insurance
subsidiaries are subject, various regulatory and public initiatives that may
affect Allstate, and regulatory and other legal actions involving Allstate; (vi)
the Company=s primary reliance, as a holding company, on dividends from AIC to
meet debt payment obligations, and regulatory restrictions on AIC's ability to
pay such dividends; (vii) the adverse impact which increases in interest rates
could have on the value of Allstate=s investment portfolio and on the
attractiveness of certain Life and Savings products; (viii) the adverse impact
to investment income in low interest rate environments due to funds being
reinvested in securities yielding less than the average portfolio rate; (ix) the
need to adjust the effective duration of the assets and liabilities of Life and
Savings' operations in order to meet the anticipated cash flow requirements of
its policyholder obligations; and (x) the uncertainty involved in estimating the
availability of reinsurance and the collectibility of reinsurance recoverables.
See also "Forward-Looking Statements," below, for several important
factors that could cause the Company's actual results and experience, with
respect to forward-looking statements in this Form 10-K to differ materially
from anticipated results or other expectations expressed in the Company's
forward-looking statements.
ALLSTATE STRATEGY
Allstate's strategy is to focus on the profitable growth of its private
passenger auto and homeowners insurance business; to improve customer retention
and to increase cross-sales of its products to its customer base; to manage its
catastrophe exposure; to expand its offering of Life and Savings products
through existing non-agency distribution channels and through the addition of
new distribution channels; and to seek opportunities in the international
markets. This
3
strategy is designed to capitalize on: (1) the strength of the Allstate name,
(2) Allstate's network of exclusive agents, (3) Allstate's auto and homeowners
insurance capabilities, and (4) additional distribution channels available to
Allstate.
Allstate is experiencing increased competition in both its PP&C and Life
and Savings segments. The increase in PP&C competition is due, in part, to
increased consolidation in the industry, to the entry of new companies to the
market attracted by historically high profit margins on auto insurance, and to
the expansion and redefinition of underwriting risk selection and tolerance by
many competitors. Increased competition in the Life and Savings segment is due,
in part, to demutualization and consolidation currently being experienced in
this industry. There is also a possibility of federal legislation that would
allow banks, securities firms and insurance companies to affiliate.
Allstate expects that the competitive pricing environment in the personal
property and casualty industry will put pressure on its premium growth and
profit margins, and plans to offset this pressure by initiating the following
actions to increase growth and to improve expense margins:
o implementing processes designed to control the cost of settling
homeowners claims;
o expanding its independent agent distribution channel with the intent
to grow standard, non-standard and homeowners premiums written;
o increasing sales of auto and homeowners related services such as auto
and home equity financing, and auto parts and labor warranties in
order to provide a more complete set of services to customers; and
o expanding its domestic and international presence through the
development of start-up operations, acquisitions, partnerships and
expanded distribution channels.
Allstate's marketing strategy for auto and homeowners insurance varies by
geographic area. Allstate is attempting to grow its auto business in the United
States more rapidly in states where the regulatory climate is more conducive to
attractive returns. Allstate is attempting to manage its homeowners exposure on
policies in areas where the potential loss from catastrophes exceeds acceptable
levels. Allstate's process of designating 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
insurance policies are approved and introduced. Allstate continuously monitors
its designated growth and limited growth areas and adjusts its actions,
including limiting premium growth, as necessary, to maintain acceptable
catastrophe exposure levels in these areas. As of December 31, 1998, the areas
designated as auto limited growth markets represent an insignificant percentage
of the total United States population. As a result of Allstate's efforts to
introduce policy changes and to purchase catastrophe insurance coverage, the
homeowners limited growth markets have been reduced to areas where approximately
4% of the United States population resides.
4
Allstate 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, and has determined its growth strategy
accordingly. The standard market consists of drivers who meet criteria
indicating that they have low to average risk of loss expectancy. The
non-standard auto insurance market consists of drivers who have
higher-than-average risk profiles due to their driving records, to their lack of
prior insurance or to the types of cars they own. Allstate has achieved the
leading market share in this market. This has been a market in which Allstate
has competed by capitalizing on an established distribution system, technology
and claim handling capabilities and by tailoring pricing and products to reach a
broader market. Allstate plans to continue to develop opportunities in this
market in part, by expanding its independent agent distribution channel.
Life and Savings has been growing its business through the development of
new customer focused products, the establishment of new marketing arrangements,
increased cross-sales of Life and Savings products to existing Allstate
customers, offering a variety of competitive fee-based and interest-sensitive
products to satisfy customer preferences in various interest rate environments,
and leveraging existing scale to increase efficiency and effectiveness, in part,
through investments in technology. Life and Savings' products are marketed
through Allstate agents (including life specialists), banks, independent agents
and brokers and through direct response marketing. Specialized brokers are used
to distribute group pension and structured settlement products not offered by
Allstate=s agency force. Life and Savings' direct response marketing program
principally targets customers of credit card issuers who prefer to purchase,
through the mail or telephone, selected products not offered by Allstate's
agency force.
Allstate's exclusive agency force of approximately 15,500 full-time agents
is at the core of its PP&C distribution system. Allstate also uses over 3,000
independent agents to market a full range of Allstate insurance products to
individuals, mostly in rural markets not served by Allstate agents, and
approximately 13,000 independent agents appointed by Allstate's subsidiary,
Deerbrook Insurance Company ("Deerbrook"), to market non-standard auto business.
Allstate's international operations have included the sale of auto
insurance in Canada for over 40 years. In 1997, Allstate commenced the sale of
private passenger auto insurance in Germany through direct response marketing.
Allstate plans similar direct response marketing of auto insurance in other
western European countries and in Japan. Allstate has also identified areas in
Asia and the Pacific Rim as attractive markets, principally for life insurance,
and plans to pursue these and other international opportunities as an avenue to
grow both its revenues and profitability. Allstate believes that it will take a
number of years before its new and planned international businesses contribute
significantly to its financial results.
Allstate plans to pursue selective business start-ups, acquisitions,
partnerships, and expanded distribution channels, both in the United States and
internationally in the pursuit of its business strategy.
5
PROPERTY-LIABILITY INSURANCE BUSINESS
Allstate's Property-Liability insurance business consists of the PP&C and
Discontinued Lines and Coverages segments. PP&C, which accounted for $19.5
billion (or 78%) of Allstate's 1998 statutory written premiums, writes primarily
private passenger auto and homeowners insurance policies in 50 states, the
District of Columbia, Puerto Rico, Canada and Germany. Operating in
approximately 11,800 locations, Allstate agents produce more than 94.2% of
PP&C's annual statutory written premiums, with the balance generated by
independent agents largely in locations not currently served by Allstate agents.
Discontinued Lines and Coverages consists of business no longer written by
Allstate, including results from environmental, asbestos and mass tort losses,
mortgage pool insurance business and other commercial insurance business in
run-off, as well as the historical results of the commercial and reinsurance
businesses sold in 1996.
PP&C is principally engaged in private passenger auto and homeowners
insurance, and accounted for substantially all of Allstate's total
Property-Liability statutory premiums. Allstate was the country's second largest
personal property and casualty insurer for both private passenger auto and
homeowners insurance in 1997. Although private passenger auto and homeowners
insurance account for the majority of its business, PP&C also writes coverages
for product lines such as motorcycles, motor homes, mechanical breakdown,
renters, condominium, residential and landlord, comprehensive personal
liability, fire, personal umbrella, recreational vehicle, mobile home, boat
owners, parts and labor warranties and selected commercial property and casualty
coverages. PP&C also operates the AEI Group, Inc., whose principal subsidiary
Allstate Motor Club provides members with travel plans and emergency road
service. Allstate customers are also offered access to auto and home equity
loans provided by a third party.
The Company separates the voluntary personal auto insurance business into
two basic categories according to insurance risk; 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
cars they own. Allstate's presence in the non-standard market as well as the
standard market allows Allstate agents to offer insurance products to the vast
majority of drivers who apply for insurance. PP&C has a refined price structure
and policy features which address the special needs of drivers in the
non-standard market. These policies are written at higher than standard rates.
Allstate writes policies covering these risks principally through AIC's
subsidiary, Allstate Indemnity Company. Deerbrook also writes non-standard
insurance through independent agencies. Allstate had a countrywide market share
of approximately 18.5% of the non-standard market in 1997.
As a condition of its license to do business in each state, Allstate, like
all other auto insurers, is required to write or share the cost of private
passenger auto insurance for higher risk
6
individuals who would otherwise be unable to obtain such insurance. This
"Involuntary," or "Shared," market is governed by the applicable laws and
regulations of each state, and policies written in this market are generally
written at higher than standard rates. Allstate has generally experienced losses
in its participation in the shared market.
PP&C, in addition to writing insurance for standard homes, also insures
high value homes and non-standard homes, such as those with increased exposure
given their distance from fire protection services, and also insures risks in
the renters and condominium markets. Allstate has targeted the homeowners
insurance business as a market with substantial profitable growth opportunities
for the Company as the implementation of catastrophe management initiatives
allows the Company to re-enter certain homeowners markets.
Allstate, unlike the majority of its competitors, does not rely on rating
bureaus in establishing prices for its PP&C products. Instead Allstate uses its
proprietary database, which contains many years of its own extensive
underwriting and pricing experience. Accordingly, subject to applicable state
regulations, different prices are derived according to numerous variables which
apply to each specific risk, including, in the case of private passenger auto
insurance, factors relating to the automobile (such as its age, make and model)
as well as factors relating to the insured (such as previous driving record). In
management's opinion, the extensive use and analysis of this database, rather
than rating bureaus, provides PP&C with the basis for its market segmentation
strategy to price risks accordingly.
Allstate has attempted to reduce its PP&C claims costs through centralized
claims administration, specialization and additional training of claims
personnel, and intensive and early investigation, evaluation and negotiation of
claims. During 1998, Allstate completed the implementation of redesigned claim
settlement procedures for auto physical damage claims. In addition, Allstate has
continued the design and testing of new procedures for personal injury claims
and for property claims involving fire and roof damage.
As is true for the property-liability industry in general, first-year costs
attributable to PP&C's products are generally higher than for subsequent years.
Accordingly, customer retention is an important factor in the profitability of
PP&C's products, since policies that remain in force generally become more
profitable over time. Allstate customer retention rates in 1998 for standard and
non-standard auto were approximately the same as in 1997. Retention rates for
homeowners increased slightly in 1998, having declined in 1997, due to the
adverse impact of Allstate's catastrophe management initiatives. These
initiatives are discussed below, under "Catastrophe Exposure." Homeowners'
retention improved significantly in Florida in 1998, after a decline in 1997 due
to the non-renewal and sale of renewal rights of certain homeowners' policies.
The personal lines private passenger auto and homeowners businesses are
highly
7
competitive. As of December 31, 1997 over 1,400 insurance companies were in the
market, with five groups of companies (State Farm, Allstate, Farmers, Nationwide
and Progressive) writing approximately 47% of the private passenger auto
premiums written. Approximately 48% of the homeowners premiums written in the
United States were written by five groups of companies (State Farm, Allstate,
Farmers, Nationwide and Travelers). State Farm maintains the leading share in
the auto and homeowners insurance market and had 20.5% of the auto market and
23.0% of the homeowners market in 1997. Together, State Farm and Allstate had
32.8% and 34.3%, respectively, of the total United States' auto and homeowners
market in 1997.
AIC competes principally on the basis of its name recognition, scope of
distribution system, customer service, use of technology, product features,
breadth of product offerings and price. Additionally, extensive use of its
database to develop proprietary information gives AIC the ability to segment its
market, appropriately price risks and cross-sell its products within its
customer base.
In 1997, approximately $48 billion of industry personal lines premiums were
generated by independent agencies, and the remaining $95 billion of premiums
were generated by insurers placing their products directly with the consumer
through employee agents, independent contractor exclusive agents, direct
response and mail order. Allstate believes its exclusive agency force provides
it with an advantage in distributing PP&C products. However, some competitors,
operating solely with exclusive agents who are independent contractors or
distributing through direct response or mail order marketing, or operating with
non-exclusive independent agents have also been able to operate effective
distribution systems.
Approximately one half of Allstate's approximately 15,500 exclusive agents
are employee agents. In future years, Allstate expects that the percentage of
its agents who are independent contractor exclusive agents will increase
substantially. In 1990, Allstate instituted an independent contractor exclusive
agent contract under which persons are hired for an 18-month period during which
they are trained as agents. Upon completion of the period, Allstate offers
contracts to some of the trainees to serve as independent contractors who are
exclusive agents for Allstate. With very limited exceptions, persons hired since
1990 for eventual consideration as Allstate agents have been hired on this
basis. In addition, employee agents who were hired prior to 1990 have been
permitted to convert to independent contractor exclusive agent status.
At December 31, 1998, independent contractor exclusive agents, including
agents in training to become independent contractor exclusive agents,
represented approximately 47% of Allstate agents. Allstate has a strategic
initiative intended to improve agencies' productivity to sell to and to service
customers and to align local processes, programs and policies, including workers
classification, with Allstate objectives. Allstate has entered into an agreement
with the Internal Revenue Service which permits continuation of the employee
agent programs under specified conditions.
8
CATASTROPHE EXPOSURE AND CATASTROPHE MANAGEMENT
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 loss experienced in any year cannot be
predicted and could be material to results of operations and financial position.
Allstate has experienced two severe catastrophes in recent years, each of which
resulted in losses of approximately $2 billion. While management believes
Allstate's catastrophe management strategies, described below, have reduced the
severity of possible future losses, Allstate continues to be exposed to similar
or greater catastrophes (see ARisk Factors" and AForward-Looking Statements" in
this Form 10-K).
A "catastrophe" is defined by Allstate as an event that produces pre-tax
losses before reinsurance in excess of $1 million involving multiple first party
policyholders. Catastrophes are caused by various events, including hurricanes,
earthquakes, tornadoes, wind and hail storms, and fires. Although catastrophes
can cause losses in a variety of PP&C lines, homeowners insurance has in the
past generated the vast majority of catastrophe-related claims. For Allstate,
major areas of potential losses due to hurricanes include major metropolitan
centers near the eastern and gulf coasts of the United States. Allstate's
exposure to potential earthquake losses in California is now limited by its
participation in the California Earthquake Authority ("CEA"), as described
below. Other areas in the United States in which Allstate is exposed to
potential losses from earthquakes include areas in the central United States
surrounding the New Madrid fault system in the Midwest and faults in and around
Seattle, Washington and Charleston, South Carolina.
Allstate has implemented initiatives to limit, over time, its insurance
exposures in certain regions prone to catastrophes, subject to the requirements
of insurance laws and regulations and as limited by competitive considerations.
These 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 continues to expand its use of deductibles in
certain regions prone to catastrophes. While management believes that its
initiatives have reduced or will reduce Allstate's exposure to catastrophes in
certain geographic regions over time, the extent of such reduction is uncertain
and is constrained by state insurance laws and regulations. See "Regulation -
Shared Markets" below.
Allstate formed Allstate Floridian Insurance Company (" Floridian") and
Allstate Floridian Indemnity Company ("AFI") which are operating to sell and
service residential property customers in Florida. Floridian entered into a
catastrophe reinsurance agreement with a non-affiliated entity which provides
access to 80% of $500 million of catastrophe reinsurance protection for any loss
in excess of approximately $1.00 billion, up to an aggregate limit of $800
million. In addition, Floridian has access to 90% of an estimated $950 million
of reimbursements of losses from the Florida Hurricane Catastrophe Fund
("FHCF").
9
The FHCF has the authority to issue bonds to pay its obligations to
participating insurers. The bonds issued by the FHCF are funded by assessments
on all property and casualty premiums written in the state, except workers'
compensation and accident and health insurance. These assessments are limited to
4% and are recoupable immediately through increases in policyholder rates. A
rate filing or any portion of a rate change attributable entirely to the
assessment is deemed approved when made to the Florida Department of Insurance
(the "Department"), subject to the Department's statutory authority to review
the "adequacy" of any rate at any time.
In addition to direct hurricane losses, Floridian and AFI are also subject
to assessments from the Florida Windstorm Underwriting Association ("FWUA") and
the Florida Property and Casualty Joint Underwriting Association ("FRPCJUA")
which are organizations created to provide coverage for catastrophic losses to
property owners unable to obtain coverage in the private market. Regular
assessments are levied on participating companies if the deficit in the calendar
year is less than or equal to 10% of the Florida property premiums industry-wide
for the year. An insurer may recoup a regular assessment through a surcharge to
policyholders subject to a cap on the amount that can be charged in any one
year. If the deficit exceeds 10%, the FWUA and/or FRPCJUA will fund the deficit
through the issuance of bonds. The costs of these bonds are then funded through
a regular assessment in the first year following the deficit and through
emergency assessments in subsequent years. Companies are required to collect
emergency assessments directly from the policyholders and remit these monies to
the organizations as they are collected. Participating companies are also
required to purchase any unsold bonds issued by the FWUA and/or FRPCJUA. The
insurer must file any recoupment surcharge with the Department at least 15 days
prior to imposing the surcharge on policies. The surcharge may be used
automatically after the expiration of the 15 days, unless the Department has
notified the insurer in writing that any of its calculations are incorrect.
While the Florida statutes are designed so that the ultimate cost is borne
by the policyholders, the exposure to assessments and availability of recoveries
may not offset one another in the insurers' financial statements due to timing
and to the possibility of policies not being renewed in subsequent years.
Allstate entered into a three-year excess of loss reinsurance contract
covering property policies in the northeastern portion of the United States
("Northeast"), effective June 1, 1997. The reinsurance program provides up to
95% of $500 million of reinsurance protection for catastrophe losses in excess
of an estimated $750 million retention subject to an annual limit of $500
million and an aggregate limit of $1.00 billion over a three-year contract
period. The deductibles on residential property policies in New York are being
converted to include a hurricane deductible that is triggered by hurricane
10
winds greater than 100 miles per hour, and at December 31, 1998, this conversion
process was 40% complete.
Allstate participates in the CEA, a privately-financed, publicly-managed
state agency created to provide coverage for earthquake damage. Insurers selling
homeowner insurance in California are required to offer earthquake insurance to
their customers either through their company or by participation in the CEA. All
of Allstate's traditional earthquake policies and mini-earthquake policies have
been either (i) renewed into the CEA, or (ii) not renewed in accordance with
customer requests. Allstate's homeowners policy will continue to include
coverages for losses caused by explosions, theft, glass breakage and fires
following an earthquake, which are not underwritten by the CEA.
Approximately $700 million of the capital needed to create the CEA was
obtained from assessments of participating insurance companies. In 1996,
Allstate's pretax assessment, including related expenses, was approximately $150
million. Should losses arising from an earthquake cause a deficit in the CEA,
additional capital needed to operate the CEA will be obtained through
assessments of participating insurance companies, reinsurance and bond issuances
funded by policyholder assessments. Participating insurers are required to fund
a second assessment, not to exceed $2.15 billion, if the capital of the CEA
falls below $350 million. Participating insurers are required to fund a third
assessment, not to exceed $1.43 billion, if the aggregate CEA earthquake losses
exceed $5.81 billion or the capital of the CEA falls below $350 million. At
December 31, 1998, the CEA's capital balance was approximately $432 million. If
the CEA assesses its member insurers for any amount, the amount of future
assessments on members is reduced by the amounts previously assessed. To date,
the CEA has not assessed member insurers beyond the initial assessment. The
authority of the CEA to assess participating insurers expires when it has
completed twelve years of operation. At the end of 1998, the CEA had completed
two years of operation. All future assessments to participating CEA insurers are
based on their CEA insurance market share as of December 31 of the preceding
year. Assuming its current CEA market share does not materially change, Allstate
does not expect its portion of these additional contingent assessments, if any,
to exceed $540 million, as the likelihood of an earthquake causing losses in
excess of the CEA industry capacity of $5.81 billion is less than .2%.
Management believes Allstate's exposure to earthquake losses in California has
been significantly reduced as a result of its participation in the CEA.
Allstate continues to support passage of legislation in Congress such as
the Homeowner's Insurance Availability Act which could, if enacted, lessen the
impact to Allstate of catastrophic natural disasters such as hurricanes and
earthquakes. Allstate is a founding member of a coalition whose members include
property insurers and insurance agents. This group is promoting a measure that
would provide federal reinsurance to state disaster plans. Proposed legislation,
H.R. 21, was introduced at the beginning of the 106th Congress and was referred
to the House Banking and Financial Services Committee. Allstate is unable to
determine whether, or in what form, such proposed legislation could be enacted
or any resulting effect on Allstate.
11
PROPERTY-LIABILITY CLAIMS AND CLAIMS EXPENSE RESERVES
Allstate establishes property-liability loss reserves to cover its
estimated ultimate liability for losses and loss adjustment expenses with
respect to reported claims and claims incurred but not yet reported as of the
end of each accounting period. In accordance with applicable insurance laws and
regulations and generally accepted accounting principles ("GAAP"), no specific
claim reserves are established until a loss occurs, including a loss from a
catastrophe. Underwriting results of the two Property-Liability segments are
significantly influenced by estimates of property-liability claims and claims
expense reserves (see Note 6 of the Notes to Consolidated Financial Statements
on pages C-48 to C-51 of the Proxy Statement, incorporated herein by reference
in response to Item 8 hereof). These reserves are an accumulation of the
estimated amounts necessary to settle all outstanding claims, including claims
which are incurred but not reported, as of the reporting date. These reserve
estimates are based on known facts and on interpretations of circumstances,
including Allstate'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 effects of inflation are implicitly
considered in the reserving process. The establishment of reserves, including
reserves for catastrophes, is an inherently uncertain process and the ultimate
cost may vary materially from the recorded amounts. 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.
The Company, in the normal course of business, may supplement its claims
and underwriting processes by utilizing third party adjusters, appraisers,
engineers, inspectors, other professionals and information sources to assess and
settle catastrophe and non-catastrophe related claims.
Establishing net loss reserves for environmental, asbestos and mass tort
claims is subject to uncertainties that are greater than those presented by
other types of claims. Among the complications are lack of historical data, long
reporting delays, uncertainty as to the number and identity of insureds with
potential exposure, unresolved legal issues regarding policy coverage,
availability and collectibility 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 clean-up costs represent
insured property damage. Management believes these issues are not likely to be
resolved in the near future. See Note 6 of the Notes to Consolidated Financial
Statements on pages C-48 to C-51 of the Proxy Statement,
12
incorporated herein by reference in response to Item 8 hereof.
The following tables are summary reconciliations of the beginning and
ending property-liability insurance claims and claims expense reserves,
displayed individually for each of the last three years. The first table
presents reserves on a gross (before reinsurance) basis. The end of year gross
reserve balances are reflected in the Consolidated Statements of Financial
Position on page C-32 of the Proxy Statement, incorporated herein by reference
in response to Item 8 hereof. The second table presents reserves on a net (after
reinsurance) basis. The total net property-liability insurance claims and claims
expense amounts are reflected in the Consolidated Statements of Operations on
page C-30 of the Proxy Statement, incorporated herein by reference in response
to Item 8 hereof.
13
GROSS
($ in millions)
Year Ended December 31,
------------------------------------
1998 1997 1996
--------- --------- ---------
Gross reserve for property-liability claims and claims expense,
beginning of year $ 17,403 $ 17,382 $ 17,687
Acquisitions 96 0 0
--------- --------- ---------
Total gross reserve adjusted 17,499 17,382 17,687
Incurred claims and claims expense
Provision attributable to the current year 14,614 14,268 15,186
Decrease in provision attributable to prior years (695) (618) (338)
--------- --------- ---------
Total claims and claims expense 13,919 13,650 14,848
Claim payments
Claims and claims expense attributable to current year 8,909 8,300 8,073
Claims and claims expense attributable to prior years 5,628 5,329 5,711
Claims and claims expense attributable to disposition of operations 0 0 1,369
--------- --------- ---------
Total payments 14,537 13,629 15,153
--------- --------- ---------
Gross reserve for property-liability claims and claims expense,
end of year as shown on 10-K loss reserve development table $ 16,881 $ 17,403 $ 17,382
========= ========= =========
NET
($ in millions)
Year Ended December 31,
----------------------------------
1998 1997 1996
--------- --------- ---------
Net reserve for property-liability claims and claims expense,
beginning of year $ 15,773 $ 15,598 $ 16,156
Acquisitions 58 0 0
--------- --------- ---------
Total net reserves adjusted 15,831 15,598 16,156
Incurred claims and claims expense
Provision attributable to the current year 14,301 14,013 14,823
Decrease in provision attributable to prior years (700) (677) (336)
--------- --------- ---------
Total claims and claims expense 13,601 13,336 14,487
Claim payments
Claims and claims expense attributable to current year 8,521 8,148 7,522
Claims and claims expense attributable to prior years 5,488 5,013 5,787
Claims and claims expense attributable to disposition of operations 0 0 1,736
--------- --------- ---------
Total payments 14,009 13,161 15,045
--------- --------- ---------
Net reserve for property-liability claims and claim expense,
end of year as shown on 10-K loss reserve development table (1) $ 15,423 $ 15,773 $ 15,598
========= ========= =========
(1) Reserves for claims and claims expense are net of reinsurance of $1.46 billion, $1.63 billion and $1.78 billion,
at December 31, 1998, 1997 and 1996, respectively.
The year-end 1998 gross reserves of $16.88 billion for property-liability
insurance claims and claims expense, as determined under GAAP, were $1.90
billion more than the reserve balance of $14.98 billion recorded on the basis of
statutory accounting practices for reports provided to state regulatory
authorities. The principal difference is the reinsurance recoverable from third
parties totaling $1.46 billion that reduces reserves for statutory reporting and
is recorded as an asset for GAAP reporting. Additional differences are caused by
the reserves of the international subsidiaries which are not included in the
combined United States statutory statement.
As the tables above illustrate, Allstate's net reserve for
property-liability insurance claims and claims expense at the end of 1997
developed favorably in 1998 by $700 million, compared to favorable development
of the gross reserves of $695 million. Net reserve development in 1998 and 1997
was more favorable than favorable gross reserve development in these years. This
relationship was due to the fact that Allstate's principal Property-Liability
lines, such as private passenger auto and homeowners, were not significantly
affected by reinsurance, whereas Discontinued Lines and Coverages involved a
higher level of ceded reinsurance protection. The more favorable development in
the net reserves was due to higher anticipated reinsurance cessions on increased
reserve reestimates for Discontinued Lines and Coverages. In 1996, following
completion of a comprehensive review of available reinsurance for Discontinued
Lines and Coverages, the Company decreased ceded loss reserves. This decrease
offset the favorable effect of higher reinsurance cessions related to increased
reestimates of gross reserves for Discontinued Lines and Coverages. See
"Property-Liability Claims and Claims Expense Reserves" on pages C-10 to C-14 of
the Proxy Statement, incorporated herein by reference in response to Item 7
hereof. For further discussion of the Company's reinsurance programs, see
"Property-Liability Reinsurance Ceded" on pages C-13 and C-14 of the Proxy
Statement, incorporated herein by reference in response to Item 7 hereof.
The loss reserve development table below illustrates the change over time
of the net reserves established for property-liability insurance claims and
claims expense at the end of various calendar years. The first section shows the
reserves as originally reported at the end of the stated year. The second
section, reading down, shows the cumulative amounts paid as of the end of
successive years with respect to that reserve liability. The third section,
reading down, shows retroactive reestimates of the original recorded reserve as
of the end of each successive year which is the result of Allstate's expanded
awareness of additional facts and circumstances that pertain to the unsettled
claims. The last section compares the latest reestimated reserve to the reserve
originally established, and indicates whether or not the original reserve was
adequate or inadequate to cover the estimated costs of unsettled claims. The
table also presents the gross reestimated liability as of the end of the latest
reestimation period, with separate disclosure of the related reestimated
reinsurance recoverable. This presentation appears for all periods in which the
income recognition provisions of Statement of Financial Accounting Standards No.
113 have been applied.
16
The loss reserve development table is cumulative and, therefore, ending balances
should not be added since the amount at the end of each calendar year includes
activity for both the current and prior years.
Loss Reserve Development
($ in millions)
December 31, (1)
--------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Gross Reserves for
Unpaid Claims and
Claims Expense $10,035 $10,962 $12,117 $13,136 $14,902 $15,209 $16,414 $17,326 $17,382 $17,403 $16,881
Deduct: Reinsurance
Recoverable 1,180 1,066 1,028 1,066 1,419 1,338 1,298 1,490 1,784 1,630 1,458
----- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Reserve For Unpaid
Claims and Claims Expense $8,855 $9,896 $11,089 $12,070 $13,483 $13,871 $15,116 $15,836 $15,598 $15,773 $15,423
- -------------------------
Paid (cumulative) as of:
- ------------------------
One year later 3,516 4,295 4,558 4,550 4,955 4,472 4,748 5,787 5,013 5,488
Two years later 5,279 6,338 6,723 6,688 7,068 6,519 7,749 8,232 7,952
Three years later 6,433 7,584 8,010 7,935 8,283 8,273 9,247 10,083
Four years later 7,161 8,338 8,778 8,694 9,430 9,140 10,400
Five years later 7,611 8,824 9,279 9,508 9,985 9,849
Six years later 7,927 9,180 9,883 9,907 10,467
Seven years later 8,189 9,651 10,196 10,284
Eight years later 8,560 9,921 10,512
Nine years later 8,803 10,206
Ten years later 9,065
Reserve Reestimated as of:
- --------------------------
End of year 8,855 9,896 11,089 12,070 13,483 13,871 15,116 15,836 15,598 15,773 15,423
One year later 8,891 10,312 11,367 11,990 13,081 13,159 14,691 15,500 14,921 15,073
Two years later 9,006 10,617 11,576 11,909 12,745 12,890 14,295 14,917 14,450
Three years later 9,323 10,990 11,680 11,905 12,735 12,832 13,928 14,700
Four years later 9,686 11,105 11,777 12,010 12,877 12,617 13,835
Five years later 9,817 11,245 11,954 12,322 12,830 12,585
Six years later 9,974 11,447 12,378 12,395 12,895
Seven years later 10,212 11,962 12,503 12,499
Eight years later 10,762 12,091 12,612
Nine years later 10,896 12,216
Ten years later 11,022
Initial reserve in excess of (less than) reestimated reserve:
- -------------------------------
Amount ($2,167) ($2,320) ($1,523) ($429) $588 $1,286 $1,281 $1,136 $1,148 $700
Percent (24.5%) (23.4%) (13.7%) (3.6%) 4.4% 9.3% 8.5% 7.2% 7.4% 4.4%
Gross Reestimated Liability-Latest $14,723 $14,274 $15,394 $16,238 $16,267 $16,708
Reestimated Recoverable-Latest 1,828 1,689 1,559 1,538 1,817 1,635
-----------------------------------------------------
Net Reestimated Liability-Latest $12,895 $12,585 $13,835 $14,700 $14,450 $15,073
Gross Cumulative Excess (Deficiency) $179 $935 $1,020 $1,088 $1,115 $695
=====================================================
(1) For 1990 through 1995, this loss reserve development table excludes ARCO claims and claims expense, due to the unavailability
of loss reserve development information for these claims on a comparable basis. ARCO was sold in 1996.
17
The subsequent reduction in the net reserves established since December 31,
1993 shown in the foregoing table reflects favorable severity trends that the
Company has experienced, as more fully discussed below. The principal cause for
the initial reserves established at the end of 1991, and all previous years
reflected in the table, needing to be increased over the time frame in the above
table is the cumulative adverse reserve development on environmental, asbestos
and mass tort claims, virtually all of which relates to 1984 and prior years.
There are significant uncertainties in estimating the amount of Allstate's
environmental, asbestos and mass tort 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, complex unresolved legal issues
regarding policy coverage, availability of reinsurance and the extent and timing
of any such contractual liability. Courts have reached different and sometimes
inconsistent conclusions as to when the loss occurred and what policies provide
coverage; what claims are covered; whether there is an insured obligation to
defend; how policy limits are determined; how policy exclusions are applied and
interpreted; and whether clean-up costs represent insured property damage. These
issues are not likely to be resolved in the near future. As a result of these
issues, the ultimate cost of these claims may generate losses that vary
materially from the amount currently reserved.
Allstate has gained access to complex databases developed by outside
experts to estimate the cost of liabilities for environmental claims. Allstate's
policy files were compared to the databases to determine an estimate of the
Company's potential environmental loss. The Company also refined its own
estimation techniques to estimate environmental and asbestos losses. Allstate
has used a combination of these resources, along with an extensive internal
review of its current claim exposures to estimate environmental and asbestos
reserves. The Company has also performed in-depth analysis of its reinsurance
recoverables. During 1996, based upon the Company's re-evaluation, loss reserves
for environmental and asbestos exposures, net of reinsurance, were increased by
$172 million and $72 million, respectively. These studies and re-evaluations
resulted in Allstate's actions to increase reserves as described in
AProperty-Liability Claims and Claims Expense Reserves" on pages C-10 to C-14 of
the Proxy Statement, incorporated herein by reference in response to Item 7
hereof. Allstate updates its evaluations of environmental, asbestos and mass
tort reserves annually. While Allstate believes the improved actuarial
techniques and databases described above have assisted in its ability to
estimate environmental, asbestos and mass tort net loss reserves, these
refinements may prove to be inadequate indicators of the extent of probable
loss. See note 6 of the Notes to the Consolidated Financial Statements on pages
C-48 to C-51 of the Proxy Statement, incorporated herein by reference in
response to Item 8 hereof.
18
The following table is derived from the Loss Reserve Development table and
summarizes the effect of reserve reestimates, net of reinsurance, on calendar
year operations for the same ten-year period ended December 31, 1998. The total
of each column details the amount of reserve reestimates made in the indicated
calendar year and shows the accident years to which the reestimates are
applicable. The amounts in the total accident year column on the far right
represent the cumulative reserve reestimates for the indicated accident year(s).
Effect of Net Reserve Reestimates on
Calendar Year Operations
($ in millions )
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 TOTAL
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----
BY ACCIDENT
YEAR
1988 & PRIOR $36 $115 $317 $363 $131 $157 $238 $550 $134 $126 $2,167
1989 301 (12) 10 (16) (17) (36) (35) (5) (1) 189
1990 (27) (164) (11) (43) (25) (91) (4) (16) (381)
1991 (289) (185) (101) (72) (112) (52) (5) (816)
1992 (321) (332) (115) (170) (120) (39) (1,097)
1993 (376) (259) (200) (168) (97) (1,100)
1994 (156) (338) (152) (61) (707)
1995 60 (216) (124) (280)
1996 (94) (254) (348)
1997 (229) (229)
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------
TOTAL $36 $416 $278 ($80) ($402) ($712) ($425) ($336) ($677) ($700) ($2,602)
===== ==== ==== ===== ====== ====== ====== ====== ====== ====== ========
Favorable calendar year reserve development in 1992 through 1998 was the
result of favorable severity trends in each of the seven years, which more than
offset adverse development in Discontinued Lines and Coverages.
The favorable severity trend during this seven-year period was largely due
to lower than anticipated medical cost inflation for personal auto injury
claims. Improvements in the Company=s claim settlement processes are also
believed to have contributed to favorable development since 1995. The reduction
in the anticipated medical cost inflation trend has emerged over time as actual
claim settlements validated the effect of the steady decline in the rate of
inflation. In addition, while the claim settlement process changes are believed
to have contributed to favorable severity trends on closed claims, these changes
introduce a greater degree of variability in reserve estimates for the remaining
outstanding claims at December 31, 1998. Future reserve releases, if any, are
expected to be adversely impacted by anticipated increases in medical cost
inflation rates. See ARisk Factors Affecting Allstate" and "Forward-Looking
Statements" in this Form 10-K.
19
DISCONTINUED LINES AND COVERAGES
An Allstate subsidiary wrote excess and surplus lines coverages from 1972
to 1985, including professional liability coverages, principally on claims-made
coverage forms. The subsidiary also wrote substantial umbrella and excess
liability coverages on an occurrence basis, including medical and other product
liability coverages, for major United States corporations. In 1985, the
subsidiary was merged into AIC with AIC assuming all of its assets and
liabilities. Since the early 1980's, Allstate has experienced significant
increases in losses for years prior to 1980 arising out of the subsidiary's
umbrella and excess liability coverage for large corporations. Since the late
1980's, most of these losses have related to environmental damages,
asbestos-related damages or mass-tort settlements. AIC continues to be involved
in coverage litigation with the subsidiary's insureds.
In addition, during the late 1960's and through the early 1980's Allstate's
reinsurance business unit wrote treaty and facultative reinsurance covering
general liability primary policies, including policies for major producers of
asbestos products. During approximately the same period, Allstate's reinsurance
business unit wrote reinsurance coverage on liability policies with major United
States corporations that have since become involved in environmental and
asbestos claims. Such companies may have been involved with hazardous wastes in
a variety of ways including as manufacturers, haulers, dump site owners, or
through a combination of these activities. Allstate's reinsurance business unit
continues to be involved in coverage litigation and arbitration with ceding
companies and their insureds involving liability for environmental and asbestos
damages claims. In 1986, Allstate ceased writing business with ceding companies
which tended to insure larger corporations with potential environmental and/or
asbestos damage exposures, and its underwriting focus was redirected toward
smaller, more regionalized insurers who focus on property and casualty coverages
and who have underwriting standards that are considered prudent by Allstate.
Also 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
asbestos exclusions. 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 environmental and asbestos exposures are primarily limited to
policies written in periods prior to 1986 with the preponderance of the losses
emanating from policies written in the 1970's. New environmental and asbestos
claims, however, continue to be reported. Allstate has established substantial
reserves for the environmental and asbestos damage claims, and for mass tort
exposures. Mass tort exposures primarily relate to product liability claims,
such as those for medical devices and other products, and general liabilities.
However, there are significant inherent uncertainties in estimating the ultimate
cost of these claims, as discussed below. Further information regarding the
foregoing is contained in AProperty-Liability Claims and Claims Expense
Reserves" on pages C-10 to C-14 of the Proxy Statement, incorporated herein by
reference in response to Item 7 hereof. For information regarding Superfund
proposed legislation, see "Regulatory Initiatives and Proposed Legislation"
below.
20
LIFE AND SAVINGS BUSINESS
Life and Savings markets a broad line of life insurance, savings and group
pension products. Life insurance includes traditional products such as whole
life and term life insurance, as well as universal life, variable life and other
interest-sensitive life products. Savings products include both deferred
annuities, such as variable annuities and fixed rate single premium deferred
annuities, flexible premium deferred annuities and immediate annuities such as
structured settlement annuities. Life and Savings' group pension products
include guaranteed investment contracts and retirement annuities. The assets and
liabilities relating to flexible premium deferred variable annuities, variable
life, variable universal life and certain guaranteed investment contracts are
legally segregated and reflected as assets and liabilities of the Separate
Accounts. In 1998, annuity premiums and deposits represented 56% of Life and
Savings' total statutory premiums and deposits.
Life and Savings competes principally on the basis of its name recognition,
scope of its distribution systems, customer service and focus, breadth of
product offerings, product features, its financial strength, claims-paying
ability ratings, and price, and with respect to variable life and annuity
products, management and investment performance of, and various investment
choices in, its Separate Account portfolio of funds.
Life and Savings markets individual and group life insurance, savings and
group pension products and reaches a broad market of potential customers
throughout the United States and in other countries through Allstate agents
(including life specialists), banks, independent agents and brokers and through
direct response marketing. Products bearing the "Allstate Life Insurance
Company" name are generally sold by Allstate agents, specialized brokers, and
through direct marketing techniques. Other products, many of which are of
similar types to those bearing the "Allstate Life Insurance Company" name but
which bear other brand names, are distributed through independent insurance
agents, brokers, banks and direct marketing techniques. Life insurance in force,
net of reinsurance, was $202 billion at December 31, 1998 and $194 billion at
December 31, 1997. As of December 31, 1998, Life and Savings had $41.86 billion
of investments, including $10.10 billion of Separate Account assets.
ALIC subsidiary Northbrook Life Insurance Company ("Northbrook") has a strategic
alliance with Dean Witter Reynolds, Inc., a wholly-owned subsidiary of Morgan
Stanley Dean Witter & Co. ("Dean Witter") for the marketing and distribution of
Northbrook's life and annuity products through Dean Witter's broker sales force.
ALIC subsidiary Glenbrook Life and Annuity Company has also entered into
marketing arrangements with banks and brokers for the sale of life and annuity
products, including an arrangement with the AIM mutual fund group under which
AIM markets Glenbrook Life and Annuity Company variable annuities. In 1998
Glenbrook Life and Annuity also began distributing a no-load variable annuity
product through direct marketing. Life and Savings is committed to broadening
its bank and broker distribution outlets in an effort to increase the sales of
its annuity products, and to participate in the market for life insurance
products sold through banks. Although Allstate currently benefits from
agreements with financial services entities who market and distribute its
products, change in control of these non-affiliated entities with which Allstate
has alliances could have a detrimental effect on Life and Savings sales. See
21
"Recent Developments," above, concerning the joint venture between ALIC and
Putnam Investments to sell variable insurance products.
Life and Savings utilizes certain services shared with AIC such as
investment, finance, information technology and legal services. Although Life
and Savings' management develops overall strategies for its business, the
primary management of each distribution channel is largely decentralized.
Accordingly, management of each distribution channel is primarily responsible
for determining its own product mix and product features appropriate for its
target market. Life and Savings believes that its range of distribution channels
promotes flexibility, extends market reach, reduces dependency on any one
distribution system, and allows Life and Savings to focus on distinct, generally
non-overlapping markets.
The establishment of reserve and contractholder fund liabilities in
recognition of Allstate's future benefit obligations under life and annuity
policies and other Life and Savings products are discussed in Note 2 of the
Notes to the Consolidated Financial Statements on pages C-36 to C-40 of the
Proxy Statement, incorporated herein by reference in response to Item 8 hereof.
The market for financial services, including the various types of life
insurance and annuities sold by Life and Savings, is highly competitive. As of
December 31, 1998, there were approximately 830 groups of life insurance
companies in the United States, most of which offer one or more products similar
to those offered by Life and Savings and many of which use similar marketing
techniques. Based on information contained in statements filed with insurance
departments, in 1997 approximately 68% of the life insurance and annuity
premiums and deposits were written by 25 groups of companies. Life and Savings
ranked 13th based on ordinary life insurance in force and 20th based on
statutory admitted assets. Banks and savings and loan associations in certain
jurisdictions compete with Life and Savings in the sale of life insurance
products. In addition, because certain life insurance and annuity products
include a savings or investment component, competition also comes from brokerage
firms, investment advisors and mutual funds as well as from banks and other
financial institutions. Despite a large number of life company acquisitions in
recent years, the life insurance and annuity market continues to be highly
fragmented and competitive.
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) inventory and assessment of
22
affected systems and equipment, 2) remediation and compliance of systems and
equipment through strategies that include the replacement or enhancement of
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 three steps of this plan, assessment,
remediation and testing, including clock-forward testing which is being
performed on the Company's systems and non-IT, are mostly complete for the
Company's critical systems. In April 1998, the Company announced its main
premium application system, ALERT, which manages more than 20 million auto and
homeowners policies is Year 2000 compliant. The Company is relying on other
remediation techniques for its midrange and personal computer environments, and
certain mainframe applications.
Certain investment processing systems, midrange computers and personal
computer environments are planned to be remediated by the middle of 1999, and
some systems and non-IT related to discontinued or non-critical functions of the
Company are planned to be abandoned by the end of 1999.
The Company is currently in the process of identifying key processes and
developing contingency plans in the event that the systems supporting these key
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. This
assessment has included the solicitation of external counterparties and
suppliers, evaluating responses received and testing third party interfaces and
interactions to determine compliance. Currently the Company has solicited
approximately 1,500 and has received responses from approximately 75% of its
counterparties and suppliers. Allstate will continue its efforts to solicit
responses on Year 2000 compliance from these parties. The majority of these
responses have stated that the counterparties and suppliers believe that they
will be Year 2000 compliant and that no transactions will be affected. However,
some key vendors have not provided affirmative responses to date. The Company
has also decided to test certain interfaces and interactions to gain additional
assurance on third party compliance. If key vendors are unable to meet the Year
2000 requirement, Allstate is preparing 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 currently does not have sufficient information to determine whether or
not all of its external counterparties and suppliers will be Year 2000 ready.
The Company is currently assessing the level of Year 2000 risk
associated with certain personal lines policies that have been issued. To date,
no changes have been made in coverages provided by the Company's personal auto
and homeowners lines policies to specifically exclude coverage for Year 2000
23
related claims. This does not mean that all losses, or any particular type of
loss, that might be related to the Year 2000 will be covered. Rather, all claims
will continue to be evaluated on a case-by-case basis to determine whether
coverage is available for a particular loss in accordance with the applicable
terms and conditions of the policy in force.
The Company also has investments which have been publicly and privately
placed. The Company may 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 all
current portfolio holdings. Any recommended actions with respect to individual
investments are determined by taking into account the potential impact of Year
2000 on the issuer. Contingency plans are being created for any securities held
whose issuer is determined to not be Year 2000 compliant.
The Company presently believes that it will resolve the Year 2000 issue in
a timely manner. Year 2000 costs are expensed as incurred, therefore the
majority of expenses related to this project have been incurred as of December
31, 1998. The Company estimates that approximately $125 million in costs will be
incurred between the years of 1995 and 2000. These amounts include costs
directly related to fixing Year 2000 issues, such as modifying software and
hiring Year 2000 solution providers. These amounts also include costs incurred
to replace certain non-compliant systems which would not have been otherwise
replaced.
CAPITAL REQUIREMENTS
The capacity for Allstate's premium growth, like that of other insurance
companies, is in part a function of its operating leverage. Operating leverage
for property-liability insurance companies is measured by the ratio of net
premiums written to statutory surplus. Ratios in excess of 3 to 1 are considered
outside the usual range by insurance regulators and rating agencies. AIC's
premium to surplus ratio was 1.4 to 1 at December 31, 1998 and 1997. Maintaining
appropriate levels of statutory surplus is considered important by Allstate's
management, state insurance regulatory authorities, and the agencies that rate
insurers' claims-paying abilities and financial strength.
Failure to maintain certain levels of statutory capital and surplus could
result in increased scrutiny or, in some cases, action taken by state regulatory
authorities and/or rating agencies. Increased public and regulatory concerns
regarding the financial stability of participants in the insurance industry have
resulted in greater emphasis being placed by policyholders upon insurance
company ratings and have created, particularly with respect to certain life
insurance products, some measure of competitive advantage for insurance carriers
with higher ratings. Failure to maintain claims-paying and financial strength
ratings could negatively affect the Company's competitiveness.
The National Association of Insurance Commissioners ("NAIC") has a standard
for assessing the solvency of insurance companies, which is referred to as
risk-based capital ("RBC"). The requirement consists of a formula for
determining each insurer's RBC and a model law specifying regulatory actions if
an insurer's RBC falls below specified levels. The RBC
24
formula for life insurance companies establishes capital requirements relating
to insurance risk, business risk, asset risk and interest rate risk. The RBC
formula for property-liability companies includes asset and credit risks, but
places more emphasis on underwriting factors for reserving and pricing. At
December 31, 1998, RBC for each of Allstate's domestic insurance companies
exceeded the required capital levels. See "Capital Resources" on pages C-19 and
C-20 of the Proxy Statement, incorporated herein by reference in response to
Item 7 hereof.
Allstate enters into certain intercompany insurance and reinsurance
transactions for its Property-Liability and Life and Savings segments. Allstate
enters into these transactions in order to maintain underwriting control and
spread insurance risk among various legal entities. These reinsurance agreements
have been approved by the appropriate regulatory authorities. All intercompany
transactions are eliminated in the Company=s consolidated financial statements.
INVESTMENTS
Allstate follows a strategy to manage its exposure to market risk. Market
risk is the risk that the Company will incur losses due to adverse changes in
market rates and prices. The Company=s primary market risk exposures are to
changes in interest rates, although the Company also has certain exposures to
changes in equity prices and foreign currency exchange rates. The active
management of market risk is integral to the Company's operations. The Company
may use the following tools to manage its exposure to market risk within defined
tolerance ranges: 1) rebalance its existing asset or liability portfolios, 2)
change the character of future investments purchased or 3) use derivative
instruments to modify the market risk characteristics of existing assets and
liabilities or assets expected to be purchased. The Company seeks to earn
returns that enhance its ability to offer competitive rates and prices to
customers while contributing to attractive and stable profits and long-term
capital growth for the Company. Accordingly, the Company=s investment decisions
and objectives are a function of the underlying risks and product profiles of
each primary business operation.
At December 31, 1998, Allstate's entire fixed income securities and equity
securities portfolios were designated as "available for sale" and carried in the
Company's financial statements at fair value. While the Company generally holds
its fixed income securities for the long-term, management classifies these fixed
income securities as available for sale to maximize the Company=s flexibility in
responding to changes in market conditions. Changes in the fair value of these
securities, net of deferred income taxes and deferred acquisition costs and
benefit reserve adjustments on certain life insurance products, are reflected as
a separate component of shareholders' equity. For discussion of the composition
of the Company's investment portfolio, see "Investments" on pages C-22 to C-24
of the Proxy Statement, incorporated herein by reference in response to Item 7
hereof, and Note 4 of the Notes to the Consolidated Financial Statements on
pages C-41 to C-44 of the Proxy Statement, incorporated herein by reference in
response to Item 8 hereof.
REGULATION
Allstate is subject to extensive regulation and supervision in the
jurisdictions in which it does business. This regulation has a substantial
effect on the business of Allstate, primarily on Allstate's PP&C segment. This
regulatory oversight includes, for example, matters relating to licensing and
examination, rate setting, trade practices, policy forms, limitations on the
nature and amount of certain investments,
25
claims practices, mandated participation in shared markets and guaranty funds,
reserve adequacy, insurer solvency, transactions with affiliates, the amount of
dividends that may be paid, and restrictions on underwriting standards. For
discussion of statutory financial information, see note 12 of the Notes to
Consolidated Financial Statements on pages C-57 and C-58 of the Proxy Statement,
incorporated herein by reference in response to Item 8 hereof; and for
discussion of regulatory contingencies, see note 9 of the Notes to Consolidated
Financial Statements on pages C-52 to C-55 of the Proxy Statement, incorporated
herein by reference in response to Item 8 hereof.
LIMITATIONS ON DIVIDENDS BY INSURANCE SUBSIDIARIES - The Company is a legal
entity separate and distinct from its subsidiaries. As a holding company with no
other business operations, its primary sources of cash to meet its obligations,
including principal and interest payments with respect to indebtedness, are
dividends and other statutorily permitted payments from AIC. AIC, as a
domiciliary of Illinois, is subject to the Illinois insurance laws and
regulations. In Illinois, a domestic stock insurer may, without prior regulatory
approval, pay ordinary dividends from statutory surplus which at the time of
declaration is not less than the minimum required for the kind of insurance
business that such company is authorized to conduct. Under the Illinois
Insurance Code, AIC's surplus following any transaction with affiliates or
dividends, including distributions to its shareholder or other security holders,
must be reasonable in relation to AIC's outstanding liabilities and must be
adequate to meet its financial needs. The Illinois Insurance Code allows
"extraordinary dividends" to be paid after thirty days notice to the Illinois
Insurance Department, unless disapproved or sooner approved during such thirty
day period. "Extraordinary dividends" for these purposes are defined as any
dividend or distribution which together with any other dividend or distribution
made within the preceding 12 months exceeds the greater of (i) 10% of the
insurance company's statutory surplus as of the preceding December 31, or (ii)
its statutory net income for the year ended on the preceding December 31. The
maximum amount of dividends that AIC can distribute during 1999 without prior
approval of the Illinois Department of Insurance is $2.96 billion. If insurance
regulators determine that payment of a dividend or any other payments to an
affiliate (such as payments under a tax sharing agreement, payments for employee
or other services, or payments pursuant to a surplus note) would be hazardous to
such insurance company's policyholders or creditors, the regulators may block
such payments that would otherwise be permitted without prior approval.
HOLDING COMPANY REGULATION - The Company and AIC are currently insurance
holding companies subject to regulation throughout jurisdictions in which
Allstate's insurance subsidiaries do business. Certain of AIC's and ALIC's
subsidiaries are property-liability and life insurance companies organized under
the respective insurance codes of Arizona, Florida, Illinois, Nebraska, New York
and Texas. The insurance codes in such states contain similar provisions
(subject to certain variations) to the effect that the acquisition or change of
"control" of a domestic insurer or of any person that controls a domestic
insurer cannot be consummated without the prior approval of the relevant
insurance regulator. In general, a presumption of "control" arises from the
ownership, control, possession with the power to vote or possession of proxies
with respect to 10% or more of the voting securities of a domestic insurer or of
a person that controls a domestic insurer. In Florida, regulatory approval must
be obtained prior to the acquisition of 5% or more of the voting securities of a
domestic stock insurer or of a controlling company. In addition, certain state
insurance laws contain provisions that require pre-acquisition notification to
state agencies of a change in control with respect to a non-domestic insurance
company admitted in that state.
26
hile such pre-acquisition notification statutes do not authorize the state
agency to disapprove the change of control, such statutes do authorize certain
remedies, including the issuance of a cease and desist order with respect to the
non-domestic admitted insurer if certain conditions exist, such as undue market
concentration. Thus, any transaction involving the acquisition of 10% or more
(5% in Florida) of the Company's common stock would generally require prior
approval by the state insurance departments in Arizona, Florida, Illinois,
Nebraska, New York and Texas and would require the pre-acquisition notification
in those states which have adopted pre-acquisition notification provisions and
wherein Allstate's insurance subsidiaries are admitted to transact business.
Such approval requirements may deter, delay or prevent certain transactions
affecting the ownership of the Company's common stock.
RATE REGULATION - Most states have insurance laws requiring that
property-liability rate schedules, policy or coverage forms, and other
information be filed with the state's regulatory authority. In many cases, such
rates and/or policy forms must be approved prior to use. While they vary from
state to state, the objectives of the rating laws are generally the same: a rate
must be adequate, not excessive, and not unfairly discriminatory.
Property-liability insurers are generally unable to effect rate increases
with respect to a coverage until sometime after the costs associated with such
coverage have increased. The speed at which an insurer can change rates in
response to the competition or to increasing costs depends, in part, on whether
the rating laws are administered as (i) prior approval, (ii) file-and-use, or
(iii) use-and-file laws. In states having prior approval laws, a rate must be
approved by the regulator before it may be used by the insurer. In states having
file-and-use laws, the insurer does not have to wait for the regulator's
approval to use a rate, but the rate must be filed with the regulatory authority
prior to being used. A use-and-file law requires an insurer to file rates within
a certain period of time after the insurer begins using the rates. Approximately
one half of the states, including California and New York, have prior approval
laws. States such as Florida, Illinois and Michigan have both use-and-file and
file-and-use laws or regulations, depending upon the line of coverage. Under all
three types of rating systems, the regulator has the authority to disapprove the
rate subsequent to its filing.
State regulators have broad discretion in judging whether an insurer's rate
or proposed rate is adequate, not excessive and not unfairly discriminatory. An
insurer's ability to adjust its rates in response to competition or to
increasing costs is often dependent on an insurer's ability to demonstrate to
the regulator that its rates or proposed rates meet the objectives of the rate
making laws. In those states that significantly restrict an insurer's discretion
in selecting the business that it wants to write, an insurer can manage its risk
of loss by charging a price that matches the cost of providing the insurance. In
those states that significantly restrict an insurer's ability to charge a price
that matches the cost of providing the insurance, the insurer can manage its
risk of loss by being more selective in the type of business it writes. When a
state significantly restricts both underwriting and pricing, it becomes more
difficult for an insurer to maintain its profitability.
Changes in Allstate=s claim settlement process which may have contributed
to favorable severity trends on closed bodily injury claims since 1995, and to a
slowing of loss payments and an increase in the number of outstanding claims,
will require Allstate to actuarially adjust loss information used in its rate
application process.
27
From time to time, the private passenger auto insurance industry has come
under pressure from state regulators, legislators and special interest groups to
reduce, freeze or set rates at levels that do not, in Allstate=s management's
view, correspond with underlying costs. Some of this activity can result in
legislation and/or regulations which adversely affect the profitability of
Allstate's auto insurance line of business in various states. Adverse
legislative and regulatory activity constraining Allstate's ability to
adequately price insurance coverage may occur in the future. Similar pressures
have been experienced regarding rates for homeowners insurance, as regulators in
catastrophe prone states struggle to identify an acceptable methodology to price
for catastrophe exposure. The impact of the insurance regulatory environment on
Allstate's results of operations in the future is not predictable.
SHARED MARKETS - As a condition of its license to do business in various
states, Allstate is required to participate in mandatory property-liability
shared market mechanisms or pooling arrangements, which provide various
insurance coverages to individuals or other entities that otherwise are unable
to purchase such coverage voluntarily provided by private insurers. Underwriting
results related to these organizations have been immaterial to the results of
operations.
GUARANTY FUNDS - Under state insurance guaranty fund laws, insurers
doing business in a state can be assessed, up to prescribed limits, for certain
obligations of insolvent insurance companies to policyholders and claimants.
Allstate's expenses related to these funds have been immaterial. See "Pending
Accounting Standards" on page C-27 of the Proxy Statement, incorporated herein
by reference in response to Item 7 hereof.
INVESTMENT REGULATION - Allstate is subject to state laws and regulations
that require diversification of its investment portfolio and limit the amount of
investments in certain investment categories. Failure to comply with these laws
and regulations would cause non-conforming investments to be treated as
non-admitted assets for purposes of measuring statutory surplus and, in some
instances, would require divestiture. As of December 31, 1998, Allstate's
investment portfolio complied with such laws and regulations in all material
respects.
REGULATORY INITIATIVES AND PROPOSED LEGISLATION - The state insurance
regulatory framework has during recent years come under increased federal
scrutiny, and certain state legislatures have considered or enacted laws that
alter and, in many cases, increase state authority to regulate insurance
companies and insurance holding company systems. Further, the NAIC and state
insurance regulators are re-examining existing laws and regulations,
specifically focusing on insurance company investments, issues relating to the
solvency of insurance companies, interpretations of existing laws and the
development of new laws. Allstate is unable to predict whether any state or
federal legislation will be enacted to change the nature or scope of regulation
of the insurance industry, or what effect any such legislation would have on the
Company.
Environmental pollution clean-up is the subject of both federal and
state regulation. By some estimates, there are thousands of potential waste
sites subject to clean-up. The insurance industry is involved in extensive
litigation regarding coverage issues. The Comprehensive Environmental Response
Compensation and Liability Act of 1980 ("Superfund") and comparable state
statutes ("mini-Superfund")
28
govern the clean-up and restoration by "Potentially Responsible Parties"
("PRP's"). Superfund and the mini-Superfunds (Environmental Clean-up Laws or
"ECLs") establish a mechanism to pay for clean-up of waste sites if PRP's fail
to do so, and to assign liability to PRP's. The extent of liability to be
allocated to a PRP is dependent on a variety of factors. Further, the number of
waste sites subject to clean-up is unknown. Very few sites have been subject to
clean-up to date. The extent of clean-up necessary and the assignment of
liability has not been established. The insurance industry, including Allstate,
is disputing many such claims. Key coverage issues include whether Superfund
response costs are considered damages under the policies, trigger of coverage,
applicability of pollution exclusions, the potential for joint and several
liability and definition of an occurrence. Similar coverage issues exist for
clean-up and waste sites not covered under Superfund. To date, courts have been
inconsistent in their rulings on these issues. Allstate's exposure to liability
with regard to its insureds which have been, or may be, named as PRPs is
uncertain. See "Discontinued Lines and Coverages", above.
Superfund reform proposals have been introduced in Congress, but none has
been enacted at the date of this filing. Allstate will support federal
legislation which provides for the resolution of Superfund related claims
against insurers at a cost which is fair and affordable to insurers, and which
fosters similar state legislation for hazardous waste cleanup at sites covered
by state law only. There can be no assurance that any Superfund reform
legislation will be enacted or that any such legislation will provide for a
fair, effective and cost-efficient system for settlement of Superfund related
claims.
New and proposed federal and state regulation and legislation would allow
banks greater participation in securities and insurance businesses. Depending on
the form in which these proposals are enacted or promulgated, they could present
an increased level of competition for the sale of Life and Savings products.
Furthermore, the market for deferred annuities and interest-sensitive life
insurance is enhanced by the tax incentives available under current law. Any
legislative changes which would lessen these incentives are likely to negatively
impact the demand for these products.
Enacted and pending state legislation to permit mutual insurance companies
to convert to a hybrid structure known as a mutual holding company could have a
number of significant effects on the Company by (1) increasing industry
competition through consolidation caused by mergers and acquisitions related to
the new corporate form of business, and (2) increasing competition in capital
markets.
GEOGRAPHIC DISTRIBUTION OF INSURANCE
Allstate, through a variety of companies, is authorized to sell
property-liability and life insurance in 50 states, the District of Columbia,
Puerto Rico and Canada. To a limited extent, in 1998 Allstate was also engaged,
through subsidiaries and joint ventures, in the insurance business in Germany,
Indonesia and the Republic of Korea. In 1999, Allstate expects to sell insurance
in Japan, Italy and the Philippines. The following tabulation reflects, in
percentages, the principal geographic distribution of statutory premiums earned
for the Property-Liability segments and statutory premiums for the Life and
Savings segment for the year ended December 31, 1998:
29
NY CA TX FL NJ PA IL MI MD Total
-- -- -- -- -- -- -- -- -- -----
Property-
Liability 11.0 9.5 9.0 7.9 5.0 5.0 4.0 3.5 3.1 58.0
PA IL NE MA OH CA NJ FL TX MI Total
-- -- -- -- -- -- -- -- -- -- -----
Life
13.0 11.8 11.6 10.6 6.8 5.3 5.0 4.3 3.5 3.3 75.2
No other jurisdiction accounted for more than 3% of the statutory premiums
for the Property-Liability or Life and Savings segments.
SEASONALITY
Although the insurance business generally is not seasonal, claims and
claims expense for the Property-Liability insurance operations tend to be higher
for periods of severe or inclement weather.
EMPLOYEES
At December 31, 1998, Allstate employed approximately 53,000 people.
SERVICE MARKS
The names "Allstate" and "Allstate Life," the slant "A" Allstate logo, the
slogan "You're in Good Hands With Allstate" and the graphic "Good Hands" design
logo which features cupped hands holding an automobile and a house, and the
"Northbrook" logo design are used extensively in Allstate's businesses.
Allstate's rights in the United States to the names "Allstate" and "Allstate
Life", the Allstate and Northbrook logos, the "Good Hands" slogan and the "Good
Hands" symbol continue so long as Allstate continues to exercise those rights.
These service marks are the subject of numerous renewable United States and
foreign service mark registrations. The Company believes that these service
marks are material to the business of Allstate.
FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-K 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, Allstate notes several important
factors that could cause its actual results and experience with respect to
forward-looking statements to differ materially from the anticipated results or
other expectations expressed in Allstate's forward-looking statements:
1. Exposure to Catastrophe Losses - Allstate believes that:
o the strategies implemented by it to manage its exposure to
catastrophes have reduced the probability of
30
severe losses in the future;
o the implementation of certain described actions taken in Florida and
the Northeast will reduce Allstate's exposure to losses from
catastrophes in those areas;
o Allstate's exposure to earthquake losses in California has been
significantly reduced as a result of its participation in the CEA (see
"Catastrophe Exposure and Catastrophe Management," above).
Factors that could cause actual catastrophe losses to be materially greater than
currently anticipated by Allstate include that fact that its beliefs are based
in part on the efficacy of the techniques and the accuracy of the data used by
Allstate and the CEA which are designed to predict the probability of
catastrophes and the extent of losses to Allstate and the CEA resulting from
catastrophes. Catastrophic events may occur in the future which indicate that
such techniques and data do not accurately predict Allstate's or the CEA's
losses from catastrophes, and the probability and extent of such losses to
Allstate and the CEA may differ materially from that which would have been
predicted by such techniques and data.
2. ENVIRONMENTAL AND ASBESTOS RISKS - Allstate believes that changes to
insurance policies have effectively limited its exposure to losses from
environmental and asbestos for most policies written in 1986 and all policies
written after 1986 ( see "Discontinued Lines and Coverages," above). Factors
that could cause Allstate to sustain materially greater losses from these
policies include the possibility that future judicial decisions could be adverse
to it. That is, interpretation of provisions in insurance policies is a complex
process, and courts have reached different and sometimes inconsistent
conclusions concerning liability under these policies. Consequently, Allstate's
experience to date may not be an accurate predictor of future experience
concerning its possible exposure to losses under these policies.
3. BODILY INJURY SEVERITY TRENDS - The references to favorable severity trends,
which management believes may be due in part to lower than anticipated medical
cost inflation for personal auto injury claims and to improvements in Allstate's
claim settlement processes (see "Property-Liability Claims and Claims Expense
Reserves," above), reflect statistical data for the periods indicated. Such data
for a future period or periods could well indicate that severities have
materially increased in such subsequent period or periods. Moreover, the recent
favorable trends may be reversed in the future because of the increased costs of
settlements and adverse judgments in cases which proceed to litigation. In the
meantime, however, the current data of reduced severities may influence state
insurance regulators to deny Allstate rate increases which could reduce the
growth of its revenues.
4. YEAR 2000 ISSUES - Allstate believes that it will be able to timely resolve
the Year 2000 issues affecting its computer operations and that the costs
incurred between the years 1995-2000 in resolving these issues will be
approximately $125 million (see "Year 2000," above). However, the extent to
which the computer operations of Allstate's external counterparties and
suppliers are adversely affected could, in turn, affect Allstate's ability to
communicate with such counterparties and suppliers, could increase the cost of
resolving the Year 2000 issues and could materially affect Allstate's results of
operations in any future period or periods.
31
Executive Officers
The following tabulation sets forth the names of the executive
officers of the Company, their current ages, the positions with Allstate held by
them, and the dates of their first election as officers:
DATE FIRST
NAME AGE POSITION AND OFFICES HELD ELECTED OFFICER
Edward M. Liddy*........53 Chairman, President and Chief Executive 1994
Officer of the Company and AIC
Richard I. Cohen........54 Senior Vice President of AIC 1989
(PP&C Claim Service Unit)
Joan M. Crockett........48 Senior Vice President
of AIC (Human Resources) 1994
Edward J. Dixon.........55 Senior Vice President of AIC 1988
(PP&C Field Operations)
Robert W. Gary..........60 Senior Vice President of AIC 1986
President, PP&C Unit)
Steven L. Groot.........49 Senior Vice President of AIC 1988
(President, International Unit)
Louis G. Lower, II......53 Chairman, ALIC 1982
Michael J. McCabe.......53 Senior Vice President of AIC 1980
(Marketing and Brand Development)
Ronald D. McNeil........46 Senior Vice President of AIC 1994
(PP&C, Property Operations)
Robert W. Pike..........57 Vice President, Secretary and 1978
General Counsel of the Company;
Executive Vice President,
Secretary and General Counsel
of AIC
Samuel H. Pilch ........52 Controller of the Company; Group 1995
Vice President and Controller
of AIC
Francis W. Pollard......56 Senior Vice President and 1984
Chief Information Officer
of AIC
Casey J. Sylla..........55 Vice President and Acting Chief Financial 1995
Officer of the Company; Senior Vice
President, Chief Investment Officer and
Acting Chief Financial Officer of AIC
Rita P. Wilson..........52 Senior Vice President of AIC 1988
(President, Allstate Indemnity)
Thomas J. Wilson........41 President, ALIC 1995
No family relationships exist among the above-named individuals.
___________________
*Also a director of the Company
32
Each of the Company and AIC officers named above may be removed from office
at any time, with or without cause, by the Board of Directors of the Company, in
the case of Company positions, and by the Board of Directors of AIC, in the case
of AIC positions.
With the exception of Messrs. Liddy, T. Wilson, Sylla and Pilch, the above
officers have held the positions set forth in the above tabulation for at least
the last five years or have served Allstate in various executive or
administrative capacities for at least five years. Prior to his election on
January 1, 1999 to the position stated above, Mr. Liddy served as the Company's
and AIC's President and Chief Operating Officer since August 1994, and before
that as Senior Vice President and Chief Financial Officer of Sears, Roebuck and
Co. since February 1992. Prior to his election on January 1, 1999 to the
position stated above, T. Wilson served as the Company's and AIC's Chief
Financial Officer since January 1, 1995 and prior to that as Sears' Vice
President, Strategy and Analysis since 1993. Prior to his election on January 1,
1999 to the position stated above, Mr. Sylla was AIC's Senior Vice President and
Chief Investment Officer since July 5, 1995. Before coming to Allstate, Mr.
Sylla served as a Senior Vice President for Northwestern Mutual Life Insurance
Company from 1992 to 1995. Before his election on January 18, 1999 to the
position stated above, Mr. Pilch served as Controller of the Company and AIC
since 1995, and prior to that as Vice President of The Travelers Corporation
since 1989.
ITEM 2. PROPERTIES
Allstate's home office complex is located in Northbrook, Illinois. The
complex consists of 11 building complexes providing approximately 2 million
square feet of office space on a 185 acre site. The Northbrook complex serves as
the headquarters for AIC and ALIC.
Allstate's field business operations are conducted substantially from 17
major offices located principally in metropolitan areas throughout the United
States and Canada. Allstate also has approximately 270 claim service offices,
sales facilities at approximately 11,600 locations, and approximately 850
automobile damage inspection locations, most of which are located at claim
service offices and sales facilities.
Allstate's home office complex and most major offices are owned. Other
facilities are leased, in almost all cases for terms of not more than five
years. The Company believes its properties and facilities are adequate and
suited to Allstate's current operations.
ITEM 3. LEGAL PROCEEDINGS
Various legal and regulatory actions are currently pending that involve
Allstate and specific aspects of the conduct of its 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 Allstate's financial position or results of operations. See note 9 to the
Consolidated Financial Statements on pages C-52 to C-55 of the Proxy Statement
incorporated herein by reference in response to Item 8 hereof.
33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There were 184,332 record holders of the Company's common stock as of
February 18, 1999. The principal market for the Company's common stock is the
New York Stock Exchange. The Company's common stock is also listed on the
Chicago Stock Exchange. Set forth below are the high and low prices of, and cash
dividends declared for, the Company's common stock during 1998 and 1997. Stock
prices and dividends have been adjusted to reflect the 2-for-1 split of the
Company's common stock in July 1998:
Dividends
High Low Close declared
1998
First quarter 49 3/16 40 15/16 45 31/32 .135
Second quarter 50 1/8 44 1/8 45 25/32 .135
Third quarter 52 3/8 36 1/16 41 1/2 .135
Fourth quarter 48 3/8 37 38 1/2 .135
-------------------------------------------------------------------------------------------
1997
First quarter 34 1/8 28 1/8 29 11/16 .12
Second quarter 38 1/2 29 5/16 36 1/2 .12
Third quarter 40 9/16 35 15/32 40 3/16 .12
Fourth quarter 47 3/16 38 15/32 45 1/4 .12
-------------------------------------------------------------------------------------------
Stock price ranges are from the New York Stock Exchange Composite Listing.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference to "11-Year Summary of Selected Financial Data"
on pages C-2 and C-3 of the Proxy Statement.
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Incorporated by reference to the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages C-4 to C-29 of the Proxy
Statement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to the "Market Risk" discussion on pages C-16 to
C-19 of the Proxy Statement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, including the notes
to such statements on pages C-30 to C-65 of the Proxy Statement and the
information under "Quarterly Results" on page C-65 of the Proxy Statement are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding directors of the Company is incorporated
herein by reference to the descriptions under "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement.
Information regarding executive officers of the Company is incorporated
herein by reference to Item 1 of this Report under the caption "Executive
Officers of the Registrant" in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by
reference to the material under the captions "Directors' Compensation and
Benefits," "Executive Compensation," "Stock Options," "Pension Plans," and
"Employment Contracts, Termination of Employment and Change-in-
35
Control Arrangements" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference to the material under the
headings "Security Ownership of Directors and Executive Officers" and "Security
Ownership of Certain Beneficial Owners" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated herein by reference to the material under the heading "Certain
Transactions" in the Proxy Statement.
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1 and 2 An "Index to Financial Statements and Financial Statement
Schedules" has been filed as a part of this Report beginning
on page S-1 hereof.
(a) 3 Exhibits:
An"Exhibit Index" has been filed as a part of this Report
beginning on page E-1 hereof and is incorporated herein by
reference.
(b) Reports on Form 8-K:
None.
36
SIGNATURES
Pursuant to the Requirements of Section 13 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)
S/SAMUEL H. PILCH
By: Samuel H. Pilch
Controller
(Principal Accounting Officer)
March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
S/ EDWARD M. LIDDY Chairman, President and
Edward M. Liddy Chief Executive Officer )
and a Director )
(Principal Executive )
Officer) )
)
March 26, 1999
S/CASEY J. SYLLA Vice President and
Casey J. Sylla Acting Chief Financial )
Officer )
(Principal Financial )
Officer) )
37
SIGNATURE TITLE DATE
S/ JAMES G. ANDRESS Director )
James G. Andress
S/WARREN L. BATTS Director )
Warren L. Batts
S/EDWARD A. BRENNAN Director )
Edward A. Brennan
S/ JAMES M. DENNY Director ) March 26, 1999
James M. Denny
S/RONALD T. LEMAY Director )
Ronald T. LeMay
S/MICHAEL A. MILES Director )
Michael A. Miles
S/H. JOHN RILEY, JR. Director )
H. John Riley, Jr.
S/JOSHUA I. SMITH Director )
Joshua I. Smith
37
THE ALLSTATE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 1998
The following consolidated financial statements, notes thereto and related
information of The Allstate Corporation are incorporated herein by reference to
the Company's Proxy Statement.
PAGE*
Consolidated Statements of Operations ** C-30
Consolidated Statements of Comprehensive Income ** C-31
Consolidated Statements of Financial Position ** C-32
Consolidated Statements of Shareholders' Equity ** C-33
Consolidated Statements of Cash Flows ** C-34
Notes to the Consolidated Financial Statements** C-35
Quarterly Results ** C-65
The following additional financial statement schedules and independent auditors'
report and consent are furnished herewith pursuant to the requirements of Form
10-K.
The Allstate Corporation Page
- ------------------------ ----
Schedules required to be filed under the provisions of Regulation S-X Article 7:
Schedule I Summary of Investments - Other than Investments in Related Parties S-2
Schedule II Condensed Financial Information of The Allstate Corporation (Registrant) S-3
Schedule III Supplementary Insurance Information S-7
Schedule IV Reinsurance S-8
Schedule V Valuation Allowance and Qualifying Accounts S-9
Schedule VI Supplementary Information Concerning Consolidated Property-Casualty S-10
Insurance Operations
Independent Auditors' Report S-11
Independent Auditors' Consent S-12
All other schedules are omitted because they are not applicable, or not required, or because the
required information is included in the Consolidated Financial Statements or in notes thereto.
* Refers to page number in the Company's Proxy Statement.
** Incorporated by reference in Item 8 herein.
S-1
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1998
($ in millions)
Cost Fair Carrying
---- Value Value
TYPE OF INVESTMENT ----- -----
Fixed Income Securities, Available for Sale:
Bonds:
United States government, government
agencies and authorities................................ $3,171 $3,960 $3,960
States, municipalities and political subdivisions............ 17,589 18,771 18,771
Foreign governments.......................................... 625 653 653
Public utilities............................................. 2,809 3,134 3,134
Convertibles and bonds with warrants attached................ 552 654 654
All other corporate bonds.................................... 13,147 13,991 13,991
Mortgage-backed securities...................................... 7,612 7,879 7,879
Asset-backed securities......................................... 4,197 4,251 4,251
Redeemable preferred stocks..................................... 244 267 267
------ ------ ------
Total fixed income securities............................... 49,946 $53,560 53,560
------ ======= ------
Equity Securities:
Common Stocks:
Public utilities............................................ 223 374 374
Banks, trusts and insurance companies....................... 325 492 492
Industrial, miscellaneous and all other..................... 3,219 5,027 5,027
Nonredeemable preferred stocks.................................. 464 528 528
----- ----- -----
Total equity securities..................................... 4,231 $6,421 6,421
----- ====== -----
Mortgage loans on real estate........................................ 3,458 3,458
Policy loans......................................................... 569 569
Other long-term investments.......................................... 40 40
Short-term investments............................................... 2,477 2,477
------ ------
Total Investments.......................................... $60,721 $66,525
======= =======
S-2
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
($ in millions) Year Ended
December 31,
---------------------------- ----
1998 1997 1996
---- ---- ----
REVENUES
Investment income, less investment expense............................. $ 52 $ 30 $ 10
Realized capital gains................................................. 32 5 -
Other income........................................................... 149 208 29
--- --- ---
233 243 39
EXPENSES
Interest expense....................................................... 192 158 100
Other operating expenses............................................... 10 6 8
--- --- ---
202 164 108
Gain on disposition of operations..................................... 49 - -
--- --- ---
Income (loss) from operations before income tax benefit and equity
in net income of subsidiaries........................................... 80 79 (69)
Income tax benefit........................................................ (24) (42) (31)
Income (loss) before equity in net income of subsidiaries................. 104 121 (38)
----- ----- -----
Equity in net income of subsidiaries...................................... 3,190 2,984 2,113
----- ----- -----
Net income............................................................. 3,294 3,105 2,075
----- ----- -----
OTHER COMPREHENSIVE INCOME, NET OF TAX
Changes in:
Unrealized gains and losses.......................................... 173 818 (633)
Foreign currency translation adjustments............................. (2) (57) 1
----- ----- -----
Other comprehensive income........................................... 171 761 (632)
----- ----- -----
Comprehensive income................................................. $3,465 $3,866 $1,443
====== ====== ======
See accompanying notes to condensed financial information and notes to Consolidated Financial Statements
incorporated herein by reference.
S-3
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II (CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF FINANCIAL POSITION
>
($ in millions)
December 31,
----------------------
1998 1997
---- ----
ASSETS
Investments in subsidiaries............................................ $ 18,720 $ 17,041
Investments
Fixed income securities, at fair value (amortized cost $484 and $419) 484 426
Short-term........................................................... 430 85
------ ------
Total investments.................................................... 914 511
Receivable from subsidiaries........................................... 563 441
Dividends receivable from subsidiaries................................. - 110
Other assets........................................................... 81 97
------- ------
TOTAL ASSETS......................................................... $ 20,278 $ 18,200
======= ======
LIABILITIES
Short-term debt........................................................ $ 393 $ 199
Long-term debt......................................................... 1,300 1,457
Payable to subsidiaries................................................ 1,182 773
Dividends payable to shareholders...................................... 111 103
Other liabilities...................................................... 52 58
----- -----
TOTAL LIABILITIES.................................................... 3,038 2,590
----- ------
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 25 million shares authorized,
none issued........................................................
Common stock, $.01 par value, 1.0 billion shares authorized
and 900 million issued; 818 million and 850 million shares
outstanding........................................................ 9 9
Additional capital paid-in............................................. 3,102 3,116
Retained income........................................................ 14,490 11,646
Deferred ESOP expense.................................................. (252) (281)
Treasury stock, at cost (82 million and 50 million shares)............. (3,065) (1,665)
Accumulated other comprehensive income:
Unrealized net capital gains..................................... 2,994 2,821
Unrealized foreign currency translation adjustments.............. (38) (36)
------ ------
Total accumulated other comprehensive income....................... 2,956 2,785
------ ------
TOTAL SHAREHOLDERS' EQUITY........................................... 17,240 15,610
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $ 20,278 $ 18,200
======= =======
See accompanying notes to condensed financial information and notes to Consolidated Financial Statements incorporated
herein by reference.
S-4
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II (CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
($ in millions) Year Ended
December 31,
---------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................................ $3,294 $3,105 $2,075
Adjustments to reconcile net income to net cash provided by operating
activities
Equity in net income of subsidiaries................................. (3,190) (2,984) (2,113)
Realized capital gains.............................................. (32) (5) -
Gain on disposition of operations.................................... (49) - -
Dividends received from subsidiaries................................. 1,497 623 525
Changes in other operating assets and liabilities.................... 197 (233) (5)
----- ----- -----
Net cash provided by operating activities.......................... 1,717 506 482
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investments..................................... 1,332 789 -
Investment purchases................................................... (1,019) (363) -
Capital contribution to subsidiaries................................... (225) - (23)
Change in short-term investments, net.................................. (335) 427 (543)
Proceeds from disposition of operations............................... 49 - -
Acquisition of subsidiary............................................. (275) - -
------ ----- -----
Net cash provided by (used in) investing activities................ (473) 853 (566)
------ ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Change in short-term debt, net......................................... 181 47 152
Transfers to subsidiaries through intercompany loan agreement, net..... (181) (47) (152)
Repayment of long-term debt............................................ (300) - -
Proceeds from issuance of long-term debt............................... 500 250 -
Proceeds from borrowings from subsidiaries............................. 405 - 773
Dividends paid to shareholders......................................... (443) (323) (378)
Treasury stock purchases............................................... (1,489) (1,358) (336)
Other.................................................................. 83 72 25
------- ------- ----
Net cash provided by (used in) financing activities................ (1,244) (1,359) 84
------- ------- ----
CASH AT END OF YEAR....................................................... $ - $ - $ -
======= ======= =====
See accompanying notes to condensed financial information and notes to Consolidated Financial Statements incorporated
herein by reference.
S-5
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II (CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
1. .GENERAL
The financial statements of the Registrant should be read in conjunction with
the Consolidated Financial Statements and notes thereto included in The Allstate
Corporation 1999 Proxy Statement.
The long-term and short-term debt and credit lines presented in Note 8 "Debt" on
page C-52 of the 1999 Proxy Statement, with the exception of the Floating Rate
Notes, are direct obligations of the Registrant.
To conform with the 1998 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
2..RECEIVABLE AND PAYABLE TO SUBSIDIARIES
The majority of the proceeds from the issuance of the commercial paper have been
loaned to subsidiaries through an intercompany loan agreement and used for
general purposes.
In 1996, the Registrant borrowed $750 million from its subsidiary trusts at a
weighted-average interest rate of 7.92%. These borrowings consist of $550
million and $200 million of debentures which mature in 2026 and 2045,
respectively, and are redeemable by the Registrant in whole or in part beginning
in 2001 and 2006, respectively. The maturity of the $550 million debenture may
be extended to 2045. The Registrant recorded $59 million of interest expense in
1998 and 1997, respectively, related to these borrowings.
3..OTHER INCOME
Other income primarily represents income from the settlement of certain employee
benefits of its subsidiaries, mainly profit sharing obligations. The 1997 amount
includes settlements for prior years.
4. GAIN ON DISPOSITION OF OPERATIONS
The gain on disposition of operations in 1998 was in connection with the
conversion of 6.76% Automatically Convertible Equity Securities ("ACES") into
shares of The PMI Group, Inc. common stock.
5. SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING ACTIVITY AND CASH FLOW
INFORMATION
The Registrant received dividends of $707 million and $768 million from a
subsidiary in the form of fixed income securities in 1998 and 1997,
respectively.
The Registrant paid $178 million, $144 million and $87 million of interest on
debt in 1998, 1997 and 1996, respectively.
S-6
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
($ in millions) At December 31,
--------------------------------------
Reserves
Claims
Deferred Expense
Policy and
Acquisition Contract Unearned
Segment Costs Benefits Premiums
- ------------------------------------- ---- -------- ----------
1998
- ----
Property-Liability operations
PP&C.................................. $ 915 $ 14,297 $ 6,376
Discontinued Lines and Coverages...... - 2,584 1
------ -------- -------
Total Property-Liability.............. 915 16,881 6,377
Life and Savings operations............. 2,181 28,734 48
Corporate and Other..................... - - -
------- -------- -------
Total................................... $ 3,096 $ 45,615 $ 6,425
======= ======== =======
1997
- ----
Property-Liability operations
PP&C................................ $844 $14,408 $6,168
Discontinued Lines and Coverages.... - 2,995 1
----- ------ -----
Total Property-Liability............ 844 17,403 6,169
Life and Savings operations........... 1,982 27,471 64
Corporate and Other .................. - - -
------ ------- ------
Total................................. $2,826 $44,874 $6,233
====== ======= ======
1996
- ----
Property-Liability operations
PP&C................................ $777 $13,909 $6,070
Discontinued Lines and Coverages.... - 3,473 2
----- ------- ------
Total Property-Liability............ 777 17,382 6,072
Life and Savings operations........... 1,837 26,407 102
Corporate and Other .................. - - -
------ ------- ------
Total................................. $2,614 $43,789 $6,174
====== ======= =======
S-7
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
($ in millions) For the Year Ended December 31,
--------------------------------------------------------------------------------
Claims,
Premium Claims Amortization
Revenue Expense of Other Premiums
and Net and Contract Policy Operating Written
Contract Investment Benefits Acquisition Costs and (Excluding
Segment Charges Income (1) Costs Expenses Life)
- ------------------------------------- ---- -------- -------- ------- ---------- ---------
1998
- ----
Property-Liability operations
PP&C.................................. $ 19,307 $ 13,572 $ 2,644 $ 1,735 $ 19,516
Discontinued Lines and Coverages...... - 29 - 22 (1)
------ ------ ------- ------- --------
Total Property-Liability.............. 19,307 $ 1,723 13,601 2,644 1,757 19,515
Life and Savings operations............. 1,519 2,115 2,415 377 315 136
Corporate and Other..................... - 52 - - (6) -
------- -------- ------- -------- ------- --------
Total................................... $ 20,826 $ 3,890 $ 16,016 $ 3,021 $ 2,066 $ 19,651
========= ======== ======== ======= ======= ========
1997
- ----
Property-Liability operations
PP&C................................ $18,600 $13,333 $2,491 $1,635 $18,787
Discontinued Lines and Coverages.... 4 3 - 19 2
------- ------ ----- ----- -------
Total Property-Liability............ 18,604 $1,746 13,336 2,491 1,654 18,789
Life and Savings operations........... 1,502 2,085 2,415 298 302 132
Corporate and Other .................. - 30 - - (19) -
-------- ----- ------ ------ ------ -------
Total................................. $20,106 $3,861 $15,751 $2,789 $1,937 $18,921
======= ====== ======= ====== ====== =======
1996
- ----
Property-Liability operations
PP&C................................ $17,708 $13,574 $2,023 $1,676 $17,978
Discontinued Lines and Coverages.... 658 913 116 130 608
----- ------ ------- ------ ------
Total Property-Liability............ 18,366 $1,758 14,487 2,139 1,806 18,586
Life and Savings operations........... 1,336 2,045 2,312 203 308 173
Corporate and Other .................. - 10 - - (2) -
------ ------- ------ ------- ------ -------
Total................................. $19,702 $3,813 $16,799 $2,342 $2,112 $18,759
======= ====== ======= ====== ====== =======
(1) A single investment portfolio supports the Property-liability segment.
S-7
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
($ in millions)
Percent
of
Ceded to Assumed from Amount
Gross Other Other Net Assuamed
Amount Companies Companies Amount to Net
YEAR ENDED DECEMBER 31, 1998 ------ --------- ----------- ------ --------
Life insurance in force................... $ 276,029 $ 73,769 $ 6 $ 202,267 0.0%
========= ========= ========== =========
Premiums and contract charges:
Life insurance.......................... $ 1,430 $ 174 $ 6 $ 1,262 0.4%
Accident-health insurance............... 238 4 23 257 8.9%
Property-liability insurance........... 19,666 433 74 19,307 0.4%
--------- --------- ---------- ---------
Total premiums and contract charges. $ 21,334 $ 611 $ 103 $ 20,826 0.5%
========== ========= ========== =========
YEAR ENDED DECEMBER 31, 1997
Life insurance in force................... $ 247,048 $ 52,760 $ 144 $ 194,432 0.1%
========= ========= ========== =========
Premiums and contract charges:
Life insurance.......................... $ 1,401 $ 165 $ - $ 1,236 0.0%
Accident-health insurance............... 274 29 21 266 7.9%
Property-liability insurance............ 18,872 366 98 18,604 0.5%
--------- --------- ---------- ---------
Total premiums and contract charges $ 20,547 $ 560 $ 119 $ 20,106 0.6%
========= ========= ========== =========
YEAR ENDED DECEMBER 31, 1996
Life insurance in force................... $ 219,453 $ 33,232 $ 124 $ 186,345 0.1%
========= ========= ========== =========
Premiums and contract charges:
Life insurance.......................... $ 1,163 $ 94 $ - $ 1,069 -%
Accident-health insurance............... 252 2 17 267 6.4%
Property-liability insurance............ 18,487 479 358 18,366 1.9%
--------- -------- ---------- ---------
Total premiums and contract charges $ 19,902 $ 575 $ 375 $ 19,702 1.9%
========= ======== ========== =========
S-8
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE V - VALUATION ALLOWANCE AND QUALIFYING ACCOUNTS
Additions
-----------------------------------
($ in millions)
Balance at Charged to Balance
Beginning Costs and Other at end
Description of Period Expenses Additions Deductions (1) of Period
----------- --------- ---------- --------- -------------- ----------
YEAR ENDED DECEMBER 31, 1998
Allowance for estimated losses on
mortgage loans and real estate........ $ 39 $ (16) $ 8 $ 15
Allowance for reinsurance recoverable.... 147 -
6 141
Allowance for premium installment 61 86 54
receivable . 93
Allowance for deferred tax assets 12 21 33
YEAR ENDED DECEMBER 31, 1997
Allowance for estimated losses on
mortgage loans and real estate....... $ 76 $ (21) $ 16 $ 39
Allowance for reinsurance recoverable 163 - 16 147
Allowance for premium installment 57 109 105 61
receivable..........................
Allowance for deferred tax assets - 12 12
YEAR ENDED DECEMBER 31, 1996
Allowance for estimated losses on
mortgage loans and real estate....... $ 100 $ 14 $ 38 $ 76
Allowance for reinsurance recoverable 246 18 101 163
Allowance for premium installment
receivable.......................... 30 112 85 57
(1) Deductions in allowance for estimated losses on mortgage loans include
amounts transferred to real estate. Deductions in allowance for
reinsurance recovered represent write-offs, net of recoveries, of amounts determined to be uncollectible.
S-9
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTARY INFORMATION CONCERNING
CONSOLIDATED PROPERTY-CASUALTY INSURANCE OPERATIONS
($ in millions)
At December 31,
---------------------------------
1998 1997 1996
---- ---- ----
Deferred policy acquisition costs......................... $ 915 $ 844 $ 777
Reserves for unpaid claims and claim adjustments.......... 16,881 17,403 17,382
Unearned premiums......................................... 6,377 6,169 6,072
($ in millions)
Year Ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
Earned premiums........................................... $19,307 $18,604 $18,366
Net investment income..................................... 1,723 1,746 1,758
Claims and claims adjustment expense incurred
Current year........................................... 14,301 14,013 14,823
Prior years............................................ (700) (677) (336)
Amortization of deferred policy acquisition costs......... 2,644 2,491 2,139
Paid claims and claims adjustment expense................. 14,009 13,161 15,045
Premiums written.......................................... 19,515 18,789 18,586
S-10
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The Allstate Corporation:
We have audited the consolidated financial statements of The Allstate
Corporation and subsidiaries as of December 31, 1998 and 1997, and for each of
the three years in the period ended December 31, 1998, and have issued our
report thereon dated February 19, 1999; such consolidated financial statements
and report are included in The Allstate Corporation 1999 Proxy Statement to
Stockholders and are incorporated herein by reference. Our audits also include
the financial statement schedules of The Allstate Corporation and subsidiaries,
listed in the Index at Item 14 (a) 2. These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
Chicago, Illinois
February 19, 1999
S-11
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-61817 and 333-34583 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 of The
Allstate Corporation of our reports dated February 19, 1999, appearing in or
incorporated by reference in this Annual Report on Form 10-K of The Allstate
Corporation for the year ended December 31, 1998.
Deloitte & Touche LLP
Chicago, Illinois
March 24, 1999
S-12
EXHIBIT INDEX
The Allstate Corporation Form 10-K
For the Year Ended December 31, 1998
EXHIBIT SEQUENTIAL
NO. DOCUMENT DESCRIPTION PAGE NO.
3.(a) Restated Certificate of Incorporation
of The Allstate Corporation as amended
effective August 18, 1995.
Incorporated by reference to Exhibit 3
to the Company's Quarterly Report on
Form 10-Q for the quarter ended
September 30, 1995**
By-Laws as amended effective June 29,1995.
3.(b) Incorporated by reference to the Company's
Form 10-Q for the quarter ended June 30,
1995.
4. Registrant hereby agrees to furnish
to the Commission, upon request, with
the instruments defining the rights of
holders of each issue of long-term debt
of the Registrant and its consolidated
subsidiaries.
10.1 Master Agreement for Systems
Operations Services, dated as
of November 30, 1992, between
Allstate Insurance Company and
Advantis, a New York general
partnership. Incorporated by
reference to Exhibit 10.5 to
Registration Statement No. 33-59676.
10.2 Human Resources Allocation Agreement,
dated as of May 27, 1993, among Sears,
Roebuck and Co., The Allstate Corporation
and Allstate Insurance Company.
Incorporated by reference to Exhibit
10.14 to Registration Statement
No. 33-59676.
E-1
EXHIBIT SEQUENTIAL
NO. DOCUMENT DESCRIPTION PAGE NO.
10.3 IPO Related Intercompany Agreement,
dated as of May 29, 1993, between The
Allstate Corporation and Sears, Roebuck
and Co. Incorporated by reference to
Exhibit 10.15 to Registration Statement
No. 33-59676.
10.4 Tax Sharing Agreement dated May 14,
1993 between Sears, Roebuck and Co.
and its subsidiaries. Incorporated by
reference to Exhibit 10.6 to Amendment
No. 3 to Registration Statement No.
33-59676.
10.5 Separation Agreement dated February
20, 1995 between Sears, Roebuck and
Co. and the Company. Incorporated by
reference to Exhibit 10(a) to the
Company's Current Report on Form 8-K
dated February 22, 1995.**
10.6 Marketing File Separation Agreement
dated February 20, 1995 between Sears,
Roebuck and Co. and the Company.
Incorporated by reference to Exhibit
10(b) to the Company's Current Report
on Form 8-K dated February 22, 1995.**
10.7 Research Services Agreement dated
February 20, 1995 between Sears,
Roebuck and Co. and the Company.
Incorporated by reference to Exhibit
10(c) to the Company's Current
Report on Form 8-K dated February 22,
1995.**
10.8 Supplemental Tax Sharing Agreement
dated January 27, 1995 between Sears,
Roebuck and Co. and the Company.
Incorporated by reference to Exhibit
10(d) to the Company's Current Report
on Form 8-K dated February 22, 1995.**
10.9 Supplemental Human Resources
Allocation Agreement dated January 27,
1995 between Sears, Roebuck and Co.
and the Company. Incorporated by
reference to Exhibit 10(e) to the
Company's Current Report on Form 8-K
dated February 22, 1995.**
E-2
EXHIBIT SEQUENTIAL
NO. DOCUMENT DESCRIPTION PAGE NO.
10.10 Profit Sharing and Employee Stock
Ownership Plan Allocation Agreement
dated January 27, 1995 between Sears,
Roebuck and Co. and the Company.
Incorporated by reference to Exhibit
10(f) to the Company's Current Report
on Form 8-K dated February 22, 1995.**
10.11* Allstate Insurance Company
Supplemental Retirement Income Plan,
as amended and restated effective
January 1, 1996. Incorporated by
reference to Exhibit 10.11
to the Company's Form 10-K report
for 1995.**
10.12* The Allstate Corporation Deferred
Compensation Plan, as amended and
restated effective November 11, 1997.
Incorporated by reference to Exhibit
to the Company's Form 10-K
report for 1997.**
10.13* The Allstate Corporation
Amended and Restated Deferred
Compensation Plan for Non-Employee
Directors, as amended and restated
as of February 5, 1997. Incorporated
by reference to Exhibit 10.13 to the
Company's Form 10-K report for 1997.**
10.14* The Allstate Corporation Annual
Executive Incentive Compensation
Plan, as amended and restated as of
March 9, 1999.
10.15* The Allstate Corporation Long-Term
Executive Incentive Compensation
Plan, as amended and restated as of
March 9, 1999.
10.16* The Allstate Corporation Equity
Incentive Plan, as amended and
restated on November 10, 1998.
10.17* Form of stock option under the
Equity Incentive Compensation Plan.
Incorporated by reference to
Exhibit 10.18 to the Company's
Form 10-K report for 1995.**
E-3
EXHIBIT SEQUENTIAL
NO. DOCUMENT DESCRIPTION PAGE NO.
10.18* Form of restricted stock grant
under the Equity Incentive Plan.
Incorporated by reference to
Exhibit 10.18 to the Company's
Form 10-K report for 1996.**
10.19* The Allstate Corporation Equity
Incentive Plan for Non-Employee
Directors as amended and restated on
November 10, 1998.
10.20* The Allstate Corporation Employees
Replacement Stock Plan, as amended
and restated on November 10, 1998.
10.21* Form of stock option under the
Replacement Stock Plan.
Incorporated by reference to
Exhibit 10.21 to the Company=s
Form 10-K report for 1995.**
10.22* Form of restricted stock grant
under the Replacement Stock Plan.
Incorporated by reference to
Exhibit 10.22 to the Company's
Form 10-K for 1995.**
10.23* The Allstate Corporation Annual
Covered Employee Incentive
Compensation Plan as amended and
restated as of March 9, 1999.
11 Computation of Earnings per
Common Share.
12 Computation of Earnings to Fixed
Charges Ratio.
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent.
E-4
EXHIBIT SEQUENTIAL
NO. DOCUMENT DESCRIPTION PAGE NO.
27 Financial Data schedule, submitted
electronically to the Securities and
Exchange Commission for information
only and not filed.
------------------
* A management contract or compensatory plan or arrangement.
** SEC File No. 1-11840
E-5
Exhibit 11
The Allstate Corporation and Subsidiaries
Computation of Earnings Per Common Share
(In millions, except for per share data) Twelve Months Ended December 31,
-------------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
Net Income $3,294 $3,105 $2,075
================ =============== ===============
Basic earnings per common share computation:
Weighted average number of common shares (1) 832.2 867.9 890.8
================ =============== ===============
Net income per share - basic $3.96 $3.58 $ 2.33
================ =============== ===============
Diluted earnings per common share computation:
Weighted average number of common shares (1) 832.2 867.9 890.8
Assumed exercise of dilutive stock options 4.4 4.9 5.6
---------------- --------------- ---------------
Adjusted weighted number of common shares outstanding 836.6 872.8 896.4
================ =============== ===============
Net income per share - diluted $3.94 $3.56 $2.31
================ =============== ===============
(1) Common shares held as treasury shares were 82 million, 501 million, and 17 million, at December 31, 1998, 1997
and 1996, respectively.
E-6
Exhibit 12
THE ALLSTATE CORPORATION
COMPUTATION OF EARNINGS TO FIXED CHARGES RATIO
($ in millions) For the Year ended December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ----------- ---------- ----------- ----------
1. Income from continuing operations
before income taxes, equity in net income
of
unconsolidated subsidiary, and dividends on
preferred securities of subsidiary trusts $4,745 $4,434 $2,669 $2,421 $120
2. Equity in income of 100% owned subsidiary - - - 49 107
3. Dividends from less than 50% owned affiliate 1 2 2 2 -
---------- ----------- ---------- ----------- ----------
4. Income from continuing operations before
income taxes $4,746 $4,436 $2,671 $2,472 $227
---------- ----------- ---------- ----------- ----------
Fixed Charges:
5. Interest on indebtedness $118 $100 $95 $81 $60
6. Interest factor of annual rental expense 90 80 71 90 95
---------- ----------- ---------- ----------- ----------
7. Total fixed charges (5+6) $208 $180 $166 $171 $155
---------- ----------- ---------- ----------- ----------
8. Dividends on redeemable preferred securities 59
59 6 - -
9. Total fixed charges and dividends on
redeemable preferred securities (7+8) $267 $239 $172 $171 $155
---------- ----------- ---------- ----------- ----------
10. Income from continuing operations before
income taxes and fixed charges (4+7) $4,954 $4,616 $2,837 $2,643 $382
========== =========== ========== =========== ==========
11. Ratio of earnings to fixed charges (A) 18.6 X 19.3 X 16.5 X 15.5 X 2.5 X
========== =========== ========== =========== ==========
12. Interest credited to contractholder funds $1,247 $1,209 $1,196 $1,191 $1,079
13. Total fixed charges including dividends
on redeemable preferred securities and interest
credited to contractholder funds (9+12) $1,514 $1,448 $1,368 $1,362 $1,234
---------- ----------- ---------- ----------- ----------
14. Income from continuing operations
before income taxes and fixed charges
including interest credited to contractholder
funds (4+7+12) $6,201 $5,825 $4,033 $3,834 $1,461
========== =========== ========== =========== ==========
15. Ratio of earnings to fixed charges,
including interest credited to contractholder
funds 4.1 X 4.0 X 2.9 X 2.8 X 1.2 X
========== =========== ========== =========== ==========
(A) The Company has authority to issue up to 25,000,000 shares of preferred stock, par value $1.00 per share; however,
there are currently no shares outstanding and the Company does not have a preferred stock dividend obligation. Therefore,
the Ratio of Earnings to Fixed Charges and Preferred Stock Dividends is equal to the Ratio of Earnings to Fixed Charges and
is not disclosed separately.
E-7
Exhibit 10.14
THE ALLSTATE CORPORATION
ANNUAL EXECUTIVE INCENTIVE COMPENSATION PLAN
AS AMENDED AND RESTATED MARCH 9, 1999
1. PURPOSES.
The purposes of the Annual Executive Incentive Compensation Plan (the
"Plan") are:
a. to attract and retain competent personnel;
b. to provide Participants with added incentives to promote
various short-term performance goals, while taking into
account the varying objectives and conditions of the
different businesses engaged in by The Allstate Corporation
and its Subsidiaries;
c. to link compensation to performance by tying a portion of
annual pay to reaching annual financial goals;
d. to compensate executives at competitive levels when
competitive performance is achieved, and at superior levels
when performance exceeds competitors', and
e. to encourage teamwork among top executives.
2. DEFINITIONS.
The following terms when used in the Plan shall, for the purposes of
the Plan, have the following meanings:
a. "Award" means the cash amount payable to a Participant for a fiscal year
pursuant to the terms of the Plan.
b. "Board" means the Board of Directors of The Allstate Corporation.
c. "Business Unit" means any operating unit of The Allstate Corporation or any
of its Subsidiaries, including but not limited to, the property and
casualty business, the life business, the investments business, or the
international business.
1
d. "Committee" means at least two members of the Board who have been appointed
by the Board to administer the Plan.
e. "Company" means The Allstate Corporation.
f. "Fiscal Year" means the calendar year.
g. "Participant" means an executive of the Company, or of any Subsidiary,
selected by the Committee to participate in the Plan for the fiscal year.
h. "Plan" means the Annual Executive Incentive Compensation Plan.
i. "Subsidiary" means any corporation of which the Company owns directly or
indirectly a majority of the outstanding shares of voting stock.
3. ADMINISTRATION OF THE PLAN.
a. The Plan shall be administered by the Committee.
b. The Committee shall have the authority to make all determinations it
deems necessary or advisable for the administration of the Plan, including
the selection of Participants, the determination of the timing and amount
of Awards made to each Participant, and the establishment of performance
standards ("performance goals") for earning Awards.
c. The Committee shall have the authority to exercise discretion in
determining the amounts of the Awards otherwise payable under the terms of
the Plan, and may increase or decrease such Awards.
4. AWARDS.
a. Awards under the Plan shall consist of annual cash bonuses based upon
the degree of attainment of performance goals of the Company and/or its
Subsidiaries and/or Business Units thereof, where applicable, over the
fiscal year. Awards to Participants who are "Covered Employees" as defined
in Section 162(m) of the Internal Revenue Code shall be payable solely for
attainment of performance priority goals set forth in Section 4.d., below.
b. The Committee shall establish performance goals for each fiscal year at
a time while the outcome of the performance goals is substantially
uncertain. Such performance goals may be expressed in terms of annual
financial, operating or other criteria, or any combination thereof, using
such measures of performance as the Committee selects solely in its own
discretion. The Committee may establish performance priority as a
performance goal, the attainment of which may result in the increase or
decrease of an Award to any Participant.
2
c. A target Award shall be established for each fiscal year based upon the
Participant's position held with the Company or any of its Subsidiaries.
The target Award will be determined as a percentage of each Participant's
base salary, and shall be payable as an Award based upon attainment of
performance goals for such year. A maximum Award opportunity shall also be
established for each Participant.
d. Awards under the Plan for Covered Employees shall be granted solely on
the basis of their achievement of performance priority goals. Performance
priority goals shall be strategic in nature, and designed to further
Company goals which are assigned to specific Participants to accomplish.
Performance priority goals shall be based on business criteria separate and
distinct from any criteria applicable to such Covered Employee under the
Annual Covered Employee Incentive Compensation Plan for the fiscal year.
5. PAYMENT OF AWARDS.
a. Awards under the Plan shall be paid to Participants as soon as
practicable after the end of the fiscal year to which performance relates,
and after the Committee has approved the Awards.
b. Awards shall be paid in cash, less required withholding, or for those
eligible, may be deferred at the Participant's election, subject to the
terms and conditions of any deferred compensation plan in which the
Participant is eligible to participate.
c. Unless the Committee has taken action under subsection 3.c. hereof prior
to payment of an Award, each Participant selected by the Committee for a
fiscal year who remains actively employed by the Company or a Subsidiary
thereof at the end of the fiscal year shall be entitled to receive a
payment of an Award earned pursuant to the terms of the Plan with respect
to such year.
d. If a Participant's employment is terminated prior to completion of a
fiscal year for any reason other than as described in subsection 5.e.
below, the Participant will forfeit any Award otherwise payable for such
fiscal year.
e. If a Participant dies, retires or is disabled during the fiscal year,
and the Committee has not taken action under Section 3.c. hereof, the
Participant's Award will be prorated based on the number of Participant's
full months as an active employee during the fiscal year. If a Participant
dies before receipt of an Award, the Award will be paid to the
Participant's beneficiaries.
f. Prorated Awards will be paid at the same time as regular Awards.
3
6. MISCELLANEOUS.
a. All amounts payable hereunder shall be payable only to the Participant
or his or her beneficiaries. The rights and interests of a Participant
under the Plan may not be assigned, encumbered, or transferred, voluntarily
or involuntarily, other than by will or the laws of descent and
distribution.
b. No individual shall have any claim or right to be a Participant in the
Plan at any time, and any individual's participation in the Plan may be
terminated at any time with or without notice, cause or regard to past
practices.
c. Neither the Plan nor any action hereunder shall confer on any person any
right to remain in the employ of the Company or any of its Subsidiaries or
shall affect an employee's compensation not arising under the Plan. Neither
the adoption of the Plan nor its operation shall in any way affect the
right and power of the Company or any Subsidiary to dismiss or discharge
any employee at any time.
d. The Company and its Subsidiaries shall have the right to deduct from any
Award, prior to payment, the amount of any taxes required to be withheld by
any federal, state or local government with respect to such payments.
e. The Committee may rely upon any information supplied to it by any
officer of the Company or any Subsidiary or by any independent accountant
for the Company and may rely upon the advice of counsel in connection with
the administration of the Plan and shall be fully protected in relying upon
such information or advice.
f. All expenses and costs in connection with the administration of the Plan
shall be borne by the Company.
g. The Plan and any agreements entered into thereunder shall be governed by
and construed in accordance with the laws of the state of Illinois.
7. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may suspend, terminate, modify or amend the Plan.
8. EFFECTIVE DATE.
The Plan was adopted by the Board on March 8, 1994, and was approved by the
Company's stockholders on May 19, 1994. The Plan, as amended and restated
herein, was adopted and made effective by the Board on March 9, 1999.
4
Exhibit 10.15
THE ALLSTATE CORPORATION
LONG-TERM EXECUTIVE INCENTIVE COMPENSATION PLAN
AS AMENDED AND RESTATED EFFECTIVE MARCH 9, 1999
1. PURPOSES.
The Allstate Corporation Long-Term Executive Incentive Compensation
Plan was adopted and made effective by the Board of Directors on March
9, 1999. The Plan was submitted to the Company's stockholders for
approval on May 18, 1999. The purposes of the Plan are:
a. to attract and retain competent personnel and to
ensure the deductibility of compensation paid under
the Plan to any Participant who is a Covered Employee
as defined in Section 162(m) of the Internal Revenue
Code (the "Code");
b. to provide Participants with added incentives to
promote various long-term performance goals, while
taking into account the varying objectives and
conditions of the different businesses engaged in by
The Allstate Corporation and its Subsidiaries;
c. to link compensation to performance by rewarding
three-year corporate performance;
d. to compensate participants at competitive levels when
competitive performance is achieved, and at superior
levels when performance exceeds competitors'; and
e. to encourage teamwork among top executives.
2. DEFINITIONS.
The following terms when used in the Plan shall, for the purposes of
the Plan, have the following meanings:
a. "Award" means the cash amount payable to a Participant for a
Performance Cycle pursuant to the terms of the Plan.
b. "Board" means the Board of Directors of The Allstate Corporation.
1
c. "Business Unit" means any operating unit of The Allstate
Corporation or any of its Subsidiaries, including but not limited to,
the property and casualty business, the life business, the investments
business, or the international business.
d. "Committee" means two or more members of the Board who are "outside
directors" within the meaning of Section 162(m) of the Code and the
regulations thereunder.
e. "Company" means The Allstate Corporation.
f. "Covered Employee" means a Participant who is a "Covered Employee"
as defined in Section 162(m)(3) of the Code.
g. "Fiscal Year" means the calendar year.
h. "Participant" means a senior executive of the Company or of any
Subsidiary, selected by the Committee to participate in the Plan for a
Performance Cycle or for any shorter period within a Performance Cycle
in which the Participant is a senior executive of the Company selected
by the Committee to participate in the Plan.
i. "Performance Cycle" means a period of three consecutive fiscal
years.
j. "Plan" means the Long-Term Executive Incentive Compensation Plan.
k. "Subsidiary" means any corporation of which the Company owns
directly or indirectly a majority of the outstanding shares of voting
stock.
3. ADMINISTRATION OF THE PLAN.
a. The Plan shall be administered by the Committee. Members of the
Committee shall be appointed by the Board.
b. The Committee shall have the authority to make all determinations
it deems necessary or advisable for the administration of the Plan,
including the selection of Participants, and, subject to the
limitations set forth herein, the determination of the timing and
amount of Awards made to each Participant, and the establishment of
objective and measurable performance standards ("performance goals")
for earning Awards.
c. The Committee shall have the authority to exercise discretion in
determining the amounts of the Awards otherwise payable under the
terms of the Plan; provided, however, that the Committee shall have no
authority to increase the amount of Awards otherwise payable to any
Covered Employee under the terms of the Plan.
4. AWARDS.
a. Awards under the Plan shall consist of cash bonuses based upon the
degree of
2
attainment of objective and measurable performance goals of the
Company and/or its Subsidiaries and/or Business Units thereof, where
applicable, over a Performance Cycle or such shorter period within a
Performance Cycle during which the Participant is an employee of the
Company or of any Subsidiary.
b. The Committee shall establish written performance goals within 90
days after the beginning of a Performance Cycle (or, if the Covered
Employee is not an employee at the beginning of a Performance Cycle,
within the first 25% of the period within the Performance Cycle in
which the Covered Employee is an employee), and while the outcome of
the performance goals is substantially uncertain. Such performance
goals shall be expressed in terms of objective and measurable
financial and/or operating criteria, and may involve comparisons with
respect to historical results of the Company and its Subsidiaries and
operating groups or Business Units thereof, as well as comparisons
with respect to peer group performance. Performance goals shall be
expressed using one or more of the following measures of performance:
net earnings, operating income, return on equity, earnings per share,
return on assets, values of assets, revenues, market share, prices of
Company stock, or strategic business criteria consisting of one or
more Company, Subsidiary or Business Unit objectives based on meeting
specified revenue goals, market penetration goals, international
business expansion goals, cost targets, customer retention goals,
customer satisfaction goals, or goals relating to acquisitions or
divestitures. The calculation is specifically defined at the time the
goal is set. Each performance goal must state, in terms of an
objective formula or standard, the Award payable to each Participant
if the performance goal is attained.
c. No award opportunity for any Participant for any Performance Cycle
shall exceed $3,500,000.
5. PAYMENT OF AWARDS.
a. Awards under the Plan shall be paid to Participants as soon as
practicable after the completion of the Performance Cycle, after the
completion of the audits for each year in the Performance Cycle and
after the Committee certifies that the performance goals and any other
material terms were in fact satisfied.
b. Awards will be paid in cash, less required withholding, or for
those eligible, may be deferred at the Participant's election, subject
to the terms and conditions of any deferred compensation plan in which
the Participant is eligible to participate.
c. Unless the Committee has taken action under subsection 3.c. hereof
prior to payment of an Award, each Participant selected by the
Committee who remains actively employed by the Company or a Subsidiary
thereof at the end of a Performance Cycle shall be entitled to receive
a payment of an Award earned pursuant to the terms of the Plan with
respect to such Performance Cycle.
d. If a Participant's employment is terminated prior to completion of a
Performance
3
Cycle for any reason other than as described in subsection 5.e. below,
the Participant will forfeit any Award otherwise payable for such
Performance Cycle.
e. If a Participant dies, retires or is disabled during a Performance
Cycle, and the Committee has not taken action under Section 3.c.
hereof, the Participant's Award shall be prorated based on the number
of Participant's full months as an active employee during the
Performance Cycle. If a Participant dies before receipt of an Award,
the Award will be paid to the Participant's beneficiaries.
f. Prorated Awards will be paid at the same time as regular Awards.
6. MISCELLANEOUS.
a. All amounts payable hereunder shall be payable only to the
Participant or his or her beneficiaries. The rights and interests of a
Participant under the Plan may not be assigned, encumbered, or
transferred, voluntarily or involuntarily, other than by will or the
laws of descent and distribution.
b. No individual shall have any claim or right to be a Participant in
the Plan at any time, and any individual's participation in the Plan
may be terminated at any time with or without notice, cause or regard
to past practices.
c. Neither the Plan nor any action hereunder shall confer on any
person any right to remain in the employ of the Company or any of its
Subsidiaries or shall affect an employee's compensation not arising
under the Plan. Neither the adoption of the Plan nor its operation
shall in any way affect the right and power of the Company or any
Subsidiary to dismiss or discharge any employee at any time.
d. The Company and its Subsidiaries shall have the right to deduct
from any Award, prior to payment, the amount of any taxes required to
be withheld by any federal, state or local government with respect to
such payments.
e. The Committee may rely upon any information supplied to it by any
officer of the Company or any Subsidiary or by any independent
accountant for the Company and may rely upon the advice of counsel in
connection with the administration of the Plan and shall be fully
protected in relying upon such information or advice.
f. All expenses and costs in connection with the administration of the
Plan shall be borne by the Company.
g. The Plan and any agreements entered into thereunder shall be
governed by and construed in accordance with the laws of the state of
Illinois.
4
7. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may suspend, terminate, modify or amend the Plan; provided,
however, that any such action which changes employees eligible to
participate, the criteria set forth in subsection 4.b., or the maximum
amount of an Award set forth in subsection 4.c., shall be disclosed to and
approved by the Company's stockholders. Stockholder approval must be given
by a majority of the votes cast by the holders of Company shares
represented in person or by proxy at the annual meeting next following the
date of any such change.
8. EFFECTIVE DATE.
The Plan was adopted by the Board on March 8, 1994, and was approved by the
Company's stockholders on May 19, 1994. The Plan, as amended and restated
herein, was adopted by the Board of Directors on March 9, 1999, and was
submitted to the Company's stockholders for approval on May 18, 1999.
5
Exhibit 10.16
THE ALLSTATE CORPORATION
EQUITY INCENTIVE PLAN
AS AMENDED AND RESTATED EFFECTIVE AS OF NOVEMBER 10, 1998
TABLE OF CONTENTS
Page
1. Purpose........................................................1
2. Definitions....................................................1
3. Scope of the Plan..............................................3
(a) Number of Shares Available For Delivery Under the Plan...3
(b) Effect of Expiration or Termination......................3
(c) Treasury Stock...........................................3
(d) Committee Discretion to Cancel Options...................4
4. Administration.................................................4
(a) Committee Administration................................4
(b) Board Reservation and Delegation........................4
(c) Committee Authority.....................................4
(d) Committee Determinations Final..........................5
5. Eligibility....................................................5
6. Conditions to Grants...........................................6
(a) General Conditions......................................6
(b) Grant of Options and Option Price.......................6
(c) Grant of Incentive Stock Options........................6
(d) Grant of Reload Options.................................8
(e) Grant of Shares of Restricted Stock.....................8
(f) Grant of Unrestricted Stock............................10
7. Limitations on Transferability................................11
8. Exercise......................................................11
(a) Exercise of Options....................................11
(b) Special Rules for Section 16 Grantees..................13
(c) Permissible Shares Issued..............................13
9. Loans and Guarantees..........................................13
10. Notification under Section 83(b)..............................14
11. Mandatory Withholding Taxes...................................14
12. Elective Share Withholding....................................14
13. Termination of Employment.....................................15
(a) Restricted Stock.......................................15
(b) Other Awards...........................................15
(c) Maximum Extension......................................16
14. Equity Incentive Plans of Foreign Subsidiaries................16
15. Substituted Awards............................................16
16. Securities Law Matters........................................16
17. No Funding Required...........................................17
18. No Employment Rights..........................................17
19. Rights as a Stockholder.......................................17
20. Nature of Payments............................................17
21. Non-Uniform Determinations....................................17
22. Adjustments...................................................18
23. Amendment of the Plan.........................................18
24. Termination of the Plan.......................................18
25. No Illegal Transactions.......................................18
26. Controlling Law...............................................19
27. Severability..................................................19
-ii-
THE PLAN. The Company established The Allstate Corporation
Equity Incentive Plan (as set forth herein and from time to time amended, the
"Plan"), effective June 2, 1993. Amendments to the Plan were approved by the
Company's stockholders on May 19, 1994 and on May 23, 1995. The Board of
Directors further amended the Plan on May 21, 1996, November 12, 1996 and August
14, 1997. On May 19, 1998, the Plan was amended and restated effective as of
July 2, 1998. The Plan was further amended and restated effective as of November
10, 1998.
1. PURPOSE. The primary purpose of the Plan is to provide a means by which
key employees of the Company and its Subsidiaries can acquire and maintain stock
ownership, thereby strengthening their commitment to the success of the Company
and its Subsidiaries and their desire to remain employed by the Company and its
Subsidiaries. The Plan also is intended to attract and retain key employees and
to provide such employees with additional incentive and reward opportunities
designed to encourage them to enhance the profitable growth of the Company and
its Subsidiaries.
2. DEFINITIONS. As used in the Plan, terms defined parenthetically
immediately after their use shall have the respective meanings provided by such
definitions and the terms set forth below shall have the following meanings
(such meanings to be equally applicable to both the singular and plural forms of
the terms defined):
(a) "Award" means options, shares of restricted Stock, or shares of
unrestricted Stock granted under the Plan.
(b) "Award Agreement" means the written agreement by which an Award is
evidenced.
(c) "Board" means the board of directors of the Company.
(d) "Committee" means the committee of the Board appointed pursuant to
Article 4.
(e) "Company" means The Allstate Corporation, a Delaware corporation.
(f) "Disability" means, as relates to the exercise of an incentive stock
option after Termination of Employment, a permanent and total disability within
the meaning of Section 22(e)(3) of the Internal Revenue Code, and for all other
purposes, a mental or physical condition which, in the opinion of the Committee,
renders a Grantee unable or incompetent to carry out the job responsibilities
which such Grantee held or the duties to which such Grantee was assigned at the
time the disability was incurred, and which is expected to be permanent or for
an indefinite duration.
(g) "Effective Date" means the date described in the first paragraph of
the Plan.
-1-
(h) "Fair Market Value" of the Stock means, as of any applicable date
(other than on the Effective Date) the mean between the high and low prices of
the Stock as reported on the New York Stock Exchange Composite Tape, or if no
such reported sale of the Stock shall have occurred on such date, on the next
preceding date on which there was such a reported sale, PROVIDED, HOWEVER, that
if the Stock is acquired and sold in a simultaneous sale pursuant to the
provisions of Article 8(a)(iv), Fair Market Value means the price received upon
such sale. Solely as of the effective date of the IPO, Fair Market Value of the
Stock means the price to the public pursuant to the form of final prospectus
used in connection with the IPO, as indicated on the cover page of such
prospectus or otherwise.
(i) "Grant Date" means the date of grant of an Award determined in
accordance with Article 6.
(j) "Grantee" means an individual who has been granted an Award.
(k) "Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended, and regulations and rulings thereunder. References to a particular
section of the Internal Revenue Code shall include references to successor
provisions.
(l) "IPO" means such term as defined in the first paragraph of the Plan.
(m) "Minimum Consideration" means the $.01 par value per share or such
larger amount determined pursuant to resolution of the Board to be capital
within the meaning of Section 154 of the Delaware General Corporation Law.
(n) "1934 Act" means the Securities Exchange Act of 1934, as amended.
(o) "Option Price" means the per share purchase price of (i) Stock
subject to an option or (ii) restricted Stock subject to an option.
(p) [deleted]
(q) "Plan" has the meaning set forth in the introductory paragraph.
(r) "Reload Option" has the meaning specified in Article 6(d).
(s) "Retirement" means a Termination of Employment occurring on or after
an individual attains age 65, or a Termination of Employment approved by the
Company as an early retirement; provided that in the case of a Section 16
Grantee, such early retirement must be approved by the Committee.
(t) "SEC" means the Securities and Exchange Commission.
-2-
(u) "Section 16 Grantee" means a person subject to potential liability
with respect to equity securities of the Company under Section 16(b) of the 1934
Act.
(v) "Stock" means common stock of the Company, par value $.01 per share.
(x) "Subsidiary" means a corporation as defined in Section 424(f) of the
Internal Revenue Code, with the Company being treated as the employer
corporation for purposes of this definition.
(y) "10% Owner" means a person who owns stock (including stock treated
as owned under Section 424(d) of the Internal Revenue Code) possessing more than
10% of the Voting Power of the Company.
(z) "Termination of Employment" occurs the first day on which an
individual is for any reason no longer employed by the Company or any of its
Subsidiaries, or with respect to an individual who is an employee of a
Subsidiary, the first day on which the Company no longer owns voting securities
possessing at least 50% of the Voting Power of such Subsidiary.
(aa) "Voting Power" means the combined voting power of the
then-outstanding voting securities entitled to vote generally in the election of
directors.
3. SCOPE OF THE PLAN.
(a) NUMBER OF SHARES AVAILABLE FOR DELIVERY UNDER THE PLAN. A maximum of
36,000,000 shares of Stock may be awarded under the Plan. Awards may be made
from authorized but unissued shares of Stock or from Treasury Stock. No more
than an aggregate of 3,400,000 shares of the aforesaid 36,000,000 shares of
Stock may be granted under Article 6(e) and (f). No more than 1,600,000 shares
of Stock may be granted as stock options to any employee during the duration of
the Plan.
(b) EFFECT OF EXPIRATION OR TERMINATION. If and to the extent an Award,
other than an Award granted under Article 6(e) or (f),shall expire or terminate
for any reason without having been exercised in full (including, without
limitation, a cancellation and regrant of an option pursuant to Article
4(c)(vii)), or shall be forfeited, without, in either case, the Grantee having
enjoyed any of the benefits of stock ownership, the shares of Stock associated
with such Award shall become available for other Awards. Except in the case of a
Reload Option granted to a Section 16 Grantee, the grant of a Reload Option
shall not reduce the number of shares of Stock available for other Awards.
(c) TREASURY STOCK. The Committee shall have the authority to cause the
Company to purchase from time to time shares of Stock to be held as treasury
shares and used for or in connection with Awards.
-3-
(d) COMMITTEE DISCRETION TO CANCEL OPTIONS. The Committee may, in its
discretion, elect at any time, should it determine it is in the best interest of
the Company's stockholders to cancel any options granted hereunder, to cancel
all or any of the options granted hereunder and pay the holders of any such
options an amount (payable in such proportion as the Committee may determine in
cash or in Stock (valued at the Fair Market Value of a share of Stock on the
date of cancellation of such option)) equal to the number of shares of Stock
subject to such cancelled option, multiplied by the amount (if any) by which the
Fair Market Value of Stock on the date of cancellation of the option exceeds the
Option Price; provided that if the Committee should determine that not making
payment of such amount to the holders of such option upon the cancellation would
be in the best interests of stockholders of the Company (ignoring in such
determination the cost of such payment and considering only other matters), the
Committee may void options granted hereunder and declare that no payment shall
be made to the holders of such options.
4. ADMINISTRATION.
(a) COMMITTEE ADMINISTRATION. Subject to Article 4(b), the Plan shall be
administered by the Committee, which shall consist of not less than two persons
appointed by the Board, who are directors of the Company and not employees of
the Company or any of its Subsidiaries. Membership on the Committee shall be
subject to such limitations (including, if appropriate, a change in the minimum
number of members of the Committee) as the Board deems appropriate to permit
transactions pursuant to the Plan to be exempt from potential liability under
Section 16(b) of the 1934 Act and to comply with Section 162 (m) of the Internal
Revenue Code.
(b) BOARD RESERVATION AND DELEGATION. The Board may, in its discretion,
reserve to itself or delegate to another committee of the Board any or all of
the authority and responsibility of the Committee with respect to Awards to
Grantees who are not Section 16 Grantees at the time any such delegated
authority or responsibility is exercised. Such other committee may consist of
one or more directors who may, but need not be, officers or employees of the
Company or of any of its Subsidiaries. To the extent that the Board has reserved
to itself or delegated the authority and responsibility of the Committee to such
other committee, all references to the Committee in the Plan shall be to such
other committee.
(c) COMMITTEE AUTHORITY. The Committee shall have full and final authority,
in its sole and absolute discretion, but subject to the express provisions of
the Plan, as follows:
(i) to grant Awards,
(ii) to determine (A) when Awards may be granted, and (B) whether or
not specific Awards shall be identified with other specific Awards, and if
so, whether they shall be exercisable cumulatively with, or alternatively
to, such other specific Awards,
(iii) to interpret the Plan and to make all determinations necessary
or advisable for
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the administration of the Plan,
(iv) to prescribe, amend, and rescind rules and regulations relating
to the Plan, including, without limitation, rules with respect to the
exercisability and nonforfeitability of Awards upon the Termination of
Employment of a Grantee,
(v) to determine the terms and provisions of the Award Agreements,
which need not be identical and, with the consent of the Grantee, to modify
any such Award Agreement at any time,
(vi) to cancel options in accordance with the provision of Section
3(d),
(vii) except as provided in Section 4(c)(vi) hereof, to cancel, with
the consent of the Grantee, outstanding Awards, and to grant new Awards in
substitution thereof,
(viii) to accelerate the exercisability of, and to accelerate or waive
any or all of the restrictions and conditions applicable to, any Award,
(ix) to authorize foreign Subsidiaries to adopt plans as provided in
Article 14,
(x) to make such adjustments or modifications to Awards to Grantees
working outside the United States as are necessary and advisable to fulfill
the purposes of the Plan,
(xi) to authorize any action of or make any determination by the
Company as the Committee shall deem necessary or advisable for carrying out
the purposes of the Plan,
(xii) to make appropriate adjustments to, cancel or continue Awards in
accordance with Article 22, and
(xiii) to impose such additional conditions, restrictions, and
limitations upon the grant, exercise or retention of Awards as the
Committee may, before or concurrently with the grant thereof, deem
appropriate, including, without limitation, requiring simultaneous exercise
of related identified Awards, and limiting the percentage of Awards which
may from time to time be exercised by a Grantee.
(d) COMMITTEE DETERMINATIONS FINAL. The determination of the Committee on
all matters relating to the Plan or any Award Agreement shall be conclusive and
final. No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any Award.
5. ELIGIBILITY. Awards may be granted to any employee of the Company or any
of its Subsidiaries. In selecting the individuals to whom Awards may be granted,
as well as in determining the number of shares of Stock subject to, and the
other terms and conditions
-5-
applicable to, each Award, the Committee shall take into consideration such
factors as it deems relevant in promoting the purposes of the Plan.
6. CONDITIONS TO GRANTS.
(a) GENERAL CONDITIONS.
(i) The Grant Date of an Award shall be the date on which the
Committee grants the Award or such later date as specified in advance by
the Committee.
(ii) The term of each Award (subject to Articles 6(c) and 6(d)
with respect to incentive stock options and Reload Options,
respectively) shall be a period of not more than 12 years from the Grant
Date, and shall be subject to earlier termination as herein provided.
(iii) A Grantee may, if otherwise eligible, be granted additional
Awards in any combination.
(iv) The Committee may grant Awards with terms and conditions
which differ among the Grantees thereof. To the extent not set forth in
the Plan, the terms and conditions of each Award shall be set forth in
an Award Agreement.
(b) GRANT OF OPTIONS AND OPTION PRICE. The Committee may, in its
discretion, grant options (which may be options to acquire unrestricted Stock or
restricted Stock) to any employee eligible under Article 5 to receive Awards. No
later than the Grant Date of any option, the Committee shall determine the
Option Price; provided that the Option Price shall, except as provided in
subsection (c) below and in Article 15, not be less than 100% of the Fair Market
Value of the Stock on the Grant Date.
(c) GRANT OF INCENTIVE STOCK OPTIONS. At the time of the grant of any
option, the Committee may designate that such option shall be made subject to
additional restrictions to permit it to qualify as an "incentive stock option"
under the requirements of Section 422 of the Internal Revenue Code. Any option
designated as an incentive stock option:
(i) shall have an Option Price of (A) not less than 100% of the
Fair Market Value of the Stock on the Grant Date or (B) in the case of a
10% Owner, not less than 110% of the Fair Market Value of the Stock on
the Grant Date;
(ii) shall have a term of not more than 10 years (five years, in
the case of a 10% Owner) from the Grant Date, and shall be subject to
earlier termination as provided herein or in the applicable Award
Agreement;
(iii) shall not have an aggregate Fair Market Value (determined
for each incentive
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stock option at its Grant Date) of Stock with respect to which incentive
stock options are exercisable for the first time by such Grantee during
any calendar year (under the Plan and any other employee stock option
plan of the Grantee's employer or any parent or subsidiary thereof
("Other Plans")), determined in accordance with the provisions of
Section 422 of the Internal Revenue Code, which exceeds $100,000 (the
"$100,000 Limit");
(iv) shall, if the aggregate Fair Market Value of Stock
(determined on the Grant Date) with respect to all incentive stock
options previously granted under the Plan and any Other Plans ("Prior
Grants") and any incentive stock options under such grant (the "Current
Grant") which are exercisable for the first time during any calendar
year would exceed the $100,000 Limit, be exercisable as follows:
(A) the portion of the Current Grant exercisable for
the first time by the Grantee during any calendar year which
would be, when added to any portions of any Prior Grants
exercisable for the first time by the Grantee during such
calendar year with respect to stock which would have an
aggregate Fair Market Value (determined as of the respective
Grant Date for such options) in excess of the $100,000 Limit
shall, notwithstanding the terms of the Current Grant, be
exercisable for the first time by the Grantee in the first
subsequent calendar year or years in which it could be
exercisable for the first time by the Grantee when added to all
Prior Grants without exceeding the $100,000 Limit; and
(B) if, viewed as of the date of the Current Grant, any
portion of a Current Grant could not be exercised under the
provisions of the immediately preceding sentence during any
calendar year commencing with the calendar year in which it is
first exercisable through and including the last calendar year
in which it may by its terms be exercised, such portion of the
Current Grant shall not be an incentive stock option, but shall
be exercisable as a separate option at such date or dates as are
provided in the Current Grant;
(v) shall be granted within 10 years from the earlier of the
date the Plan is adopted or the date the Plan is approved by the
stockholders of the Company; and
(vi) shall require the Grantee to notify the Committee of any
disposition of any Stock issued pursuant to the exercise of the
incentive stock option under the circumstances described in Section
421(b) of the Internal Revenue Code (relating to certain disqualifying
dispositions), within 10 days of such disposition.
Notwithstanding the foregoing and Article 4(c)(v), the Committee may take any
action with respect to any option, including but not limited to an incentive
stock option, without the consent of the Grantee, in order to prevent such
option from being treated as an incentive stock option.
(d) GRANT OF RELOAD OPTIONS. The Committee may provide in an Award
Agreement
-7-
that a Grantee who exercises all or any portion of an option for shares of Stock
which have a Fair Market Value equal to not less than 100% of the Option Price
for such options ("Exercised Options") and who paid the Option Price with shares
of Stock shall be granted, subject to Article 3, an additional option ("Reload
Option") for a number of shares of stock equal to the sum ("Reload Number") of
the number of shares of Stock tendered or withheld in payment of the Option
Price for the Exercised Options plus, if so provided by the Committee, the
number of shares of Stock, if any, retained by the Company in connection with
the exercise of the Exercised Options to satisfy any federal, state or local tax
withholding requirements.
Reload Options shall be subject to the following terms and conditions:
(i) the Grant Date for each Reload Option shall be the date of
exercise of the Exercised Option to which it relates;
(ii) subject to Article 6(d)(iii) below, the Reload Option may
be exercised at any time during the unexpired term of the Exercised
Option (subject to earlier termination thereof as provided in the Plan
and in the applicable Award Agreement); and
(iii) the terms of the Reload Option shall be the same as the
terms of the Exercised Option to which it relates, except that (A) the
Option Price shall be the Fair Market Value of the Stock on the Grant
Date of the Reload Option and (B) no Reload Option may be exercised
within one year from the Grant Date thereof.
(e) GRANT OF SHARES OF RESTRICTED STOCK.
(i) The Committee may, in its discretion, grant shares of
restricted Stock to any employee eligible under Article 5 to receive
Awards.
(ii) Before the grant of any shares of restricted Stock, the
Committee shall determine, in its discretion:
(A) whether the certificates for such shares shall be
delivered to the Grantee or held (together with a stock power
executed in blank by the Grantee) in escrow by the Secretary of
the Company until such shares become nonforfeitable or are
forfeited,
(B) the per share purchase price of such shares, which may
be zero provided, however, that
(1) the per share purchase price of all such shares
(other than treasury shares) shall not be less than the
Minimum Consideration for each such share; and
-8-
(2) if such shares are to be granted to a Section 16
Grantee, the per share purchase price of any such shares
shall also be at least 50% of the Fair Market Value of the
Stock on the Grant Date unless such shares are granted for
no monetary consideration (in which case treasury shares are
to be delivered) or with a purchase price per share equal to
the Minimum Consideration for the Stock, and
(C) the restrictions applicable to such grant;
(iii) Payment of the purchase price (if greater than zero) for
shares of restricted Stock shall be made in full by the Grantee before
the delivery of such shares and, in any event, no later than 10 days
after the Grant Date for such shares. Such payment may, at the election
of the Grantee, be made in any one or any combination of the following:
(A) cash,
(B) Stock valued at its Fair Market Value on the date
of payment or, if the date of payment is not a business day, the
next succeeding business day, or
(C) with the approval of the Committee, shares of
restricted Stock, each valued at the Fair Market Value of a
share of Stock on the date of payment or, if the date of payment
is not a business day, the next succeeding business day
provided, however, that, in the case of payment in Stock or restricted Stock,
(1) the use of Stock or restricted Stock in
payment of such purchase price by a Section 16 Grantee
is subject to (i) the availability of an exemption of
such use of stock from potential liability under
Section 16(b) of the 1934 Act, or (ii) the
inapplicability of such Section;
(2) in the discretion of the Committee and to
the extent permitted by law, payment may also be made
in accordance with Article 9; and
(3) if the purchase price for restricted Stock
("New Restricted Stock") is paid with shares of
restricted Stock ("Old Restricted Stock"), the
restrictions applicable to the New Restricted Stock
shall be the same as if the Grantee had paid for the
New Restricted Stock in cash unless, in the judgment of
the Committee, the Old Restricted Stock was subject to
a greater risk of forfeiture, in which case a number of
shares of New Restricted Stock equal to the number of
shares of Old Restricted Stock tendered in payment for
New Restricted Stock may in the discretion of the
Committee be subject to the same restrictions as the
Old Restricted Stock,
-9-
determined immediately before such payment.
(iv) The Committee may, but need not, provide that all or any
portion of a Grantee's Award of restricted Stock shall be forfeited
(A) except as otherwise specified in the Award Agreement,
upon the Grantee's Termination of Employment within a specified
time period after the Grant Date, or
(B) if the Company or the Grantee does not achieve specified
performance goals within a specified time period after the Grant
Date and before the Grantee's Termination of Employment, or
(C) upon failure to satisfy such other restrictions as the
Committee may specify in the Award Agreement.
(v) If a share of restricted Stock is forfeited, then
(A) the Grantee shall be deemed to have resold such share of
restricted Stock to the Company at the lesser of (1) the purchase
price paid by the Grantee (such purchase price shall be deemed to
be zero dollars ($0) if no purchase price was paid) or (2) the
Fair Market Value of a share of Stock on the date of such
forfeiture;
(B) the Company shall pay to the Grantee the amount
determined under clause (A) of this sentence as soon as is
administratively practical; and
(C) such share of restricted Stock shall cease to be
outstanding, and shall no longer confer on the Grantee thereof
any rights as a stockholder of the Company, from and after the
date of the Company's tender of the payment specified in clause
(B) of this sentence, whether or not such tender is accepted by
the Grantee.
(vi) Any share of restricted Stock shall bear an appropriate
legend specifying that such share is non-transferable and subject to the
restrictions set forth in the Plan. If any shares of restricted Stock
become nonforfeitable, the Company shall cause certificates for such
shares to be issued or reissued without such legend and delivered to the
Grantee or, at the request of the Grantee, shall cause such shares to be
credited to a brokerage account specified by the Grantee.
(f) GRANT OF UNRESTRICTED STOCK. The Committee may, in its discretion,
grant shares of unrestricted Stock to any employee eligible under Article 5 to
receive Awards.
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7. LIMITATIONS ON TRANSFERABILITY. Except as otherwise provided in the
terms of a specific grant, each Award (other than unrestricted Stock) granted
hereunder shall by its terms not be assignable or transferable other than by
will or the laws of descent and distribution and may be exercised, during the
Grantee's lifetime, only by the Grantee. Each share of restricted Stock shall be
non-transferable until such share becomes nonforfeitable. Notwithstanding the
foregoing, the Committee shall have the authority, in its discretion, to grant
(or to sanction by way of amendment of an existing grant) nonqualified stock
options the vested portions of which may be transferred by the Grantee during
his lifetime to (a) any member of his immediate family, (b) to a trust
established for the exclusive benefit of himself or one or more members of his
immediate family, or (c) to a partnership, the partners of which are limited to
the Grantee and members of his immediate family. A transfer of a stock option
pursuant to this section 7 may only be effected by the Company at the written
request of a Grantee and shall become effective only when recorded in the
Company=s record of outstanding stock options. In the event a stock option is
transferred as contemplated in this section 7 any Reload Options associated with
such transferred stock option shall terminate, and such transferred stock option
may not be subsequently transferred by the transferee except by will or the laws
of descent and distribution. Otherwise, a transferred stock option shall
continue to be governed by and subject to the terms and limitations of the Plan
and the relevant grant, and the transferee shall be entitled to the same rights
as the Grantee, as if no transfer had taken place. As used in this section 7,
Aimmediate family@ shall mean, with respect to any person, his/her spouse, any
child, stepchild or grandchild, and shall include relationships arising from
legal adoption.
8. EXERCISE.
(a) EXERCISE OF OPTIONS. Subject to Articles 4(c)(vii), 14 and 17, and such
terms and conditions as the Committee may impose, each option shall be
exercisable in one or more installments commencing not earlier than the first
anniversary of the Grant Date of such option. Options shall not be exercisable
for twelve months following a hardship distribution that is subject to Treasury
Regulation ' 1.401(k)-1(d)(2)(iv)(B)(4), except to the extent permitted
thereunder. Options shall not be exercisable for less than 25 shares of Stock
unless the exercise represents the entire remaining balance of a grant or
grants. Each option shall be exercised by delivery to the Company of written
notice of intent to purchase a specific number of shares of Stock or restricted
Stock subject to the option. The Option Price of any shares of Stock or
restricted Stock as to which an option shall be exercised shall be paid in full
at the time of the exercise. Payment may, at the election of the Grantee, be
made in any one or any combination of the following forms:
(i) check in such form as may be satisfactory to the Committee,
(ii) Stock valued at its Fair Market Value on the date of exercise or,
if the date of exercise is not a business day, the next succeeding business
day,
(iii) with the approval of the Committee, shares of restricted Stock,
each valued
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at the Fair Market Value of a share of Stock on the date of exercise or, if
the date of exercise is not a business day, the next succeeding business
day,
(iv) through simultaneous sale through a broker of shares of
unrestricted Stock acquired on exercise, as permitted under Regulation T of
the Federal Reserve Board, or
(v) by authorizing the Company in his or her written notice of
exercise to withhold from issuance a number of shares of Stock issuable
upon exercise of such option which, when multiplied by the Fair Market
Value of Common Stock on the date of exercise (or, if the date of exercise
is not a business day, the next succeeding business day), is equal to the
aggregate Option Price payable with respect to the option so exercised.
In the event a Grantee elects to pay the Option Price payable with
respect to an option pursuant to clause (ii) above, (A) only a whole number of
share(s) of Stock (and not fractional shares of Stock) may be tendered in
payment, (B) such Grantee must present evidence acceptable to the Company that
he or she has owned any such shares of Stock tendered in payment of the Option
Price (and that such shares of Stock tendered have not been subject to any
substantial risk of forfeiture) for at least six months prior to the date of
exercise, and (C) Stock must be delivered to the Company. Delivery may, at the
election of the Grantee, be made either by (I) delivery of the certificate(s)
for all such shares of Stock tendered in payment of the Option Price,
accompanied by duly executed instruments of transfer in a form acceptable to the
Company, or (II) direction to the Grantee=s broker to transfer, by book entry,
such shares of Stock from a brokerage account of the Grantee to a brokerage
account specified by the Company. When payment of the Option Price is made by
tender of Stock, the difference, if any, between the aggregate Option Price
payable with respect to the option being exercised and the Fair Market Value of
the share(s) of Stock tendered in payment (plus any applicable taxes) shall be
paid by check. No Grantee may tender shares of Stock having a Fair Market Value
exceeding the aggregate Option Price payable with respect to the Option being
exercised
In the event a Grantee elects to pay the Option Price payable with
respect to an option pursuant to clause (v) above, (A) only a whole number of
share(s) of Stock (and not fractional shares of Stock) may be withheld in
payment and (B) such Grantee must present evidence acceptable to the Company
that he or she has owned a number of shares of Stock at least equal to the
number of shares of Stock to be withheld in payment of the Option Price (and
that such owned shares of Stock have not been subject to any substantial risk of
forfeiture) for at least six months prior to the date of exercise. When payment
of the Option Price is made by the withholding of shares of Stock, the
difference, if any, between the aggregate Option Price payable with respect to
the option being exercised and the Fair Market Value of the share(s) of Stock
withheld in payment (plus any applicable taxes) shall be paid by check. No
Grantee may authorize the withholding of shares of Stock having a Fair Market
Value exceeding the aggregate Option Price payable with respect to the option
being exercised. Any withheld shares of Stock shall no longer be issuable under
such option.
-12-
If restricted Stock ("Tendered Restricted Stock") is used to pay the
Option Price for Stock, then a number of shares of Stock acquired on exercise of
the option equal to the number of shares of Tendered Restricted Stock shall be
subject to the same restrictions as the Tendered Restricted Stock, determined as
of the date of exercise of the option. If the Option Price for restricted Stock
is paid with Tendered Restricted Stock, and if the Committee determines that the
restricted Stock acquired on exercise of the option is subject to restrictions
("Greater Restrictions") that cause it to have a greater risk of forfeiture than
the Tendered Restricted Stock, then notwithstanding the preceding sentence, all
the restricted Stock acquired on exercise of the option shall be subject to such
Greater Restrictions.
Shares of unrestricted Stock acquired by a Grantee on exercise of an
option shall be delivered to the Grantee or, at the request of the Grantee,
shall be credited directly to a brokerage account specified by the Grantee.
(b) SPECIAL RULES FOR SECTION 16 GRANTEES. Subject to Article 15, no option
shall be exercisable by a Section 16 Grantee during the first six months after
its Grant Date, if such exercise (or the sale of shares received upon exercise)
would result in the loss of an exemption for a grant under Section 16(b) of the
1934 Act.
(c) PERMISSIBLE SHARES ISSUED. No shares of Stock shall be issued hereunder
upon option exercise except shares of Stock available under Article 3(a). Each
Grantee, by acceptance of an award, waives all rights to specific performance or
injunctive or other equitable relief and acknowledges that he has an adequate
remedy at law in the form of damages.
9. LOANS AND GUARANTEES. The Committee may, in its discretion:
(a) allow a Grantee to defer payment to the Company of all or any portion
of (i) the Option Price of an option, (ii) the purchase price of a share of
restricted Stock, or (iii) any taxes associated with a benefit hereunder which
is not a cash benefit at the time such benefit is so taxable, or
(b) cause the Company to guarantee a loan from a third party to the
Grantee, in an amount equal to all or any portion of such Option Price, purchase
price, or any related taxes.
Any such payment deferral or guarantee by the Company pursuant to this Article 9
shall be, on a secured or unsecured basis, for such periods, at such interest
rates, and on such other terms and conditions as the Committee may determine.
Notwithstanding the foregoing, a Grantee shall not be entitled to defer the
payment of such Option Price, purchase price, or any related taxes unless the
Grantee (i) enters into a binding obligation to pay the deferred amount and (ii)
except with respect to treasury shares, pays upon exercise of an option or grant
of shares of restricted Stock, as the case may be, an amount equal to or greater
than the aggregate Minimum Consideration therefor. If the Committee has
permitted a payment deferral or caused the Company to guarantee
-13-
a loan pursuant to this Article 9, then the Committee may, in its discretion,
require the immediate payment of such deferred amount or the immediate release
of such guarantee upon the Grantee's Termination of Employment or if the Grantee
sells or otherwise transfers the Grantee's shares of Stock purchased pursuant to
such deferral or guarantee.
10. NOTIFICATION UNDER SECTION 83(B). The Committee may, on the Grant Date
or any later date, prohibit a Grantee from making the election described below.
If the Committee has not prohibited such Grantee from making such election, and
the Grantee shall, in connection with the exercise of any option, or the grant
of any share of restricted Stock, make the election permitted under Section
83(b) of the Internal Revenue Code (i.e., an election to include in such
Grantee's gross income in the year of transfer the amounts specified in Section
83(b) of the Internal Revenue Code), such Grantee shall notify the Company of
such election within 10 days of filing notice of the election with the Internal
Revenue Service, in addition to any filing and notification required pursuant to
regulations issued under the authority of Section 83(b) of the Internal Revenue
Code.
11. MANDATORY WITHHOLDING TAXES.
(a) Whenever under the Plan, cash or shares of Stock are to be delivered
upon exercise or payment of an Award or upon a share of restricted Stock
becoming nonforfeitable, or any other event with respect to rights and benefits
hereunder, the Company shall be entitled to require as a condition of delivery
(i) that the Grantee remit an amount sufficient to satisfy all federal, state,
and local withholding tax requirements related thereto, (ii) the withholding of
such sums from compensation otherwise due to the Grantee or from any shares of
Stock due to the Grantee under the Plan or (iii) any combination of the
foregoing.
(b) If any disqualifying disposition described in Article 6(c)(vi) is made
with respect to shares of Stock acquired under an incentive stock option granted
pursuant to the Plan or any election described in Article 10 is made, then the
person making such disqualifying disposition or election shall remit to the
Company an amount sufficient to satisfy all federal, state, and local
withholding taxes thereby incurred; provided that, in lieu of or in addition to
the foregoing, the Company shall have the right to withhold such sums from
compensation otherwise due to the Grantee or from any shares of Stock due to the
Grantee under the Plan.
12. ELECTIVE SHARE WITHHOLDING
(a) Subject to the prior approval of the Committee and to Article 12(b), a
Grantee may elect the withholding ("Share Withholding") by the Company of a
portion of the shares of Stock otherwise deliverable to such Grantee upon the
exercise or payment of an Award or upon a share of restricted Stock's becoming
nonforfeitable (each a "Taxable Event") having a Fair Market Value equal to
(i) the minimum amount necessary to satisfy required federal, state,
or local
-14-
withholding tax liability attributable to the Taxable Event; or
(ii) with the Committee's prior approval, a greater amount, not to
exceed the estimated total amount of such Grantee's tax liability with
respect to the Taxable Event.
(b) Each Share Withholding election by a Grantee shall be subject to the
following restrictions:
(i) any Grantee's election shall be subject to the Committee's right
to revoke its approval of Share Withholding by such Grantee at any time
before the Grantee's election if the Committee has reserved the right to do
so at the time of its approval;
(ii) if the Grantee is a Section 16 Grantee, such Grantee's election
shall be subject to the disapproval of the Committee at any time, whether
or not the Committee has reserved the right to do so; and
(iii) the Grantee's election must be made before the date (the "Tax
Date") on which the amount of tax to be withheld is determined.
13. TERMINATION OF EMPLOYMENT.
(a) RESTRICTED STOCK. Except as otherwise provided by the Committee on
or after the Grant Date, a Grantee's shares of restricted Stock that are
forfeitable shall be forfeited upon the Grantee's Termination of
Employment.
(b) OTHER AWARDS. If a Grantee has a Termination of Employment, then,
unless otherwise provided in the Grant Agreement, any unexercised option to
the extent exercisable on the date of the Grantee's Termination of
Employment may be exercised by the Grantee, in whole or in part, at any
time within three months following such Termination of Employment, except
that
(i) if the Grantee's Termination of Employment is on account of
Disability, then any unexercised option to the extent exercisable at
the date of such Termination of Employment, may be exercised, in whole
or in part, by the Grantee at any time within two years after the date
of such Termination of Employment; and
(ii) if the Grantee's Termination of Employment is on account of
Retirement, then any unexercised option to the extent exercisable at
the date of such Termination of Employment, may be exercised, in whole
or in part, by the Grantee at any time within five years after the
date of such Termination of Employment; and
(iii) if the Grantee's Termination of Employment is caused by the
death of the Grantee or if the Grantee's death occurs during the
period following Termination of
-15-
Employment during which the option would be exercisable under the
preceding clause of Article 13(b) or under Article 13(b)(i) or (ii),
then any unexercised option to the extent exercisable on the date of
the Grantee's death, may be exercised, in whole or in part, at any
time within two years after the Grantee's death by the Grantee's
personal representative or by the person to whom the option is
transferred by will or the applicable laws of descent and
distribution.
(c) Maximum Extension. Notwithstanding the foregoing, no Award shall be
exercisable beyond the maximum term permitted under the original Award Agreement
unless the Committee explicitly extends such original term, in which case such
term shall not be extended beyond the maximum term permitted by the Plan.
14. EQUITY INCENTIVE PLANS OF FOREIGN SUBSIDIARIES. The Committee may
authorize any foreign Subsidiary to adopt a plan for granting Awards ("Foreign
Equity Incentive Plan"). All awards granted under such Foreign Equity Incentive
Plans shall be treated as grants under the Plan. Such Foreign Equity Incentive
Plans shall have such terms and provisions as the Committee permits not
inconsistent with the provisions of the Plan and which may be more restrictive
than those contained in the Plan. Awards granted under such Foreign Equity
Incentive Plans shall be governed by the terms of the Plan except to the extent
that the provisions of the Foreign Equity Incentive Plans are more restrictive
than the terms of the Plan, in which case such terms of the Foreign Equity
Incentive Plans shall control.
15. SUBSTITUTED AWARDS. The Committee may grant substitute awards for any
cancelled Award granted under this Plan or any plan of any entity acquired by
the Company or any of its Subsidiaries in accordance with this Article 15. If
the Committee cancels any Award (granted under this Plan, or any plan of any
entity acquired by the Company or any of its Subsidiaries), and a new Award is
substituted therefor, then the Committee may, in its discretion, determine the
terms and conditions of such new Award, and may provide that the Grant Date of
the cancelled Award shall be the date used to determine the earliest date or
dates for exercising the new substituted Award under Article 8 hereof so that
the Grantee may exercise the substituted Award at the same time as if the
Grantee had held the substituted Award since the Grant Date of the cancelled
Award.
16. SECURITIES LAW MATTERS.
(a) If the Committee deems necessary to comply with the Securities Act of
1933, the Committee may require a written investment intent representation by
the Grantee and may require that a restrictive legend be affixed to certificates
for shares of Stock.
(b) If based upon the opinion of counsel for the Company, the Committee
determines that the exercise or nonforfeitability of, or delivery of benefits
pursuant to, any Award could violate any applicable provision of (i) federal or
state securities law or regulations or (ii) the listing requirements of any
national securities exchange on which are listed any of the
-16-
Company's equity securities, then the Committee may postpone any such exercise,
nonforfeitability or delivery, as the case may be, but the Company shall use its
best efforts to cause such exercise, nonforfeitability or delivery to comply
with all such provisions at the earliest practicable date.
17. NO FUNDING REQUIRED. Benefits payable under the Plan to any person
shall be paid directly by the Company. The Company shall not be required to
fund, or otherwise segregate assets to be used for payment of, benefits under
the Plan.
18. NO EMPLOYMENT RIGHTS. Neither the establishment of the Plan, nor the
granting of any Award shall be construed to (a) give any Grantee the right to
remain employed by the Company or any of its Subsidiaries or to any benefits not
specifically provided by the Plan or (b) in any manner modify the right of the
Company or any of its Subsidiaries to modify, amend, or terminate any of its
employee benefit plans.
19. RIGHTS AS A STOCKHOLDEr. A Grantee shall not, by reason of any Award
(other than restricted Stock) have any right as a stockholder of the Company
with respect to the shares of Stock which may be deliverable upon exercise or
payment of such Award until such shares have been delivered to him. Shares of
restricted Stock held by a Grantee or held in escrow by the Secretary of the
Company shall confer on the Grantee all rights of a stockholder of the Company,
except as otherwise provided in the Plan or the Award Agreement. The Committee,
in its discretion, at the time of grant of restricted Stock, may permit or
require the payment of cash dividends thereon to be deferred and, if the
Committee so determines, reinvested in additional restricted Stock to the extent
shares are available under Article 3, or otherwise reinvested in Stock. Stock
dividends, deferred cash dividends and dividends in the form of property other
than cash, issued with respect to restricted Stock shall, unless otherwise
provided in the Award Agreement, be treated as additional shares of restricted
Stock that are subject to the same restrictions and other terms as apply to the
shares with respect to which such dividends are issued. The Committee may, in
its discretion, provide for crediting and payment of interest on deferred cash
dividends.
20. NATURE OF PAYMENTS. Any and all grants, payments of cash, or deliveries
of shares of Stock hereunder shall constitute special incentive payments to the
Grantee and shall not be taken into account in computing the amount of salary or
compensation of the Grantee for the purposes of determining any pension,
retirement, death or other benefits under (a) any pension, retirement,
profit-sharing, bonus, life insurance or other employee benefit plan of the
Company or any of its Subsidiaries or (b) any agreement between the Company or
any Subsidiary, on the one hand, and the Grantee, on the other hand, except as
such plan or agreement shall otherwise expressly provide.
21. NON-UNIFORM DETERMINATIONS. Neither the Committee's nor the Board's
determinations under the Plan need be uniform and may be made by the Committee
or the Board selectively among persons who receive, or are eligible to receive,
Awards (whether or not such
-17-
persons are similarly situated). Without limiting the generality of the
foregoing, the Committee shall be entitled, among other things, to make
non-uniform and selective determinations, to enter into non-uniform and
selective Award Agreements as to (a) the identity of the Grantees, (b) the terms
and provisions of Awards, and (c) the treatment, under Article 13, of
Terminations of Employment.
22. ADJUSTMENTS. The Committee may make such provision with respect to
Awards, including without limitation, equitable adjustment of
(a) the aggregate numbers of shares of Stock available under Articles 3(a)
and 3(b),
(b) the number of shares of Stock or shares of restricted Stock covered by
an Award, and
(c) the Option Price, or
the termination or continuation of an Award as it may determine to be
appropriate and equitable to reflect a stock dividend, stock split, reverse
stock split, share combination, recapitalization, merger, consolidation,
acquisition of property or shares, separation, spin-off, reorganization, stock
rights offering, liquidation, or similar event, of or by the Company.
23. AMENDMENT OF THE PLAN. The Board may from time to time in its
discretion amend or modify the Plan without the approval of the stockholders of
the Company, except as such stockholder approval may be required (a) to permit
transactions in Stock pursuant to the Plan to be exempt from potential liability
under Section 16(b) of the 1934 Act, (b) to permit the Company to deduct, in
computing its income tax liability pursuant to the provisions of the Internal
Revenue Code, compensation resulting from Awards, (c) to retain incentive stock
option treatment under Section 422 of the Internal Revenue Code, or (d) under
the listing requirements of any securities exchange on which are listed any of
the Company's equity securities.
24. TERMINATION OF THE PLAN. The Plan shall terminate on the tenth (10th)
anniversary of the Effective Date or at such earlier time as the Board may
determine. Any termination, whether in whole or in part, shall not affect (a)
any Award then outstanding under the Plan, or (b) the Company's ability to make
adjustments to or cancel or continue Awards in accordance with Article 22.
25. NO ILLEGAL TRANSACTIONS. The Plan and all Awards granted pursuant to it
are subject to all laws and regulations of any governmental authority which may
be applicable thereto; and notwithstanding any provision of the Plan or any
Award, Grantees shall not be entitled to exercise Awards or receive the benefits
thereof and the Company shall not be obligated to deliver any Stock or pay any
benefits to a Grantee if such exercise, delivery, receipt or payment of benefits
would constitute a violation by the Grantee or the Company of any provision of
any such law or regulation.
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26. CONTROLLING LAW. The law of the State of Delaware except its law with
respect to choice of law, shall be controlling in all matters relating to or
arising out of the Plan or any Award.
27. SEVERABILITY. If all or any part of the Plan is declared by any court
or governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not serve to invalidate any portion of the Plan not declared to
be unlawful or invalid. Any Article or part of an Article so declared to be
unlawful or invalid shall, if possible, be construed in a manner which will give
effect to the terms of such Article or part of an Article to the fullest extent
possible while remaining lawful and valid.
-19-
Exhibit 10.19
THE ALLSTATE CORPORATION
EQUITY INCENTIVE PLAN FOR NON-EMPLOYEE DIRECTORS
As Amended and Restated effective as of November 10, 1998
I. PURPOSE.
The purpose of The Allstate Corporation Equity Incentive Plan for
Non-Employee Directors (the "Plan") is to promote the interests of The Allstate
Corporation (the "Company") by providing an inducement to obtain and retain the
services of qualified persons as members of the Company's Board of Directors
(the "Board") and to align more closely the interests of such persons with the
interests of the Company's stockholders by providing a significant portion of
the compensation provided to such persons in the form of equity securities of
the Company.
II. ADMINISTRATION.
The Plan shall be administered by the Committee. The Committee shall
have full power to construe and interpret the Plan and Shares and Options
granted hereunder, to establish and amend rules for its administration and to
correct any defect or omission and to reconcile any inconsistency in the Plan or
in any Share or Option granted hereunder to the extent the Committee deems
desirable to carry the Plan or any Share or Option granted hereunder into
effect. Any decisions of the Committee in the administration of the Plan shall
be final and conclusive. The Committee may authorize any one or more of its
members, the secretary of the Committee or any officer of the Company to execute
and deliver documents on behalf of the Committee. Each member of the Committee,
and, to the extent provided by the Committee, any other person to whom duties or
powers shall be delegated in connection with the Plan, shall incur no liability
with respect to any action taken or omitted to be taken in connection with the
Plan and shall be fully protected in relying in good faith upon the advice of
counsel, to the fullest extent permitted under applicable law.
III. ELIGIBILITY.
Each Non-Employee Director shall be eligible to participate in the
Plan.
IV. LIMITATION ON AGGREGATE SHARES.
A. MAXIMUM NUMBER OF SHARES. The aggregate maximum number of Shares
that may be granted pursuant to the Plan or issued upon exercise of Options
granted pursuant to the Plan shall be 580,000 shares. Such maximum number of
Shares is subject to adjustment under the provisions of Section IV.B. The Shares
to be granted or issued upon exercise of Options may be authorized but unissued
Shares or Shares previously issued which have been reacquired by the
1
Company. In the event any Option or Reload Option shall, for any reason,
terminate or expire or be surrendered without having been exercised in full, the
Shares subject to such Option or Reload Option but not purchased thereunder
shall be available for future Options or Reload Options to be granted under the
Plan.
B. ADJUSTMENt. The maximum number of Shares referred to in Section IV.A
of the Plan, the number of Shares granted pursuant to Section VI of the Plan,
the number of Options granted pursuant to Section VII of the Plan, and the
option price and the number of Shares which may be purchased under any
outstanding Option granted under Section VII of the Plan shall be
proportionately adjusted for any increase or decrease in the number of issued
and outstanding Shares as the result of (i) the declaration and payment of a
dividend payable in Common Stock, or the division of the Common Stock
outstanding at the date hereof (or the date of the grant of any such outstanding
Option, as applicable) into a greater number of Shares without the receipt of
consideration therefor by the Company, or any other increase in the number of
such Shares of the Company outstanding at the date hereof (or the date of the
grant of any such outstanding Option, as applicable) which is effective without
the receipt of consideration therefor by the Company (exclusive of any Shares
granted by the Company to employees of the Company or any of its Subsidiaries
without receipt of separate consideration by the Company), or (ii) the
consolidation of the Shares outstanding at the date hereof (or the date of the
grant of any such outstanding Option, as applicable) into a smaller number of
Shares without the payment of consideration thereof by the Company, or any other
decrease in the number of such Shares outstanding at the date hereof (or the
date of the grant of any such outstanding Option, as applicable) effected
without the payment of consideration by the Company; provided, however, that the
total option price for all Shares which may be purchased upon the exercise of
any Option granted pursuant to the Plan (computed by multiplying the number of
Shares originally purchasable thereunder, reduced by the number of such Shares
which have theretofore been purchased thereunder, by the original option price
per share before any of the adjustments herein provided for) shall not be
changed.
In the event of a change in the Common Stock as presently constituted
which is limited to a change of the Company's authorized shares with a par value
into the same number of shares with a different par value or without par value,
the shares resulting from any such change will be deemed to be the Common Stock
within the meaning of this Plan and no adjustment will be required pursuant to
this Section IV.B.
The foregoing adjustments shall be made by the Committee, whose
determination in that respect shall be final, binding and conclusive. Except as
expressly provided in this Section IV.B, a Non-Employee Director shall have no
rights by reason of any subdivision or consolidation of shares of stock of any
class or the payment of any stock dividend or any other increase or decrease in
the number of shares of stock of any class.
V. DEFINITIONs.
The following terms shall have the meanings set forth below when used
herein:
2
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the Compensation and Nominating Committee of the
Board, any successor committee of the Board performing similar functions or, in
the absence of such a committee, the Board.
"COMMON STOCK" means the Common Stock, par value $.01 per share, of
the Company.
"DISABILITY" means a mental or physical condition which, in the opinion
of the Committee, renders a Non-Employee Director unable or incompetent to carry
out his or her duties as a member of the Board and which is expected to be
permanent or for an indefinite duration.
"ELECTION SHARES" means any Shares issued to a Non-Employee Director
pursuant to the election of such person to receive such Shares in lieu of cash
compensation made in accordance with Section VIII.B.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FAIR MARKET VALUE" of any Share means, as of any applicable date, the
mean between the high and low prices of the Shares as reported on the New York
Stock Exchange-Composite Tape, or if no such reported sale of the Shares shall
have occurred on such date, on the next succeeding date on which there was such
a reported sale.
"INITIAL ELECTION DATE" means, for each Non-Employee Director, the
later to occur of (i) the date the Plan is approved and adopted by the Company's
stockholders pursuant to Section XIII of the Plan, and (ii) the date of such
member's initial election or appointment to the Board.
"NON-EMPLOYEE DIRECTOR" means each member of the Board who is not an
officer or employee of the Company or any of its Subsidiaries.
"OPTION" means an option to purchase shares of Common Stock.
"SHARES" means shares of Common Stock.
"SUBSIDIARY" means any partnership, corporation, association, limited
liability company, joint stock company, trust, joint venture, unincorporated
organization or other business entity of which (i) if a corporation, a majority
of the total voting power of shares of stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
the Company or one or more of the other Subsidiaries of the Company or a
combination thereof, or (ii) if a
3
partnership, association, limited liability company, joint stock company, trust,
joint venture, unincorporated organization or other business entity, a majority
of the partnership or other similar equity ownership interest thereof is at the
time owned or controlled, directly or indirectly, by the Company or one or more
Subsidiaries of the Company or a combination thereof. For purposes hereof, the
Company or a Subsidiary shall be deemed to have a majority ownership interest in
a partnership, association, limited liability company, joint stock company,
trust, joint venture, unincorporated organization or other business entity if
the Company or such Subsidiary shall be allocated a majority of partnership,
association, limited liability company, joint stock company, trust, joint
venture, unincorporated organization or other business entity gains or losses or
shall be or control the managing director, the trustee, the manager or the
general partner of such partnership, association, limited liability company,
joint stock company, trust, joint venture, unincorporated organization or other
business entity.
VI. FORMULA RESTRICTED STOCK GRANTS FOR NON-EMPLOYEE DIRECTORS.
A. ANNUAL GRANT OF SHARES. Beginning December 1, 1998, on December 1 of
each year 1,000 Shares shall automatically be granted to each Non-Employee
Director serving on the Board on such date who has served in such capacity since
June 1 of such year. If any person serving as a Non-Employee Director on June 1
of any year ceases to serve as a director of the Company prior to December 1 of
such year, such director shall be automatically granted on his or her last day
of service a number of Shares equal to (i) 1,000 multiplied by (ii) a fraction,
the numerator of which is the number of full calendar months such Non-Employee
Director has served on the Board during the period beginning on such June 1 and
ending on such director's last date of service and the denominator of which is
6.
B. GRANT FOR NEWLY APPOINTED DIRECTORS. If after June 1, 1998 a
Non-Employee Director is initially elected or appointed to the Board effective
on any date other than June 1, such Non-Employee Director shall automatically be
granted, on the June 1 following the date he or she joins the Board (or such
earlier date as he or she ceases to serve as a director), a number of Shares
equal to (i) 1,000 multiplied by (ii) a fraction, the numerator of which is the
number of full calendar months such Non-Employee Director has served on the
Board during the period beginning on the date such director joined the Board and
ending on the following May 31 (or such earlier date as he or she ceases to
serve as a director) and the denominator of which is 6; provided that such
fraction shall in no event be greater than one.
C. ROUNDING OF SHARE AMOUNTS. To the extent that application of the
foregoing formulas would result in fractional Shares being issuable, such
Non-Employee Director shall be granted a number of Shares equal to the nearest
whole number of Shares.
D. PAYMENT FOR ESTIMATED TAXES. In addition, the Company shall pay to
each Non-Employee Director, in cash, as soon as practicable after each issuance
of Shares pursuant to this Section VI, an amount equal to the estimated increase
in such Non-Employee Director's federal, state and local tax liabilities as a
result of such grant of Shares, assuming the maximum statutory
4
tax rates applicable to such Non-Employee Director.
E. RESTRICTIONS. The Non-Employee Directors shall have no rights as a
shareholder with respect to any Shares to be granted pursuant to this Section VI
prior to the time such Shares are granted. Upon such grant, the Shares shall be
represented by a stock certificate registered in the name of the holder. The
Shares granted pursuant to this Section VI shall be fully vested, but shall be
subject to certain restrictions during the six month period following the date
of grant (the "Restriction Period"). The holder shall have the right to enjoy
all shareholder rights during the Restriction Period (including the right to
vote the Shares and the right to receive any cash or other dividends paid in
respect thereof) with the exception that (i) the holder may not sell, transfer,
pledge or assign the Shares during the Restriction Period, and (ii) the Company
shall retain custody of the certificates representing the Shares during the
Restriction Period.
All restrictions shall lapse and the holder of the Shares shall be
entitled to the delivery of a stock certificate or certificates representing the
Shares (and to the removal of any restrictive legend set forth on such
certificates) upon the earliest of (i) six months from the date of grant of such
Shares, (ii) the date of the holder's death or Disability, and (iii) the date on
which the holder is no longer serving as a director of the Company.
VII. FORMULA STOCK OPTION GRANTS FOR NON-EMPLOYEE DIRECTORS.
A. ANNUAL GRANT OF OPTIONS. On June 1 of each year, beginning June 1,
1999, Options to purchase 3,000 Shares shall automatically be granted to each
Non-Employee Director serving on the Board on such date. If any such
Non-Employee Director will be required to retire (pursuant to the policies of
the Board) during the 12 month period beginning on the date of any grant (or if
any such Non-Employee Director has notified the Board that he or she intends to
resign from the Board for any reason during the 12 month period beginning on the
date of any grant), such director shall instead be granted on June 1 of the
relevant year Options to purchase a number of Shares equal to (i) 3,000,
multiplied by (ii) a fraction, the numerator of which is the number of full
calendar months such Non-Employee Director will serve on the Board during the
period beginning on such June 1 and ending on such director's last date of
service and the denominator of which is 12.
B. GRANT FOR NEWLY APPOINTED DIRECTORS. If after July 2, 1998 a
Non-Employee Director is initially elected or appointed to the Board effective
on any date other than June 1, such Non-Employee Director shall automatically be
granted, on the date he or she joins the Board, Options to purchase a number of
Shares equal to (i) 3,000, MULTIPLIED BY (ii) a fraction, the numerator of which
is the number of full calendar months such Non-Employee Director will serve on
the Board during the period beginning on the date such director joins the Board
and ending on the following May 31 and the denominator of which is 12.
C. OPTION EXERCISE PRICE. The exercise price per Share for each
option shall be 100% of the Fair Market Value of a Share on the date of grant,
subject to Section IV.B.
5
D. TERM OF OPTIONS. Each Option shall be exercisable for ten years
after the date of grant, subject to Section VII.F.
E. CONDITIONS AND LIMITATIONS ON EXERCISE.
(i) VESTING. Each Option shall vest in three equal
installments on the first, second and third anniversaries of the date
of grant. Upon a Non-Employee Director's mandatory retirement pursuant
to the policies of the Board, the unvested portions of any outstanding
Options held by such Non-Employee Director shall fully vest. Upon the
termination of a Non-Employee Director's tenure for any other reason,
the unvested portions of any outstanding Options shall expire and no
Options granted to such Non-Employee Director shall vest after the
termination of such director's tenure on the Board.
(ii) EXERCISE. Each Option shall be exercisable in one or
more installments and shall not be exercisable for less than 100
Shares, unless the exercise represents the entire remaining exercisable
balance of a grant or grants. Each Option shall be exercised by
delivery to the Company of written notice of intent to purchase a
specific number of Shares subject to the Option. The option price of
any Shares as to which an Option shall be exercised shall be paid in
full at the time of the exercise. Payment may, at the election of the
Non-Employee Director, be made in any one or any combination of the
following forms:
(a) check or wire transfer of funds in such form as may
be satisfactory to the Committee;
(b) delivery of Shares valued at their Fair Market
Value on the date of exercise or, if the date of exercise is
not a business day, the next succeeding business day;
(c) through simultaneous sale through a broker of
unrestricted Shares acquired on exercise, as permitted under
Regulation T of the Federal Reserve Board; or
(d) by authorizing the Company in his or her written
notice of exercise to withhold from issuance a number of
Shares issuable upon exercise of such Option which, when
multiplied by the Fair Market Value of Common Stock on the
date of exercise (or, if the date of exercise is not a
business day, the next succeeding business day), is equal to
the aggregate exercise price payable with respect to the
Option so exercised.
In the event a Non-Employee Director elects to pay the exercise price
payable with respect to an Option pursuant to clause (b) above, (i) only a whole
number of Share(s) (and not fractional Shares) may be tendered in
6
payment, (ii) such Non-Employee Director must present evidence acceptable to the
Company that he or she has owned any such Shares tendered in payment of the
exercise price (and that such Shares tendered have not been subject to any
substantial risk of forfeiture) for at least six months prior to the date of
exercise, and (iii) the certificate(s) for all such Shares tendered in payment
of the exercise price must be accompanied by duly executed instruments of
transfer in a form acceptable to the Company. When payment of the Option
exercise price is made by the tender of Shares, the difference, if any, between
the aggregate exercise price payable with respect to the Option being exercised
and the Fair Market Value of the Share(s) tendered in payment (plus any
applicable taxes) shall be paid by check or wire transfer of funds. No
Non-Employee Director may tender Shares having a Fair Market Value exceeding the
aggregate exercise price payable with respect to the Option being exercised.
In the event a Non-Employee Director elects to pay the exercise price
payable with respect to an Option pursuant to clause (d) above, (i) only a whole
number of Share(s) (and not fractional Shares) may be withheld in payment and
(ii) such Non-Employee Director must present evidence acceptable to the Company
that he or she has owned a number of Shares at least equal to the number of
Shares to be withheld in payment of the exercise price (and that such owned
Shares have not been subject to any substantial risk of forfeiture) for at least
six months prior to the date of exercise. When payment of the Option exercise
price is made by the withholding of Shares, the difference, if any, between the
aggregate exercise price payable with respect to the Option being exercised and
the Fair Market Value of the Share(s) withheld in payment (plus any applicable
taxes) shall be paid by check or wire transfer of funds. No Non-Employee
Director may authorize the withholding of Shares having a Fair Market Value
exceeding the aggregate exercise price payable with respect to the Option being
exercised. Any withheld Shares shall no longer be issuable under such Option.
F. ADDITIONAL PROVISIONS.
(i) ACCELERATED EXPIRATION OF OPTIONS UPON TERMINATION OF
DIRECTORSHIP. Upon the termination of a Non-Employee Director's tenure
for any reason, each outstanding vested and previously unexercised
Option shall expire three months after the date of such termination;
PROVIDED that (a) upon the termination of a Non-Employee Director's
tenure as a result of death or Disability, each outstanding vested and
previously unexercised Option shall expire two years after the date of
his or her termination as a director, and (b) upon the mandatory
retirement of a Non-Employee Director pursuant to the policies of the
Board, each outstanding vested and previously unexercised Option shall
expire five years after the date of his or her termination as a
director. In no event shall the provisions of this Section VII.F
operate to extend the original expiration date of any Option.
(ii) SALE OF THE COMPANY. In the event of a merger of the
Company with or into another corporation constituting a change of
control of the Company, a sale of all or substantially all of the
Company's assets or a sale of a majority of the Company's outstanding
voting securities (a "Sale of the Company"), the Options may be assumed
by the successor corporation or a parent of such
7
successor corporation or substantially equivalent options may be
substituted by the successor corporation or a parent of such successor
corporation, and if the successor corporation does not assume the
Options or substitute options, then all outstanding and unvested
Options shall become immediately exercisable and all outstanding
Options shall terminate if not exercised as of the date of the Sale of
the Company (or other prescribed period of time). The Company shall
provide at least 30 days prior written notice of the Sale of the
Company to the holders of all outstanding Options, which notice shall
state whether (a) the Options will be assumed by the successor
corporation or substantially equivalent options will be substituted by
the successor corporation, or (b) the Options are thereafter vested
and exercisable and will terminate if not exercised as of the date of
the Sale of the Company (or other prescribed period of time).
(iii) Liquidation or Dissolution. In the event of the liquidation
or dissolution of the Company, Options shall terminate immediately
prior to the liquidation or dissolution.
G. GRANT OF RELOAD OPTIONS. A Non-Employee Director who exercises all or
any portion of an Option by the tender or withholding of Shares which have a
Fair Market Value equal to not less than 100% of the exercise price for such
Options (the "Exercised Options") shall be granted, subject to Section IV, an
additional option (a "Reload Option") for a number of Shares equal to the sum of
the number of Shares tendered or withheld in payment of the exercise price for
the Exercised Options.
Reload Options shall be subject to the following terms and conditions:
(i) the grant date for each Reload Option shall be the date of
exercise of the Exercised Option to which it relates;
(ii) subject to clause (iii) below, the Reload Option may be
exercised at any time during the unexpired term of the Exercised
Option (subject to earlier termination thereof as provided in the
Plan); and
(iii) the other terms of the Reload Option shall be the same as
the terms of the Exercised Option to which it relates and shall be
subject to the provisions of the Plan, except that (a) the option
price shall be the Fair Market Value of the Shares on the grant date
of the Reload Option, (b) no Reload Option may be exercised within six
months from the grant date thereof, and (c) no other Reload Option
shall be granted upon exercise of such Reload Option.
H. NON-QUALIFIED STOCK OPTIONS. All Options granted under the Plan shall be
non-qualified options not entitled to special tax treatment under Code Section
422, as may be amended from time to time.
8
VIII. ELECTION TO RECEIVE STOCK IN LIEU OF CASH COMPENSATION.
A. GENERAL. A Non-Employee Director may elect to reduce the cash
compensation otherwise payable for services to be rendered by him or her as a
director for any period beginning on June 1 and continuing to the following May
31 (or such other period for which cash compensation is payable to Non-Employee
Directors pursuant to the policies of the Board), beginning June 1, 1996 and to
receive in lieu thereof Shares as provided in this Section VIII.
B. ELECTION. By the later of (i) the date of the Company's annual meeting
of stockholders next preceding the June 1 to which such election relates (but in
no event less than five business days prior to such June 1) and (ii) such
Non-Employee Director's Initial Election Date, each Non-Employee Director may
make an irrevocable election to receive, in lieu of all or a specified
percentage (which percentage shall be in 10% increments) of the cash
compensation to which such director would otherwise be entitled as a member of
the Board and any committee thereof (including the annual retainer fee and any
meeting or other fees payable for services on the Board or any committee
thereof, but excluding any reimbursement for out-of-pocket expenses) for the
year beginning the following June 1 (or such other period for which cash
compensation is payable to such Non-Employee Director pursuant to the policies
of the Board), an equivalent value in Shares granted in accordance with this
Section VIII. An election shall be effective (i) if made in accordance with
clause (i) of the preceding sentence, beginning on the June 1 following such
election; and (ii) if made on such Non-Employee Director's Initial Election
Date, immediately.
Each such election shall (i) be in writing in a form prescribed by the
Company, (ii) specify the amount of cash compensation to be received in the form
of Election Shares (expressed as a percentage of the compensation otherwise
payable in cash), and (iii) be delivered to the Secretary of the Company. Such
election may not be revoked or changed thereafter except as to compensation for
services to be rendered in any 12 month period beginning on any June 1 at least
six months following such revocation or new election.
C. ISSUANCE OF COMMON STOCK. If a Non-Employee Director elects pursuant to
Section VIII.B above to receive Shares, there shall be issued to such director
promptly following each subsequent June 1 for which such election is effective
(or promptly following the first day of such other period for which such
election is effective) a number of Shares equal to the amount of compensation
otherwise payable for the 12 month period beginning on such June 1 (or the other
period for which such election is effective) divided by the Fair Market Value of
the Shares on such June 1 (or on the first day of such other period). To the
extent that the application of the foregoing formula would result in fractional
shares of Common Stock being issuable, cash will be paid to the Non-Employee
Director in lieu of such fractional Shares based upon the Fair Market Value of
such fractional Share.
D. COMPLIANCE WITH EXCHANGE ACT. The election to receive Election Shares is
intended to comply in all respects with Rule 16b-3(d)(1) promulgated under
Section 16(b) of the Exchange Act such that the issuance of Election Shares
under the Plan on a grant date occurring
9
at least six months after the election shall be exempt from Section 16(b) of the
Exchange Act.
E. GRANT DATE. The grant date for each Election Share for the Non-Employee
Director electing such option shall be the first day of the period to which such
election relates and is effective.
IX. MISCELLANEOUS PROVISIONS.
A. RIGHTS OF NON-EMPLOYEE DIRECTORS. No Non-Employee Director shall be
entitled under the Plan to voting rights, dividends or other rights of a
stockholder prior to the issuance of Common Stock. Neither the Plan nor any
action taken hereunder shall be construed as giving any Non-Employee Director
any right to be retained in the service of the Company.
B. LIMITATIONS ON TRANSFER AND EXERCISE. All Options granted under the Plan
shall not be transferable by the Non-Employee Director, other than by will or
the laws of descent and distribution or pursuant to a qualified domestic
relations order, as defined by '1 et seq, of the Code, Title I of ERISA or the
rules and regulations thereunder, and shall be exercisable during the
Non-Employee Director's lifetime only by such Non-Employee Director or by such
Non-Employee Director's guardian or other legal representative; provided,
however, that the vested portions of Options, (other than Incentive Stock
Options as defined in Section 422 of the Code), may be transferred by the
Non-Employee Director during his lifetime to (a) any member of his immediate
family, (b) to a trust established for the exclusive benefit of himself or one
or more members of his immediate family, or (c) to a partnership, the partners
of which are limited to the Non-Employee Director and members of his immediate
family. A transfer of an Option pursuant to this paragraph may only be effected
by the Company at the written request of a Non-Employee Director and shall
become effective only when recorded in the Company=s record of outstanding
Options. In the event an Option is transferred as contemplated in this
paragraph, any Reload Options associated with such transferred Option shall
terminate, and such transferred Option may not be subsequently transferred by
the transferee except by will or the laws of descent and distribution.
Otherwise, a transferred Option shall continue to be governed by and subject to
the terms and limitations of the Plan and the relevant grant, and the transferee
shall be entitled to the same rights as the Non-Employee Director, as if no
transfer had taken place. As used in this paragraph, Aimmediate family@ shall
mean, with respect to any person, his/her spouse, any child, stepchild or
grandchild, and shall include relationships arising from legal adoption.
C. COMPLIANCE WITH LAWS. No shares of Common Stock shall be issued
hereunder unless counsel for the Company shall be satisfied that such issuance
will be in compliance with applicable federal, state, local and foreign
securities, securities exchange and other applicable laws and requirements. Each
Share granted pursuant to Section VI or Section VIII and each Option granted
pursuant to Section VII shall be subject to the requirement that if at any time
the Committee shall determine, in its discretion, that the listing, registration
or qualification of the Shares granted or subject to the Option upon any
securities exchange or under any state or federal securities or other law or
regulation, or the consent or approval of any governmental
10
regulatory body, is necessary or desirable as a condition to or in connection
with the granting of such Share, such Option or the issuance or purchase of
Shares thereunder, no such Share may be issued and no Option may be exercised or
paid in Common Stock, in whole or in part, unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Committee. The holder of such Share or
Option will supply the Company with such certificates, representations and
information as the Company shall request and shall otherwise cooperate with the
Company in obtaining such listing, registration, qualification, consent or
approval. The Committee may at any time impose any limitations upon the sale of
a Share or the exercise of an Option or the sale of the Common Stock issued upon
exercise of an Option that, in the Committee's discretion, are necessary or
desirable in order to comply with Section 16(b) of the Exchange Act and the
rules and regulations thereunder. The Committee may at any time impose
additional limitations, or may amend or delete the existing limitations, upon
the exercise of Options by the tender or withholding of Shares in accordance
with Section VII.E (including an amendment or deletion of the related ownership
period for Shares specified in such Section), if such additional, amended or
deleted limitations are necessary, desirable or no longer required (as the case
may be) to remain in compliance with applicable accounting pronouncements
relating to the treatment of the plan as a fixed plan for accounting purposes.
D. PAYMENT OF WITHHOLDING TAX. Whenever Shares are to be issued pursuant to
Section VI or Section VIII of the Plan or upon exercise of Options issued
pursuant to Section VII of the Plan, the Company shall be entitled to require as
a condition of delivery (i) that the participant remit an amount sufficient to
satisfy all federal, state and local withholding tax requirements related
thereto, (ii) the withholding of Shares due to the participant under the Plan
with a Fair Market Value equal to such amount, or (iii) any combination of the
foregoing.
E. EXPENSES. The expenses of the Plan shall be borne by the Company and its
Subsidiaries.
F. DEEMED ACCEPTANCE, RATIFICATION AND CONSENt. By accepting any Common
Stock hereunder or other benefit under the Plan, each Non-Employee Director and
each person claiming under or through him or her shall be conclusively deemed to
have indicated his or her acceptance and ratification of, and consent to, any
action taken under the Plan by the Company, the Board or the Committee.
G. SECURITIES ACT REGISTRATION. The Company shall use its best efforts to
cause to be filed under the Securities Act of 1933, as amended, a registration
statement covering the Shares issued, and issuable upon exercise of options
granted, under the Plan.
H. GOVERNING LAW. The provisions of the Plan shall be governed by and
construed in accordance with the laws of the
State of Delaware.
I. ELECTION SHARES. Pending the grant of Election Shares hereunder, all
compensation earned by a Non-Employee Director with respect to which an election
to receive
11
the grant of Election Shares pursuant to Section VIII.B has been made shall be
the property of such director and shall be paid to him or her in cash in the
event that Election Shares are not granted by the Company hereunder.
J. HEADINGS; CONSTRUCTION. Headings are given to the sections of the Plan
solely as a convenience to facilitate reference. Such headings, numbering and
paragraphing shall not in any case be deemed tn any way material or relevant to
the construction of the Plan or any provisions hereof. The use of the singular
shall also include within its meaning the plural, where appropriate, and vice
versa.
X. THIS SECTION INTENTIONALLY LEFT BLANK.
XI. AMENDMENT.
The Plan may be amended at any time and from time to time by resolution
of the Board as the Board shall deem advisable; PROVIDED, HOWEVER, that no
amendment shall become effective without stockholder approval if such
stockholder approval is required by law, rule or regulation. No amendment of the
Plan shall materially and adversely affect any right of any participant with
respect to any Options or Shares theretofore granted under the Plan without such
participant's written consent, except for any modifications required to maintain
compliance with any federal or state statute or regulation.
XII. TERMINATION.
The Plan shall terminate upon the earlier of the following dates or
events to occur:
(i) upon the adoption of a resolution of the Board terminating
the Plan; and
(ii) ten years from the date the Plan is initially approved and
adopted by the stockholders of the Company in accordance with Article
XIII.
Except as specifically provided herein, no termination of the Plan
shall materially and adversely affect any of the rights or obligations of any
person without his or her consent with respect to any Options or Shares
theretofore granted under the Plan.
XIII. STOCKHOLDER APPROVAL AND ADOPTION.
The Plan was originally adopted by the Board on March 12, 1996 and was
approved and adopted at a meeting of the stockholders of the Company held on May
21, 1996. The Plan was amended and restated by the Board at a meeting held on
November 12, 1996, August 14, 1997 and, in connection with a 2-for-1 stock split
in the form of a dividend, effective as of July 2, 1998. The Plan was further
amended and restated by the Board at a meeting held on November 10, 1998.
12
Exhibit 10.20
THE ALLSTATE CORPORATION
EMPLOYEES REPLACEMENT STOCK PLAN
As Amended and Restated on November 10, 1998
TABLE OF CONTENTS
Page
1. Purpose...............................................................1
2. Definitions...........................................................1
3. Scope of the Plan.....................................................5
(a) Number of Shares Available Under Plan........................5
(b) Expired or Terminated Awards not Available...................5
(c) Treasury Stock...............................................6
4. Administration........................................................6
(a) Committee Administration.....................................6
(b) Board Reservation and Delegation.............................6
(c) Committee Authority..........................................6
(d) Committee Determinations Final...............................7
5. Eligibility...........................................................7
6. Awards................................................................7
(a) In General...................................................7
(b) Options and Reload Options...................................7
(c) Stock Appreciation Rights....................................9
(d) Restricted Stock............................................10
7. Limitations on Transferability.......................................11
8. Exercise.............................................................12
(a) Exercise of Replacement Options.............................12
(b) Exercise of Replacement Stock Appreciation Rights...........12
(c) Special Rules for Section 16 Grantees.......................12
9. Notification under Section 83(b).....................................12
10. Withholding Taxes....................................................13
(a) Mandatory Withholding.......................................13
(b) Elective Share Withholding..................................13
11. Termination of Employment............................................14
(a) Restricted Stock............................................14
(b) Other Awards................................................14
-i-
12. Securities Law Matters...............................................14
13. No Funding Required..................................................15
14. No Employment Rights.................................................15
15. Rights as a Stockholder..............................................15
16. Nature of Payments...................................................15
17. Non-Uniform Determinations...........................................16
18. Adjustments..........................................................16
19. Amendment of the Plan................................................16
20. Termination of the Plan..............................................16
21. No Illegal Transactions..............................................16
22. Controlling Law......................................................17
23. Severability.........................................................17
-ii-
THE PLAN. The Allstate Corporation ("Company") Employees Replacement
Stock Plan (as set forth herein and from time to time amended, the "Plan"), was
adopted by the Company's Board of Directors on January 16, 1995 and was approved
by the Company's stockholders on May 23, 1995. The Plan was amended and restated
by the Board on November 12, 1996, August 14, 1997 and November 10, 1998.
1. PURPOSE. The purpose of the Plan is to provide continuation of benefits
and opportunities provided to former participants in any of the Sears Plans,
which benefits and opportunities were lost, terminated, forfeited, cancelled
(with or without consent of the grantee) or reduced as a result of the
Distribution, by providing for the grant of substitute Awards hereunder.
2. DEFINITIONS.
As used in the Plan, terms defined parenthetically immediately after their
use shall have the respective meanings provided by such definitions and the
terms set forth below shall have the following meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):
(a) "Allstate Group Grantee" means any individual who is employed on
the Distribution Date or who, immediately prior to his most recent Termination
of Employment prior to the Distribution Date, was employed by The Allstate
Corporation or any Allstate Affiliate, as defined in the Separation Agreement,
except The PMI Group, Inc. ("PMI") or any of PMI's subsidiaries.
(b) "Award" means an option, share of restricted Stock, or stock
appreciation right granted under the Plan.
(c) "Award Agreement" means the written agreement by which an Award is
evidenced.
(d) "Board" means the Board of Directors of the Company.
(e) "Change of Control" means any of the following occurring more than
five business days after the Distribution:
(i) the acquisition by any person or group of beneficial
ownership of any of the Stock or the Voting Power of the Company, which
acquisition results in such person or group having beneficial ownership
of 20% or more of either the then-outstanding Stock or Voting Power of
the Company, except that (A) no such person or group shall be deemed to
own beneficially (1) any securities acquired directly from the Company
pursuant to a written agreement with the Company, (2) any securities
held by the Company or a Subsidiary or any employee benefit plan (or
any related trust) of the Company or a Subsidiary, or (3) any
securities acquired directly from any Grantee, except securities
acquired in transactions effected through the facilities of a
registered national
1
securities exchange or any automated quotation system of the National
Association of Securities Dealers, Inc., and (B) no Change of Control
shall be deemed to have occurred solely by reason of any such
acquisition by a corporation with respect to which, after such
acquisition, more than 60% of both the then-outstanding common shares
of such corporation and the Voting Power of such corporation are then
beneficially owned, directly or indirectly, by the persons who were
the beneficial owners of the Stock and Voting Power of the Company
immediately before such acquisition in substantially the same
proportion as their ownership, immediately before such acquisition, of
the then-outstanding Stock or the Voting Power of the Company, as the
case may be;
(ii) individuals who, as of the Effective Date, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided that any individual who becomes
a director after the Effective Date whose election, or nomination for
election by the Company's stockholders, was approved by a vote of at
least two-thirds of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office is in connection with an actual or
threatened election contest relating to the election of the directors
of the Company (as such terms are used in Rule 14a-11 under the 1934
Act); or
(iii) approval by the stockholders of the Company of (A) a
merger, reorganization or consolidation with respect to which the
individuals and entities who were the respective beneficial owners of
the Stock and Voting Power of the Company immediately before such
merger, reorganization or consolidation do not, after such merger,
reorganization or consolidation, beneficially own, directly or
indirectly, more than 60% of, respectively, the then outstanding common
shares and the Voting Power of the corporation resulting from such
merger, reorganization or consolidation, (B) a liquidation or
dissolution of the Company or (C) the sale or other disposition of all
or substantially all of the assets of the Company; PROVIDED, HOWEVER,
that for the purposes of this clause (iii), the votes of all Section 16
Grantees shall be disregarded in determining whether stockholder
approval has been obtained.
For purposes of this definition, "person" means such term as used in SEC Rule
13d-5(b) under the 1934 Act, "beneficial owner" means such term as defined in
SEC Rule 13d-3 under the 1934 Act, and "group" means such term as defined in
Section 13(d) of the 1934 Act.
Notwithstanding the foregoing, (a) a Change of Control shall be deemed
not to have occurred with respect to any Section 16 Grantee if such Section 16
Grantee is, by agreement (written or otherwise), a participant on such Section
16 Grantee's own behalf in a transaction which causes the Change of Control to
occur; and (b) the Distribution shall not be deemed to be a Change in Control.
(f) "Change of Control Value" means the Fair Market Value of a share of
Stock on the date of receipt of notice of exercise of a limited stock
appreciation right issued to replace a
2
limited stock appreciation right granted under a Sears Plan.
(g) "Committee" means the committee of the Board appointed pursuant to
Article 4.
(h) "Company" means The Allstate Corporation, a Delaware corporation.
(i) "Distribution" means the distribution by Sears to holders of Sears
common shares of all of the shares of Stock owned by it.
(j) "Distribution Date" means the date to be determined by the board of
directors of Sears, as of which the Distribution shall be effected.
(k) "Effective Date" means the date described in the first paragraph of
the Plan.
(l) "Fair Market Value" of any security of the Company or any other
issuer (other than Fair Market Value of Stock as of the Distribution Date and
Fair Market Value of a Sears common share as of the Distribution Date) means, as
of any applicable date:
(i) if the security is listed for trading on the New York
Stock Exchange, the mean between the high and low prices of the
security as reported on the New York Stock Exchange Composite Tape, or
if no such reported sale of the security shall have occurred on such
date, on the next preceding date on which there was such a reported
sale, or
(ii) if the security is not so listed, but is listed on
another national securities exchange or authorized for quotation on the
National Association of Securities Dealers Inc.'s NASDAQ National
Market ("NASDAQ/NM"), the closing price, regular way, of the security
on such exchange or NASDAQ/NM, as the case may be, or if no such
reported sale of the security shall have occurred on such date, on the
next preceding date on which there was such a reported sale, or
(iii) if the security is not listed for trading on a national
securities exchange or authorized for quotation on NASDAQ/NM, the
average of the closing bid and asked prices as reported by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ")
or, if no such prices shall have been so reported for such date, on the
next preceding date for which such prices were so reported, or
(iv) if the security is not listed for trading on a national
securities exchange or authorized for quotation on NASDAQ/NM or NASDAQ,
the fair market value of the security as determined in good faith by
the Committee.
Notwithstanding paragraphs (i) through (iv) above, "Fair Market Value" of a
Sears common share as of the Distribution Date shall be the sum of the average
of the high and low per share prices, regular way, of such share as reported on
the New York Stock Exchange Composite Tape on each of the five business days
beginning on and including the tenth business day preceding
3
the record date associated with the Distribution ("Record Date"), on which there
was a reported sale of such stock, divided by five (or, if less, the number of
such days on which there was such a reported sale); and "Fair Market Value" of
Stock as of the Distribution Date shall be the sum of the average of the high
and low per share prices, regular way, of the Stock as reported on the New York
Stock Exchange Composite Tape on each of the five business days beginning on and
including the tenth business day preceding the Record Date, on which there was a
reported sale of such stock divided by five (or, if less, the number of such
days on which there was such a reported sale).
(m) "Grant Date" means, except as provided in Article 6, the date on
which the Committee grants the Award or such later date as specified in advance
by the Committee.
(n) "Grantee" means an individual who has been granted an Award.
(o) "Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended, and regulations and rulings thereunder. References to a particular
section of the Internal Revenue Code shall include references to successor
provisions.
(p) "Minimum Consideration" means the $.01 par value per share of the
Stock or such larger amount determined pursuant to resolution of the Board to be
capital within the meaning of Section 154 of the Delaware General Corporation
Law.
(q) "1934 Act" means the Securities Exchange Act of 1934, as amended.
(r) "Option Price" means the per share purchase price of Stock subject
to an option.
(s) "Plan" has the meaning set forth in the introductory paragraph.
(t) "Reload Option" has the meaning set forth in Article 6(b)(ii).
(u) "Retirement" means a Termination of Employment occurring on or
after an individual attains age 65, or a Termination of Employment after an
individual attains age 55 approved by Allstate Insurance Company as an early
retirement, provided that in the case of a Section 16 Grantee, such early
retirement must be approved by the Committee.
(v) "Sears" means Sears, Roebuck and Co., a New York corporation.
(w) "Sears Option" means an option granted under a Sears Plan.
(x) "Sears Plans" means the following plans of Sears: the 1994
Employees Stock Plan, the 1990 Employees Stock Plan, the 1986 Employees Stock
Plan, the 1982 Employees Stock Plan, the 1978 Employees Stock Plan and the 1979
Incentive Compensation Plan.
(y) "Sears Restricted Stock" means restricted shares granted under a
Sears Plan.
4
(z) "Sears SAR" means a stock appreciation right, limited stock
appreciation right or tax benefit right granted under a Sears Plan.
(aa) "SEC" means the Securities and Exchange Commission.
(bb) "Section 16 Grantee" means a person subject to potential liability
with respect to equity securities of the Company under Section 16(b) of the 1934
Act.
(cc) "Separation Agreement" means the separation agreement between
Sears and the Company dated as of January ___, 1995.
(dd) "Stock" means common stock of the Company, par value $.01 per
share.
(ee) "Subsidiary" means a corporation as defined in Section 424(f) of
the Internal Revenue Code, with the Company being treated as the employer
corporation for purposes of this definition.
(ff) "10% Owner" means a person who owns stock (including stock treated
as owned under Section 424(d) of the Internal Revenue Code) possessing more than
10% of the total combined voting power of all classes of stock of the Company.
(gg) "Termination of Employment" occurs as of the first day on which an
individual is for any reason no longer employed by the Company or any of its
Subsidiaries, or with respect to an individual who is an employee of a
Subsidiary, the first day on which the Company no longer, directly or
indirectly, owns voting securities possessing at least 50% of the aggregate
Voting Power of such Subsidiary.
(hh) "Voting Power" of a corporation or other entity means the combined
voting power of the then-outstanding voting securities of such corporation or
other entity entitled to vote generally in the election of directors.
3. SCOPE OF THE PLAN.
(a) NUMBER OF SHARES AVAILABLE UNDER PLAN. An aggregate number of shares of
Stock is hereby made available and is reserved for delivery on account of the
exercise of Awards and payment of benefits in connection with Awards equal to
the number of shares of Stock determined pursuant to the formulas set forth in
Article 6 to be required to replace awards under the Sears Plans; provided that
in no event shall the aggregate number of such shares of Stock exceed
4,500,000shares of Stock. Subject to the foregoing limits, shares of authorized
but unissued Stock or shares of Stock held as treasury shares by the Company may
be used for or in connection with Awards.
(b) EXPIRED OR TERMINATED AWARDS NOT AVAILABLE. If and to the extent an
Award shall
5
expire or terminate for any reason without having been exercised in full, or
shall be forfeited, regardless of whether, in either case, the Grantee enjoyed
any of the benefits of stock ownership, the shares of Stock (including
restricted Stock) and stock appreciation rights associated with such Award shall
not become available for other Awards.
(c) TREASURY STOCK. The Committee shall have the authority to cause the
Company to purchase from time to time shares of Stock to be held as treasury
shares and used for or in connection with Awards.
4. ADMINISTRATION.
(a) COMMITTEE ADMINISTRATION. Subject to Article 4(b), the Plan shall be
administered by the Committee, which shall consist of not less than three
persons who are appointed by the Board, who are directors of the Company and not
employees of the Company or any of its affiliates. Membership on the Committee
shall be subject to such limitations (including, if appropriate, a change in the
minimum number of members of the Committee) as the Board deems appropriate to
permit transactions pursuant to the Plan to be (1) exempt from potential
liability under Section 16(b) of the 1934 Act, and Rule 16b-3 pursuant thereto,
as in effect both before and after September 1, 1995, or such other date as the
SEC shall determine, and (2) exempt from limitations on deductibility under
Section 162(m) of the Internal Revenue Code.
(b) BOARD RESERVATION AND DELEGATION. The Board may, in its discretion,
reserve to itself or delegate to another committee of the Board any or all of
the authority and responsibility of the Committee with respect to Awards to
Grantees who are not Section 16 Grantees at the time any such delegated
authority or responsibility is exercised. Such other committee may consist of
one or more directors who may, but need not, be officers or employees of the
Company or of any of its Subsidiaries. To the extent that the Board has reserved
to itself or delegated the authority and responsibility of the Committee to such
other committee, all references to the Committee in the Plan shall be to the
Board or such other committee, as the case may be.
(C) COMMITTEE AUTHORITY. The Committee shall have full and final authority,
in its discretion, but subject to the express provisions of the Plan, as
follows:
(i) to grant Awards on or after the Distribution Date as described in
Article 6,
(ii) to determine (A) when Awards may be granted, and (B) whether or
not specific Awards shall be identified with other specific Awards, and if
so, whether they shall be exercisable cumulatively with, or alternatively
to, such other specific Awards,
(iii) to interpret the Plan and to make all determinations necessary
or advisable for the administration of the Plan,
(iv) to prescribe, amend, and rescind rules and regulations relating
to the Plan, including, without limitation, rules with respect to the
exercisability and nonforfeitability
6
of Awards upon the Termination of Employment of a Grantee,
(v) to determine the terms and provisions of the Award Agreements,
which need not be identical and, with the consent (to the extent required
by the Plan) of the Grantee, to modify any such Award Agreement at any
time,
(vi) to accelerate the exercisability of, and to accelerate or waive
any or all of the restrictions and conditions applicable to, any Award,
(vii) to make such adjustments or modifications to Awards to Grantees
working outside the United States as are necessary and advisable to fulfill
the purposes of the Plan, and
(viii) to impose such additional conditions, restrictions, and
limitations upon the grant, exercise or retention of Awards as the
Committee may, before or concurrently with the grant thereof, deem
appropriate, including, without limitation, requiring simultaneous exercise
of related identified Awards, and limiting the percentage of Awards which
may from time to time be exercised by a Grantee.
The Committee shall have full and final authority to authorize any
action or make any determination as the Committee shall deem necessary or
advisable for carrying out the purposes of the Plan, including to correct any
defect, supply any omission and reconcile any inconsistency between the Plan and
the awards under the Sears Plans the Plan is intended to replace.
(d) COMMITTEE DETERMINATIONS FINAL. The determination of the Committee
on all matters relating to the Plan or any Award Agreement shall be
conclusive and final. No member of the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
Award.
5. ELIGIBILITY. Awards may be granted to any employee or former employee
(or to the estate of a deceased employee) of the Company or any of its
Subsidiaries to replace any awards granted to such employee, former employee or
deceased employee under a Sears Plan which were terminated, forfeited, cancelled
or reduced (with or without the consent of the Grantee) in connection with the
Distribution.
6. AWARDS.
(a) IN GENERAL. In accordance with its powers under the Plan, the Committee
may grant replacement Awards, including options (including Reload Options),
replacement stock appreciation rights (including replacement stock appreciation
rights replacing limited stock appreciation rights and tax benefit rights) and
replacement restricted stock in accordance with Article 6 to preserve those
opportunities and benefits of Allstate Group Grantees which were terminated,
forfeited, cancelled, or reduced in connection with the Distribution, provided
that no Grantee shall be granted Awards under the Plan with respect to more than
675,000 shares of
7
Stock.
(b) OPTIONS AND RELOAD OPTIONs.
(i) GRANT OF REPLACEMENT OPTIONS. Subject to Article 3(a), the Committee
may grant options ("Replacement Options") under the Plan to each Allstate Group
Grantee who holds unexercised Sears Options (whether or not nonforfeitable) at
the Distribution Date; provided that such Allstate Group Grantee's right to
exercise any Sears Options has been forfeited or cancelled in connection with
the Distribution. The Award Agreement with respect to such Replacement Options
shall provide that the Grantee may exercise a Replacement Option at the same
time as he would have been able to exercise the Sears Option it replaces,
subject to Article 8(c), if applicable.
(A) The Option Price for a Replacement Option shall
be determined by the following formula; provided that in no event
shall the Option Price be less than the Minimum Consideration:
Option Price = A x B
------
C
Any fraction of a cent shall be rounded down to the next full cent.
(B) The number of shares of Stock for which the
Replacement Option is exercisable shall be determined in
accordance with the following formula:
Number of shares = C x D
-----
B
Any fractional share shall be rounded up to the next full share.
(C) In the foregoing formulas,
"A" is the option exercise price for a Sears Option being replaced,
"B" is the Fair Market Value of a share of Stock as of the
Distribution Date,
"C" is the Fair Market Value of a Sears common share as of the
Distribution Date, and
"D" is the number of Sears common shares for which the Sears Option
being replaced is exercisable.
(D) Each Replacement Option shall have the same terms
and conditions (other than the Option Price and the number of
shares of Stock, but including any provision for Reload Options)
as, and not give the Grantee any benefits he did not
8
have, under the corresponding Sears Option.
(ii) GRANT OF RELOAD OPTIONS. The Committee may, subject to
Article 3, grant a Reload Option to any Grantee of a Replacement Option
whose Replaced Sears Option included a reload option for Sears shares.
For purposes of the Plan, a "Reload Option" shall mean an option to
purchase a number of shares of Stock granted in connection with the
exercise of the Grantee's Replacement Option (the "Exercised Options")
upon the payment of the Option Price for such Exercised Options with
shares of Stock which have a Fair Market Value equal to not less than
100% of the Option Price for such Exercised Options. The Reload Option
with respect to an Exercised Option shall be for a number of shares of
Stock equal to the number of shares of Stock tendered to exercise the
Exercised Options plus, if so provided by the Committee, the number of
shares of Stock, if any, retained by the Company in connection with the
exercise of the Exercised Options to satisfy any federal, state, or
local tax withholding requirements. Reload Options shall be subject to
the following terms and conditions:
(A) the Grant Date for each Reload Option shall be
the date of exercise of the Exercised Option to which it relates;
(B) the Reload Option may be exercised at any time
during the unexpired term of the Replacement Option to which it
relates (subject to earlier termination thereof as provided in
the Plan and in the applicable Award Agreement); and
(C) the terms of the Reload Option shall be the same
as the terms of the Exercised Option to which it relates, except
that (1) the Option Price shall be the Fair Market Value of the
Stock on the Grant Date of the Reload Option and (2) no Reload
Option may be exercised within one year from the Grant Date
thereof.
(c) STOCK APPRECIATION RIGHTS.
(i) GRANT OF REPLACEMENT SARs. The Committee may grant stock
appreciation rights ("Replacement SARs") under the Plan to each
Allstate Group Grantee who holds unexercised limited stock appreciation
rights, and tax benefit rights (whether or not nonforfeitable) under
the Sears Plans; provided that such Allstate Group Grantee's right to
exercise any Sears SARs has been forfeited or cancelled in connection
with the Distribution. Replacement SARs granted in replacement of Sears
SARs identified with Sears Options shall be equal in number to, and
shall be identified with the Replacement Options granted in replacement
of such Sears Options. The Award Agreement with respect to such
Replacement SARs shall provide that the Grantee may exercise a
Replacement SAR at the same time as if the Grantee had held the
Replacement SAR since the grant date of the Sears SAR it replaces,
subject to the limitations of Article 8(c), if applicable.
(ii) BENEFIT FOR REPLACEMENT LIMITED STOCK APPRECIATION
RIGHTS. The benefit for
9
each Replacement SAR granted in replacement of a limited stock
appreciation right ("Replacement LSAR") identified with a Sears Option
shall be equal to the difference between the Change of Control Value
of a share of Stock on the date of exercise of such Replacement SAR
and the Option Price of the related Replacement Option.
(iii) BENEFIT FOR REPLACEMENT TAX BENEFIT RIGHTS. The benefit
for each Replacement SAR granted in replacement of a tax benefit right
("Replacement Tax Benefit Right") identified with a Sears Option shall
be equal to the then applicable maximum statutory federal income tax
rate for corporations (subject to any limitations thereon contained in
the tax benefit right being replaced), multiplied by the amount of
compensation, if any, realized by the Grantee for federal income tax
purposes upon exercise of the related Replacement Option.
(iv) TERMS AND CONDITIONS OF REPLACEMENT SARs. Each
Replacement SAR shall have the same terms and conditions (except as
provided above in this Article 6(c)) as, and not give the Grantee
greater rights than, the corresponding Sears SAR.
(d) RESTRICTED STOCK.
(i) REPLACEMENT RESTRICTED STOCK. The Committee may grant
shares of restricted Stock ("Replacement Restricted Stock") under the
Plan to each Allstate Group Grantee whose Sears Restricted Stock is
forfeited or cancelled in connection with the Distribution. The Award
Agreement with respect to such Replacement Restricted Stock shall
provide that such Replacement Restricted Stock shall become
nonforfeitable at the same time that the Sears Restricted Stock it
replaces would have become nonforfeitable, subject to the limitations
of Article 8(c), if applicable.
(A) The Grantee's basis in the Replacement Restricted
Stock (i.e. the amount of consideration, if any, that shall be
deemed to have been paid by the Grantee for the Replacement
Restricted Stock) shall be determined by the following formula:
E x B
-----
C
The Grantee shall not be required to pay additional
consideration for the grant of Replacement Restricted Stock,
except that the Minimum Consideration shall be paid for any
shares of restricted Stock that are not treasury shares.
(B) The number of shares of Replacement Restricted
Stock to be granted shall be determined by the following formula:
Number of shares = F x C
-----
B
10
Any fractional share shall be rounded up to the next full share.
(C) In the foregoing formulas,
"B" is the Fair Market Value of a share of Stock as of
the Distribution Date,
"C" is the Fair Market Value of a Sears common share as
of the Distribution Date,
"E" is the Grantee's average per share basis, if any,
in the Sears Restricted Stock being replaced, and
"F" is the number of shares of Sears Restricted Stock
being replaced.
(D) Each share of Replacement Restricted Stock shall be
substantially the same terms and conditions (other than the
number of shares and the amount of the Grantee's basis therein)
as, and shall not give the Grantee any benefits which he did not
have, under the corresponding Sears Restricted Stock, except as
otherwise provided by the Committee.
(ii) ADDITIONAL CONDITIONS FOR RESTRICTED STOCK.
(A) The Committee may provide that any share of
restricted Stock shall be held (together with a stock power
executed in blank by the Grantee) in escrow by the Secretary of
the Company until such shares become nonforfeitable or are
forfeited or may make such other arrangements for the holding of
shares of restricted stock as it deems appropriate.
(B) If a share of restricted Stock is forfeited such
share of restricted Stock shall cease to be outstanding, and
shall no longer confer on the Grantee thereof any rights as a
stockholder of the Company.
(C) Any share of restricted Stock shall bear an
appropriate legend specifying that such share is non-transferable
and subject to the restrictions set forth in the Plan. If any
shares of restricted Stock become nonforfeitable, the Company
shall cause certificates for such shares to be issued or reissued
without such legend and delivered to the Grantee or, at the
request of the Grantee, shall cause such shares to be credited to
a brokerage account specified by the Grantee.
7. LIMITATIONS ON TRANSFERABILITY. Awards are not transferable by a
Grantee except by will or the laws of descent and distribution; PROVIDED,
HOWEVER, that the Committee shall have
11
the authority, in its discretion, to grant (or to sanction by way of amendment
of an existing grant) Replacement Options (other than Replacement Options which
are Incentive Stock Options under Section 422 of the Internal Revenue Code), the
vested portions of which may be transferred by the Grantee during his lifetime
to (a) any member of his immediate family, (b) to a trust established for the
exclusive benefit of himself or one or more members of his immediate family, or
(c) to a partnership, the partners of which are limited to the Grantee and
members of his immediate family. A transfer of an Award may only be effected by
the Company at the written request of a Grantee and shall become effective only
when recorded in the Company=s record of outstanding Awards. In the event an
Award is transferred, any Reload Options associated with such transferred Award
shall terminate, and such transferred Award may not be subsequently transferred
by the transferee except by will or the laws of descent and distribution.
Otherwise, a transferred Award shall continue to be governed by and subject to
the terms and limitations of the Plan and the relevant grant, and the transferee
shall be entitled to the same rights as the Grantee, as if no transfer had taken
place. As used in this paragraph, Aimmediate family@ shall mean, with respect to
any person, his/her spouse, any child, stepchild or grandchild, and shall
include relationships arising from legal adoption.
8. EXERCISE.
(a) EXERCISE OF REPLACEMENT OPTIONS. Subject to Articles 4 and 6, (i) each
Replacement Option shall be exercisable in one or more installments commencing
not earlier than the first anniversary of the grant date of the Sears Option it
replaces, (ii) options shall not be exercisable for twelve months following a
hardship distribution that is subject to Treasury Regulation '
1.401(k)-1(d)(2)(iv)(B)(4), (iii) each option shall be exercised by delivery to
the Company of written notice of intent to purchase a specific number of shares
of Stock subject to the option, (iv) the Option Price of any shares of Stock as
to which an option shall be exercised shall be paid in full at the time of the
exercise, and (v) payment may be made in either one or any combination of the
following, as provided in the Award Agreement:
(I) cash, or
(II) Stock that has been held for at least six months,
valued at the Fair Market Value on the date of exercise.
Shares of Stock acquired by a Grantee on exercise of an option shall be
delivered to the Grantee or, at the request of the Grantee, shall be credited
directly to a brokerage account specified by the Grantee.
(b) EXERCISE OF REPLACEMENT STOCK APPRECIATION RIGHTS. Subject to Articles
4(c)(vi) and 6, (i) each stock appreciation right shall be exercisable not
earlier than the first anniversary of the grant date of the Sears stock
appreciation right it replaces, to the extent the option with which it is
identified, if any, may be exercised, (ii) replacement LSARs shall become fully
exercisable upon the occurrence of a Change of Control and shall be exercisable
for a period of sixty days
12
thereafter, (iii) replacement SARs shall be exercised by delivery to the Company
of written notice of intent to exercise a specific number of Replacement SARs,
and (iv) unless otherwise provided in the applicable Award Agreement, the
exercise of stock appreciation rights which are identified with shares subject
to an option shall result in the cancellation or forfeiture of such option to
the extent of such exercise.
(c) SPECIAL RULES FOR SECTION 16 GRANTEES. Subject to Article 6, no stock
appreciation right or option shall be exercisable by a Section 16 Grantee during
the first six months after its Grant Date, except as exempted from Section 16(b)
of the 1934 Act.
9. NOTIFICATION UNDER SECTION 83(B). The Committee may, on the Grant Date
or any later date, prohibit a Grantee from making the election described below.
If the Committee has not prohibited such Grantee from making such election, and
the Grantee, in connection with the exercise of any option, or the grant of any
share of restricted Stock, makes the election permitted under Section 83(b) of
the Internal Revenue Code to include in such Grantee's gross income in the year
of transfer the amounts specified in Section 83(b) of the Internal Revenue Code,
such Grantee shall notify the Company of such election within 10 days of filing
notice of such election.
10. WITHHOLDING TAXES.
(a) MANDATORY WITHHOLDING.
(i) Whenever under the Plan, cash or shares of Stock are to be
delivered upon exercise or payment of an Award or upon a share of
restricted Stock becoming nonforfeitable, or any other event with
respect to rights and benefits hereunder, the Company shall be entitled
to require as a condition of delivery (A) that the Grantee remit an
amount sufficient to satisfy all federal, state, and local withholding
tax requirements related thereto, (B) the withholding of such sums from
compensation otherwise due to the Grantee or from any shares of Stock
due to the Grantee under the Plan or (C) any combination of the
foregoing.
(ii) If any election described in Article 9 is made, then the
person making such election shall remit to the Company an amount
sufficient to satisfy all federal, state, and local withholding taxes
thereby incurred; provided that, in lieu of or in addition to the
foregoing, the Company shall have the right to withhold such sums from
compensation otherwise due to the Grantee or from any shares of Stock
due to the Grantee under the Plan.
(b) ELECTIVE SHARE WITHHOLDING.
(i)To the extent provided under the terms of the Sears Option or
Sears Restricted Stock Award which it replaces, and subject to the
prior approval of the Committee and to Article 10(b)(ii) below, a
Grantee may elect the withholding ("Share Withholding") by
13
the Company of a portion of the shares of Stock otherwise deliverable to
such Grantee upon the exercise or payment of an Award or upon a share of
restricted Stock's becoming nonforfeitable (each a "Taxable Event")
having a Fair Market Value equal to
(A) the minimum amount necessary to satisfy required federal,
state, or local withholding tax liability attributable to the
Taxable Event; or
(B) with the Committee's prior approval, a greater amount, not
to exceed the estimated total amount of such Grantee's tax
liability with respect to the Taxable Event.
(ii) Each Share Withholding election by a Grantee shall be
subject to the following restrictions:
(A) any Grantee's election shall be subject to the Committee's
right to revoke its approval of Share Withholding by such Grantee
at any time before the Grantee's election if the Committee has
reserved the right to do so at the time of its approval;
(B) if the Grantee is a Section 16 Grantee, such Grantee's
election shall be subject to the disapproval of the Committee at
any time, whether or not the Committee has reserved the right to
do so; and
(C) the Grantee's election must be made before the date (the
"Tax Date") on which the amount of tax to be withheld is
determined.
11. TERMINATION OF EMPLOYMENT.
(a) RESTRICTED STOCK. Except as otherwise provided by the Committee on or
after the Grant Date, a Grantee's shares of restricted Stock that are
forfeitable shall be forfeited upon the Grantee's Termination of Employment.
(b) OTHER AWARDS. Unless otherwise provided in the Award Agreement, any
unexercised option or stock appreciation right, to the extent exercisable on the
date of the Grantee's Termination of Employment, may be exercised, in whole or
in part, at any time within three months after the Grantee's Termination of
Employment, except that
(i) if the Grantee's Termination of Employment is caused by
the death of the Grantee, or if the Grantee's death occurs during the
period following Termination of Employment during which the option or
stock appreciation right would be exercisable under the preceding
clause of Article 11(b) or under Article 11(b)(ii), then any
unexercised option or stock appreciation rights, to the extent
exercisable on the date of the Grantee's death, may be exercised, in
whole or in part, at any time within two years after the Grantee's
death by the Grantee's personal representative or by the person to
14
whom the option or stock appreciation rights are transferred by will
or the applicable laws of descent and distribution; and
(ii) if the Grantee's Termination of Employment is on account
of Retirement, then any unexercised option or stock appreciation
rights, to the extent exercisable on the date of such Termination of
Employment, may be exercised, in whole or in part, at any time within
two years after such Termination of Employment.
(c) The foregoing provisions of this Article 11 shall not extend the
unexpired term of any Award.
12. SECURITIES LAW MATTERS.
(a) If the Committee deems necessary to comply with the Securities Act
of 1933, the Committee may require a written investment intent representation by
the Grantee and may require that a restrictive legend be affixed to certificates
for shares of Stock.
(b) If, based upon the opinion of counsel for the Company, the
Committee determines that the exercise, nonforfeitability of, or delivery of
benefits pursuant to, any Award would violate any applicable provision of (i)
federal or state securities law or regulations or (ii) the listing requirements
of any national securities exchange on which are listed any of the Company's
equity securities, then the Committee may postpone any such exercise,
nonforfeitability or delivery, as the case may be, but the Company shall use its
best efforts to cause such exercise, nonforfeitability or delivery to comply
with all such provisions at the earliest practicable date.
13. NO FUNDING REQUIRED. Benefits payable under the Plan to any person
shall be paid directly by the Company. The Company shall not be required to fund
or otherwise segregate assets to be used for payment of benefits under the Plan.
14. NO EMPLOYMENT RIGHTS. Neither the establishment of the Plan nor the
granting of any Award shall be construed to (a) give any Grantee the right to
remain employed by the Company or any of its Subsidiaries or to any benefits not
specifically provided by the Plan or (b) alter in any manner the right of the
Company or any of its Subsidiaries to modify, amend, or terminate any of its
employee benefit plans.
15. RIGHTS AS A STOCKHOLDER. A Grantee shall not, by reason of any Award
(other than restricted Stock) have any right as a stockholder of the Company
with respect to the shares of Stock which may be deliverable upon exercise or
payment of such Award until such Stock has been delivered to him. Shares of
restricted Stock held by a Grantee or held in escrow by the Secretary of the
Company shall confer on the Grantee all rights of a stockholder of the Company,
except as otherwise provided in the Plan or Award Agreement. Subject to Article
6, the Committee may, in its discretion, at the time of grant of restricted
Stock, permit or require the payment of cash dividends thereon to be reinvested
in additional restricted Stock to the extent
15
shares are available under Article 3, or otherwise reinvested in Stock. Stock
dividends and deferred cash dividends with respect to restricted Stock shall be
subject to the same restrictions and other terms as apply to the shares with
respect to which such dividends are issued. Subject to Article 6, the Committee
may, in its discretion, provide for crediting and payment of interest on
deferred cash dividends.
16. NATURE OF PAYMENTS. Any and all grants, payments of cash, or
deliveries of shares of Stock hereunder shall constitute special incentive
payments to the Grantee and shall not be taken into account in computing the
amount of salary or compensation of the Grantee for the purposes of determining
any pension, retirement, death or other benefits under (a) any pension,
retirement, profit-sharing, bonus, life insurance or other employee benefit plan
of the Company or any of its Subsidiaries or (b) any agreement between the
Company or any Subsidiary, on the one hand, and the Grantee, on the other hand,
except as such plan or agreement shall otherwise expressly provide.
17. NON-UNIFORM DETERMINATIONS. The Committee and the Board may make
non-uniform determinations under the Plan and may make determinations
selectively among persons who receive, or are eligible to receive, Awards
(whether or not such persons are similarly situated). Without limiting the
generality of the foregoing, the Committee shall be entitled, among other
things, to make non-uniform and selective determinations, to enter into
non-uniform and selective Award Agreements as to (a) the identity of the
Grantees, (b) the terms and provisions of Awards, and (c) the treatment, under
Article 11, of Terminations of Employment.
18. ADJUSTMENTS. Subject to Article 6, the Committee shall make equitable
adjustment of
(a) the aggregate numbers of shares of Stock available under Articles
3(a) and 3(b),
(b) the number of shares of Stock, shares of restricted Stock or stock
appreciation rights covered by an Award,
(c) the Option Price,
(d) the Fair Market Value of Stock to be used to determine the amount
of the benefit payable upon exercise of stock appreciation rights, and
(e) all other appropriate matters,
to reflect any stock dividend, stock split, reverse stock split, share
combination, recapitalization, merger, consolidation, acquisition of property or
shares, separation, spin-off, reorganization, stock rights offering, liquidation
or similar event of or by the Company.
19. AMENDMENT OF THE PLAN. The Board may from time to time in its
discretion amend or
16
modify the Plan without the approval of the stockholders of the Company, except
as such stockholder approval may be required (a) to permit transactions in Stock
pursuant to the Plan to be exempt from potential liability under Section 16(b)
of the 1934 Act, (b) to permit the Company to deduct, in computing its income
tax liability pursuant to the provisions of the Internal Revenue Code,
compensation resulting from Awards, or (c) under the listing requirements of any
national securities exchange on which are listed any of the Company's equity
securities.
20. TERMINATION OF THE PLAN. The Plan shall terminate on the tenth (10th)
anniversary of the Effective Date or at such earlier time as the Board may
determine. Any termination, whether in whole or in part, shall not affect any
Award then outstanding under the Plan.
21. NO ILLEGAL TRANSACTIONS. The Plan and all Awards granted pursuant to
it are subject to all laws and regulations of any governmental authority which
may be applicable thereto; and notwithstanding any provision of the Plan or any
Award, Grantees shall not be entitled to exercise Awards or receive the benefits
thereof and the Company shall not be obligated to deliver any Stock or pay any
benefits to a Grantee if such exercise, delivery, receipt or payment of benefits
would constitute a violation by the Grantee or the Company of any provision of
any such law or regulation.
22. CONTROLLING LAW. The law of the State of Delaware, except its law
with respect to choice of law, shall be controlling in all matters relating to
the Plan.
23. SEVERABILITY. If all or any part of the Plan is declared by any
court or governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not invalidate any portion of the Plan not declared to be
unlawful or invalid. Any Article or part of an Article so declared to be
unlawful or invalid shall, if possible, be construed in a manner which will give
effect to the terms of such Article or part of an Article to the fullest extent
possible while remaining lawful and valid.
17
Exhibit 10.23
THE ALLSTATE CORPORATION
ANNUAL COVERED EMPLOYEE INCENTIVE COMPENSATION PLAN
1. PURPOSES.
The Allstate Corporation Annual Covered Employee Incentive Compensation
Plan was adopted and made effective by the Board of Directors on March
9, 1999. The Plan was submitted to the Company's stockholders for
approval on May 18, 1999. The Plan's purposes are to provide cash
incentive compensation to Covered Employees to achieve annual
performance goals, and to ensure the deductibility of such compensation
under Section 162(m) of the Internal Revenue Code (the "Code").
2. DEFINITIONS.
The following terms when used in the Plan shall, for the purposes of
the Plan, have the following meanings:
a. "Award" means the cash amount payable to a Participant for a fiscal
year pursuant to the terms of the Plan.
b. "Board" means the Board of Directors of The Allstate Corporation.
c. "Business Unit" means any operating unit of The Allstate
Corporation or any of its Subsidiaries, including but not limited to,
the property and casualty business, the life business, the investments
business, or the international business.
d. "Committee" means two or more members of the Board who are "outside
directors" within the meaning of Section 162(m) of the Code and the
regulations thereunder.
e. "Company" means The Allstate Corporation.
f. "Covered Employee" means a Participant who is a "Covered Employee"
as defined in Section 162(m)(3) of the Code.
g. "Fiscal Year" means the calendar year.
h. "Participant" means any senior executive of the Company or a
Subsidiary who is a Covered Employee for the fiscal year or for any
shorter period within the fiscal year in which the Covered Employee is
an employee of the Company or of any Subsidiary.
i. "Plan" means the Annual Covered Employee Incentive Compensation
Plan.
1
j. "Subsidiary" means any corporation of which the Company owns
directly or indirectly a majority of the outstanding shares of voting
stock.
3. ADMINISTRATION OF THE PLAN.
a. The Plan shall be administered by the Committee. Members of the
Committee shall be appointed by the Board.
b. The Committee shall have the authority to make all determinations
it deems necessary or advisable for the administration of the Plan,
including the selection of Participants, and, subject to the
limitations set forth herein, the determination of the timing and
amount of Awards made to each Participant, and the establishment of
objective and measurable performance standards ("performance goals")
for earning Awards.
c. The Committee shall have the authority to exercise discretion to
decrease the amount of any Award otherwise payable under the Plan, but
the Committee shall have no authority to increase the amount of any
such Award.
4. AWARDS.
a. Awards under the Plan shall consist of annual cash bonuses based
solely upon the degree of attainment of objective and measurable
performance goals of the Company and/or its Subsidiaries and/or
Business Units over the fiscal year or, if shorter, over the period
within the fiscal year in which a Covered Employee is an employee of
the Company or of any Subsidiary.
b. The Committee shall establish written performance goals within 90
days after the beginning of the fiscal year (or, if the Covered
Employee is not an employee at the beginning of the fiscal year,
within the first 25% of the period within the fiscal year in which the
Covered Employee is an employee), and while the outcome of the
performance goals is substantially uncertain. Such performance goals
shall be expressed in terms of objective and measurable annual
financial and/or operating criteria, and may involve comparisons with
respect to historical results of the Company and its Subsidiaries and
operating groups or Business Units thereof, as well as comparisons
with respect to peer group performance. Performance goals shall be
expressed using one or more of the following measures of performance:
net earnings, operating income, return on equity, earnings per share,
return on assets, values of assets, revenues, market share, prices of
Company stock, or strategic business criteria consisting of one or
more Company, Subsidiary or Business Unit objectives based on meeting
specified revenue goals, market penetration goals, international
business expansion goals, cost targets, customer retention goals,
customer satisfaction goals, or goals relating to acquisitions or
divestitures. The calculation is specifically defined at the time the
goal is set. Each performance goal must state, in terms of an
objective formula or standard, the Award payable to each Participant
if the performance goal is attained.
2
c. No Award for any Participant for any fiscal year may exceed
$3,000,000.
5. PAYMENT OF AWARDS.
a. Awards under the Plan shall be paid to Participants as soon as
practicable after the completion of the fiscal year audit and after
the Committee certifies that the performance goals and any other
material terms were in fact satisfied.
b. Awards shall be paid in cash, less required withholding, or for
those eligible may be deferred at the Participant's election, subject
to the terms and conditions of any deferred compensation plan in which
the Participant is eligible to participate.
c. Unless the Committee has taken action under subsection 3.c. hereof
prior to payment of an Award, each Participant selected by the
Committee for a fiscal year who remains actively employed by the
Company or a Subsidiary at the end of the fiscal year shall be
entitled to receive a payment of an Award earned pursuant to the terms
of the Plan with respect to such year.
d. If a Participant's employment is terminated prior to completion of
a fiscal year for any reason other than as described in subsection
5.e. below, the Participant will forfeit any Award otherwise payable
for such fiscal year.
e. If a Participant dies, retires or is disabled during the fiscal
year, and the Committee has not taken action under Section 3.c.
hereof, the Participant's Award will be prorated based on the number
of Participant's full months as an active employee during the fiscal
year. If a Participant dies before receipt of an Award, the Award will
be paid to the Participant's beneficiaries.
f. Prorated Awards will be paid at the same time as regular Awards.
6. MISCELLANEOUS.
a. All amounts payable hereunder shall be payable only to the
Participant or his or her beneficiaries. The rights and interests of a
Participant under the Plan may not be assigned, encumbered, or
transferred, voluntarily or involuntarily, other than by will or the
laws of descent and distribution.
b. No individual shall have any claim or right to be a Participant in
the Plan at any time, and any individual's participation in the Plan
may be terminated at any time with or without notice, cause or regard
to past practices.
c. Neither the Plan nor any action hereunder shall confer on any
person any right to remain in the employ of the Company or any of its
Subsidiaries or shall affect an
3
employee's compensation not arising under the Plan. Neither the
adoption of the Plan nor its operation shall in any way affect the
right and power of the Company or any Subsidiary to dismiss or
discharge any employee at any time.
d. The Company and its Subsidiaries shall have the right to deduct
from any Award, prior to payment, the amount of any taxes required to
be withheld by any federal, state or local government with respect to
such payments.
e. The Committee may rely upon any information supplied to it by any
officer of the Company or any Subsidiary or by any independent
accountant for the Company and may rely upon the advice of counsel in
connection with the administration of the Plan and shall be fully
protected in relying upon such information or advice.
f. All expenses and costs in connection with the administration of the
Plan shall be borne by the Company.
g. The Plan and any agreements entered into thereunder shall be
governed by and construed in accordance with the laws of the state of
Illinois.
7. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may suspend, terminate, modify or amend the Plan; provided,
however, that any such action which changes employees eligible to
participate, the criteria set forth in subsection 4.b., or the maximum
amount of an Award set forth in subsection 4.c., shall be disclosed to
and approved by the Company's stockholders. Stockholder approval must
be given by a majority of the votes cast by the holders of Company
shares represented in person or by proxy at the annual meeting next
following the date of any such change.
8. EFFECTIVE DATE.
The Plan was adopted by the Board of Directors of the Company on March
9, 1999, and was submitted to the Company's stockholders for approval
on May 18, 1999.
4
Exhibit 21
THE ALLSTATE CORPORATION (Delaware)
OPERATING SUBSIDIARIES
THE ALLSTATE CORPORATION
Allstate Insurance Company (Illinois)
Allstate International Insurance Holdings, Inc. (Delaware)
Allstate Non-Insurance Holdings, Inc. (Delaware)
Allstate Federal Savings Bank1
Kennett Capital, Inc.
Willow Insurance Holdings Inc.
ALLSTATE INSURANCE COMPANY (Subsidiary of The Allstate Corporation)
Allstate Holdings, Inc. (Delaware)
Allstate Indemnity Company (Illinois)
Allstate International Inc. (Delaware)
Allstate Life Insurance Company (Illinois)
Allstate New Jersey Holdings, Inc. (Delaware)
Allstate Property and Casualty Insurance Company (Illinois)
Allstate Texas Lloyd's, Inc. (Texas)
Deerbrook Insurance Company (Illinois)
Forestview Mortgage Insurance Co. (California)
General Underwriters Agency, Inc. (Illinois)
Pinebrook Mortgage Insurance Company (Illinois)
The Northbrook Corporation (Nebraska)
ALLSTATE INTERNATIONAL INSURANCE HOLDINGS, INC. (Subsidiary of The Allstate
Corporation)
Allstate International Holding GmbH (Germany)
Allstate Life Insurance Company of the Philippines, Inc. (Philippines)2
Allstate Property and Casualty Insurance Japan Company, Limited (Japan)3
Allstate Reinsurance Ltd. (Bermuda)
Allstate Services, Inc. (Japan)4
Pafco Underwriting Managers Inc. (Ontario)
Pembridge America Inc. (Florida)
ALLSTATE NON-INSURANCE HOLDINGS, INC. (Subsidiary of The Allstate Corporation)
AEI Group, Inc. (Delaware)
Allstate Investment Management Company (Delaware)
Tech-Cor, Inc. (Delaware)
- ---------------------
1 A "stock savings association" organized under federal law.
2 Wholly-owned except for five shares owned by incorporator(s).
3 Wholly-owned except for one share owned by incorporator.
4 Wholly-owned except for one share owned by incorporator.
ALLSTATE HOLDINGS, INC. (Subsidiary of Allstate Insurance Company)
Allstate Floridian Insurance Company (Illinois)
Allstate Floridian Indemnity Company (Illinois)
ALLSTATE NEW JERSEY HOLDINGS, INC. (Subsidiary of Allstate Insurance Company)
Allstate New Jersey Insurance Company (Illinois)
ALLSTATE LIFE INSURANCE COMPANY (Subsidiary of Allstate Insurance Company)
Allstate Insurance Company of Canada (Canada)
Allstate Life Financial Services, Inc. (Delaware)5
Allstate Life Insurance Company of New York (New York)
Allstate Settlement Corporation (Nebraska)
CNL, Inc. (Missouri)
Glenbrook Life and Annuity Company (Arizona)
Laughlin Group Holdings, Inc. (Delaware)
Lincoln Benefit Life Company (Nebraska)
Northbrook Life Insurance Company (Arizona)
PT Asuransi Jiwa Allstate (Indonesia)6
Surety Life Insurance Company (Nebraska)
AEI GROUP, INC. (Subsidiary of Allstate Non-Insurance Holdings, Inc.)
Allstate Motor Club, Inc. (Delaware)
Roadway Protection Auto Club, Inc. (Delaware)
Allstate Motor Club of Canada Inc. (Canada)
ALLSTATE INTERNATIONAL INC. (Subsidiary of Allstate Insurance Company)
Samshin Allstate Life Insurance Company, Ltd. (Republic of Korea)7
TECH-COR, INC. (Subsidiary of Allstate Non-Insurance Holdings,Inc.)
Northbrook Services, Inc. (Delaware)
ALLSTATE INSURANCE COMPANY OF CANADA (Subsidiary of Allstate Life Insurance
Company)
Allstate Life Insurance Company of Canada (Canada)
LAUGHLIN GROUP HOLDINGS, INc. (Subsidiary of Allstate Life Insurance Company)
Investor Financial Services, Inc. (Nevada)
LSA Securities, Inc. (Oregon)8
Lifemark Financial and Insurance Agency, LLC (New York)
- ----------------------
5 Broker/dealer.
6 Joint venture of which Allstate Life Insurance Company controls 80%.
7 Allstate International Inc. owns only 50%.
8 Broker/dealer.
Lifemark Financial & Insurance Services, Inc. (California)
Lifemark Insurance Services of California, Inc. (California)
ProVest Insurance Services, Inc. (Indiana)
ProVest Insurance Services, Inc. (Kentucky)
ProVest Insurance Services, Inc. (Pennsylvania)
Security Financial Network, Inc. (Georgia)
The Laughlin Direct Advantage Agency, Inc. (Delaware)
The Laughlin Group, Inc. (Oregon)
LINCOLN BENEFIT LIFE COMPANY (Subsidiary of Allstate Life Insurance Company)
Lincoln Benefit Financial Services, Inc.(Delaware)9
ALLSTATE INTERNATIONAL HOLDING GMBH (Subsidiary of Allstate International
Insurance Holdings, Inc.)
Allstate Direct Versicherungs-Aktiengesellschaft (Germany)
Allstate Diretto Assicurazioni Danni S.p.A (Italy)10
Allstate Werbung und Marketing GmbH (Germany)
PAFCO UNDERWRITING MANAGERS INC. (Subsidiary of Allstate International
Insurance Holdings, Inc.)
Pafco Insurance Company (Ontario)11
Pembridge Reinsurance Company Limited (Ireland)
Precision Claims Management Inc. (Canada)
PEMBRIDGE AMERICA INC. (Subsidiary of Allstate International
Insurance Holdings, Inc.)
American Surety and Casualty Company (Florida)
ALLSTATE MOTOR CLUB, INC. (Subsidiary of AEI Group,Inc.)
Direct Marketing Center, Inc. (Delaware)
Enterprises Services Corporation (Delaware)
Rescue Express, Inc. (Delaware)
- -------------------
9 Broker/dealer.
10 Allstate International Holding GmbH owns 90% of this company and Allstate
International Insurance Holdings, Inc. owns 10%.
11 Pafco Underwriting Managers Inc. owns all of the common stock except for
directors' qualifying shares.
OTHER POSSIBLY SIGNIFICANT COMPANIES
Allstate County Mutual Insurance Company (Texas)
A mutual company owned by policy holders. Officers and employees of
Allstate Insurance Company serve as directors and officers of Allstate
County Mutual Insurance Company
Allstate Texas Lloyd's (Texas)
An insurance syndicate organized under the laws of Texas. Allstate Texas
Lloyd's, Inc. (a direct wholly-owned subsidiary of Allstate Insurance
Company) is the attorney-in-fact for this syndicate.
LSI Financial Services, Inc. (Ohio)
S corporation owned by Marco Mazzone. Sole member of Board of Directors is
Bud Taylor, indirectly appointed by Allstate.
ProVest Insurance Services, Inc. (Ohio)
S corporation owned by Marco Mazzone. Sole member of Board of Directors is
Bud Taylor, indirectly appointed by Allstate.
Saison Automobile and Fire Insurance Company, Ltd. (Japan)
5% owned by Allstate International Inc.
7
0000899051
THE ALLSTATE CORPORATION
1,000,000
U.S. Dollars
12-MOS
DEC-31-1998
JAN-01-1998
DEC-31-1998
1
53560
0
53560
6421
3458
0
66525
258
1932
3096
87691
24482
6425
0
21133
1746
750
0
9
17231
87691
20826
3890
1163
0
16016
3021
2184
4745
1422
3294
0
0
0
3294
3.96
3.94
0
0
0
0
0
0
0
