(b)
|
As of December 31,
1999 based on Form 13G reflecting sole investment power over shares, filed
by Capital Research and Management Company on February 14,
2000.
|
Ratification of
Appointment of Auditors
Item 2 is the ratification of the
recommendation of the Audit Committee and the Board that Deloitte &
Touche LLP be appointed auditors for 2000. Representatives of Deloitte &
Touche LLP will be present at the meeting, will be available to respond to
questions and may make a statement if they so desire.
The Board unanimously recommends that
stockholders vote for the ratification of the appointment of Deloitte
& Touche LLP as auditors for 2000 as proposed.
Stockholder
Proposal on Cumulative Voting
Mr. William E. Parker and Ms. Terri K. Parker,
544 Ygnacio Valley Road, Suite B, Walnut Creek, California 94596, registered
owners of 209.7 shares of Allstate common stock as of February 15, 2000,
have given notice of their intention to propose the following resolution at
the Annual Meeting. The proposal, as submitted, reads as
follows:
“Resolved: That the
stockholders of The Allstate Corporation, assembled at the annual meeting in
person and by proxy, hereby request the Board of Directors to take steps
necessary to provide for cumulative voting in the election of directors,
which means each stockholder shall be entitled to as many votes as shall
equal the number of shares he or she owns multiplied by the number of
directors to be elected, and he or she may cast all of the votes for a
single candidate, or any two or more of them as he or she may see fit.
”
The following statement has been submitted in
support of the resolution:
“At the 1998 Stockholders meeting of The
Allstate Corporation, this proposal received more than 95,000,000 votes, and
last year it received over 184,000,000 votes. This shows a strong interest
by the stockholders on the issue of corporate affairs and management
accountability.
We believe that the company’s financial
performance is directly related to its corporate governance procedures and
policies.
In the past we pointed out that negative
events, like Criminal Investigations and the reopening of the earthquake
claims were not good for business.
The company is under investigation from the
Department of Labor with regard to the classification of agents as exempt or
non-exempt from the requirements of the Fair Labor Standards Act. In
addition, agents have asked the Department of Labor to investigate Allstate
’s classification of its Exclusive Agency Independent Contractor
Program as an independent contractor program for purposes of the Fair Labor
Standards Act. Also the company is a defendant in lawsuits involving car
repairs which allege non-original manufacturers’ parts are inferior to
original equipment manufacturers’ parts.
Cumulative voting increases the possibility of
electing independent minded directors that will enforce management’s
accountability to shareholders.
Corporations that have independent minded
directors can help foster improved financial performance and greater
stockholder wealth.
Management nominees to the board often bow to
the chairman’s desires on business issues and executive pay without
question.
Currently, the company’s Board of
Directors is composed entirely of management nominees. Cumulative voting
would aid in placing a check on management nominees by creating more
competitive elections. The National Bank Act provides for cumulative voting
for bank company boards. California law provides that all state pension and
state college funds, invested in shares must vote for cumulative voting.
Sears, Roebuck and Company, founded the Allstate Insurance Company in 1931
and adopted cumulative voting in 1906. The argument that the adoption of
cumulative voting will lead to the election of dissidents to the Board that
will only represent the special interests is misleading, because the
standards of fiduciary duty compel all directors to act in the best interest
of all shareholders. Directors who fail to respect the duties of loyalty
and/or care expose themselves to significant liability. We believe that
honest differences of opinion are good for a corporation. Dissent stimulates
debate, which leads to thoughtful action and deters complacency on the Board
of Directors.
Please vote yes on this resolution, or abstain
from voting, as a non vote is considered a no vote.”
The Board
unanimously recommends that stockholders vote against this
proposal for the following reasons:
The General Corporation Law of Delaware, the
state in which Allstate is incorporated, allows cumulative voting only if it
is provided for in a corporation’s certificate of incorporation.
Allstate’s certificate of incorporation does not provide for cumulative
voting. Consequently, each director of Allstate must be elected by a
plurality of the votes of all shares present in person or represented by
proxy.
At present, Allstate’s entire Board must
stand for election each year, and Allstate’s By-Laws permit
stockholders to nominate candidates to serve as directors, subject to
compliance with the procedures provided in the By-Laws. The Board believes
that a change in the method of stockholder voting would be appropriate only
if another method would better serve the interests of the stockholders as a
whole. The Board believes that cumulative voting would empower a limited
group of stockholders with the ability to support only a special interest
group by electing one or more directors representing primarily the interests
of that group. The Board believes directors elected by this method may view
themselves as representatives of only the group that elected them. They may
feel obligated to represent that group’s interests, regardless of
whether the furtherance of those interests would benefit all stockholders
generally. This would lead to the promotion of narrow interests rather than
those of stockholders at large. Election of directors by a plurality vote of
all voted shares is designed to produce a Board that views its
accountability as being to all stockholders.
The Board believes that cumulative voting
introduces the possibility of partisanship among Board members representing
particular groups of stockholders, which could destroy the ability of the
Board to work together. These factors could operate to the disadvantage of
Allstate and its stockholders. The present method of electing directors,
where each director is elected by a plurality vote of the shares held by all
stockholders, encourages the directors to administer the affairs of Allstate
for the benefit of all of its stockholders. The Board believes each director
should serve on the Board only if a plurality of shares held by all voting
stockholders elect the director to that position.
The percentage of shares that voted in favor
of the cumulative voting proposal actually declined in 1999. The number of
favorable votes cited to in the proposal does not take into account the
effect of the two-for-one stock split which occurred on July 1,
1998.
The Board is confident that this method will
continue to work successfully for the benefit of all stockholders. The Board
agrees that financial performance is driven in part by strong corporate
governance standards which is why it is continuing to cooperate fully with
the federal government’s investigation of the 1994 Northridge,
California earthquake claims handling. To date, no criminal charges have
been brought against Allstate and we cannot yet determine the impact of
resolving the matter. Regarding the reopening of claims, Allstate has
resolved the vast majority of all Northridge claims and related litigation.
The pending lawsuits relating to the use of non-original equipment
manufacturer replacement parts are in various stages of development and the
outcome of these disputes is currently uncertain. Lastly, Allstate has
received confirmation from the Department of Labor that it does not intend
to pursue the matter of alleged Fair Labor Standards Act violations at this
time.
For the reasons stated above, the Board
recommends a vote against this proposal.
Stockholder
Proposal Relating to CERES Principles
Ms. Elizabeth R. Welsh, beneficial owner of 95
shares of Allstate common stock as of December 10, 1999, (shares held
through Trillium Asset Management Corporation, 711 Atlantic Avenue, Boston
Massachusetts 02111-2809) has given notice of her intention to propose the
following resolution at the Annual Meeting. The proposal, as submitted,
reads as follows:
“ENDORSEMENT OF
THE CERES PRINCIPLES
FOR PUBLIC
ENVIRONMENTAL ACCOUNTABILITY
WHEREAS: Leaders of industry in the United
States now acknowledge their obligation to pursue superior environmental
performance and to disclose information about the performance to their
investors and other stakeholders.
The integrity, utility, and comparability of
environmental disclosure depend on using a common format, credible metrics,
and a set of generally accepted standards. This will enable investors to
assess environmental progress within and across industries.
The Coalition for Environmentally Responsible
Economies (CERES)—a ten-year partnership between large investors,
environmental groups, and corporations—has established what we believe
is the most thorough and well-respected environmental disclosure form in the
United States. CERES has also taken the lead internationally, convening
major organizations together with the United Nations Environment Programme
in the Global Reporting Initiative, which has produced guidelines for
standardizing environmental disclosure worldwide.
Companies that endorse the CERES Principles
engage with stakeholders in transparent environmental management and agree
to a single set of consistent standard for environmental reporting. That
standard is set by the endorsing companies together with CERES.
The CERES Principles and CERES Report have
been adopted by leading firms in various industries: Arizona Public Service,
Bank America, BankBoston, Baxter International, Bethlehem Steel, Coca-Cola,
General Motors, Interface, ITT Industries, Northeast Utilities, Pennsylvania
Power and Light, and Polaroid, and Sun company.
We believe endorsing the CERES Principles
commits a company to the prudent oversight of its financial and physical
resources through: 1) protection of the biosphere; 2) sustainable use of
natural resources; 3) waste reduction; 4) energy conservation; 5) risk
reduction; 6) safe products/services; 7) environmental restoration; 8)
informing the public; 9) management commitment; 10) audits and reports. (The
full text of the CERES Principles and accompanying CERES Report form are
obtainable from CERES, 11 Arlington Street, Boston, Massachusetts 02116,
(617) 247-0700/ www.ceres.org.)
RESOLVED: Shareholders request that the
company endorse the CERES Principles as a reasonable and beneficial
component of their corporate commitment to be publicly accountable for
environmental performance.
SUPPORTING STATEMENT: Recent studies show that
the integration of environmental commitment into business operations
provides competitive advantage and improves long-term financial performance
for companies. In addition, the depth of a firm’s environmental
commitment and the quality with which it manages its environmental
performance are indicators of prudent foresight exercised by
management.
Given investors’ needs for credible
information about a firm’s environmental performance and given the
number of companies that have already endorsed the CERES Principles and
adopted its report format, it is a reasonable, widely accepted step for a
company to endorse these Principles if it wishes to demonstrate its
seriousness about superior environmental performance.
Your vote FOR this resolution serves the best
interests of our Company and its shareholders.”
The Board unanimously recommends that
stockholders vote against this proposal for the following
reasons:
Allstate has long been committed to conducting
its business and operations in an environmentally sound manner and agrees,
in principle, with the objectives espoused by the CERES organization.
However, Allstate’s environmental efforts and commitments need to be
closely aligned with that of its stockholders as well as its policyholders
and their communities. The Board does not believe that the formal
endorsement of the CERES principles would effectively advance those
interests.
Allstate’s environmental efforts have
been underway for many years and reflect its commitment to operating in a
human-healthy and environmentally sound manner. Allstate locations engage in
recycling programs that include paper, newspaper, plastics, cans, cutting
blades, fluorescent lamps, fuel oil, solvents, automobile tires, coolants
and scrap metals. Allstate operates an energy-friendly vanpool program for
its home office employees. Allstate’s Tech-Cor research and training
facility works with auto manufacturers to develop innovative ways to make
cars more damage resistant, safe and cost-efficient.
Allstate prides itself on its history of
commitment to various community service programs. This commitment is
demonstrated through external partnerships, financial support and by
encouraging employee volunteerism. A few of the community-focused
organizations that Allstate supports include America’s Promise, the
Boys and Girls Clubs of America, the NeighborWorks Network, the All-America
Cities Awards and the National Council of LaRaza. In addition to its
community service investments, Allstate also manages its investment
portfolio with consideration given to environmental and community value
criteria.
Allstate’s commitment to human safety and
risk aversion lies at the very core of its business. We continuously strive
to promote awareness of issues aimed at accident- and injury-prevention and
safety. In this regard, we publish hundreds of safety-related pamphlets and
post an annual safety calendar of events on our website. Topics are targeted
to health and safety issues arising in any given month—from child
passenger safety month to alcohol awareness month to tornado, hurricane and
wildfire preparedness months.
Allstate has considered the CERES Principles
carefully and while it agrees with their fundamental objectives, the Board
does not recommend their formal endorsement. As a service business, we do
not feel it is appropriate to adopt mandatory principles that for us would
add administrative burden and an unnecessary financial drain. As an insurer,
Allstate must comply with the state laws of all fifty states as well as all
relevant federal laws. Adding the expense of compliance with the CERES
Principles as well as the payment of the organization’s dues would not
be in the best interests of Allstate or its shareholders.
For the reasons stated above, the Board
recommends a vote against this proposal.
The following Summary Compensation Table sets
forth information on compensation earned in 1997, 1998 and 1999 by Mr. Liddy
(Allstate’s Chief Executive Officer since January 1, 1999) and by each
of Allstate’s four most highly compensated executive officers (with Mr.
Liddy, the “named executives”).
|
Summary Compensation Table
|
|
|
Annual
Compensation
|
|
Long-Term
Compensation
|
Name and
Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)(1)
|
|
Other Annual
Compensation
($)(2)
|
|
Awards
|
|
Payouts
|
|
All Other
Compensation
($)(6)
|
|
|
|
|
|
Restricted
Stock
Award(s)
($)(3)
|
|
Securities
Underlying
Options/SARs
(#)(4)
|
|
LTIP
Payouts
($)(5)
|
| Edward M.
Liddy |
|
1999 |
|
890,000 |
|
538,873 |
|
13,218 |
|
–0
– |
|
400,000 |
|
2,468,250 |
|
7,292 |
|
(Chairman, President and |
|
1998 |
|
762,143 |
|
1,714,823 |
|
11,552 |
|
–0
– |
|
225,000 |
|
–0
– |
|
8,626 |
|
Chief Executive Officer) |
|
1997 |
|
709,167 |
|
1,595,625 |
|
306,765 |
|
849,912 |
|
177,952 |
|
1,027,032 |
|
8,626 |
|
| Robert W.
Gary |
|
1999 |
|
518,100 |
|
219,896 |
|
19,168 |
|
–0- |
|
105,000 |
|
1,222,004 |
|
7,124 |
|
(President of Personal |
|
1998 |
|
459,333 |
|
602,874 |
|
12,973 |
|
–0
– |
|
67,824 |
|
–0
– |
|
8,684 |
|
Property and Casualty) |
|
1997 |
|
414,667 |
|
544,251 |
|
13,270 |
|
315,053 |
|
52,762 |
|
512,204 |
|
8,684 |
|
| Louis G. Lower,
II |
|
1999 |
|
458,700 |
|
409,213 |
|
94,044 |
|
–0
– |
|
50,000 |
|
1,204,088 |
|
7,081 |
|
(Chairman, Allstate |
|
1998 |
|
458,700 |
|
505,999 |
|
25,064 |
|
–0
– |
|
55,417 |
|
–0
– |
|
8,694 |
|
Life and Savings) |
|
1997 |
|
453,225 |
|
500,000 |
|
22,933 |
|
280,589 |
|
51,828 |
|
570,068 |
|
8,694 |
|
| Casey J.
Sylla |
|
1999 |
|
409,200 |
|
494,632 |
|
3,688 |
|
–0
– |
|
137,662 |
|
811,230 |
|
7,142 |
|
(Chief Investment |
|
1998 |
|
386,000 |
|
362,913 |
|
3,742 |
|
–0
– |
|
35,511 |
|
–0
– |
|
8,569 |
|
Officer of Allstate |
|
1997 |
|
364,000 |
|
636,618 |
|
3,106 |
|
239,510 |
|
36,384 |
|
373,013 |
|
8,000 |
|
Insurance Company) |
|
| Thomas J. Wilson,
II |
|
1999 |
|
458,700 |
|
409,213 |
|
79,589 |
|
–0
– |
|
165,340 |
|
930,864 |
|
6,998 |
|
(President, Allstate |
|
1998 |
|
405,100 |
|
510,001 |
|
2,393 |
|
–0
– |
|
53,850 |
|
–0
– |
|
8,646 |
|
Life and Savings) |
|
1997 |
|
383,333 |
|
468,375 |
|
634 |
|
301,776 |
|
38,934 |
|
384,738 |
|
8,646 |
|
|
|
(1)
|
Payments under
Allstate’s Annual Executive Incentive Compensation Plan and Allstate
’s Annual Covered Employee Incentive Compensation Plan, received in
the year following performance.
|
|
(2)
|
The amount
attributed to Mr. Liddy in 1997 represents principally income tax benefit
rights payments under stock options granted to Mr. Liddy by Sears, Roebuck
and Co. and assumed by Allstate when it was spun off from Sears in June
1995. The amount reflected for Mr. Lower in 1999 includes $40,691
representing amounts paid for business related spousal travel expenses.
Similarly, the amount attributed to Mr. Wilson in 1999 includes $35,868
paid for business related spousal travel expenses. The remainder of the
amounts for each of the named executives represent tax gross-up payments
attributable to income taxes payable on certain travel benefits, tax
return preparation fees and financial planning.
|
|
(3)
|
The 1997 awards of
restricted stock became unrestricted on or before April 1,
1998.
|
|
(4)
|
The 1999 awards are
set forth below in detail in the table titled “Option/SAR Grants in
1999.” The number of shares listed for the 1997 awards were adjusted
for the 2-for-1 stock split in July 1998.
|
|
(5)
|
Payments under
Allstate’s Long-Term Executive Incentive Compensation Plan, received
in year following performance cycle.
|
|
(6)
|
Each of the named
executives participated in group term life insurance and in Allstate
’s profit sharing plan, a qualified defined contribution plan
sponsored by Allstate. The amounts shown represent the premiums paid for
the group term life insurance by Allstate on behalf of each named
executive officer and the value of the allocations to each named executive
’s account derived from employer matching contributions to the profit
sharing plan.
|
Option/SAR Grants in 1999
The following table is a summary of all
Allstate stock options granted to the named executives during 1999.
Individual grants are listed separately for each named executive. In
addition, this table shows the potential gain that could be realized if the
fair market value of Allstate’s common shares were not to appreciate,
or were to appreciate at either a five or ten percent annual rate over the
period of the option term:
|
|
Individual
Grants
|
|
Potential
Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation for
Option Term
|
| |
Number of
Securities
Underlying
Options/SARs
Granted(1)
|
|
% of Total
Options/SARs
Granted to All
Employees in 1999
|
|
Exercise or
Base
Price ($/SH)
|
|
Expiration
Date
|
|
0%
|
|
5%($)
|
|
10%($)
|
| Edward M.
Liddy |
|
400,000 |
|
|
5.39 |
|
35.00 |
|
8/12/09 |
|
–0
– |
|
$8,804,525 |
|
$22,312,394 |
|
| Robert W.
Gary |
|
55,000 |
|
|
.74 |
|
39.19 |
|
1/4/09 |
|
–0
– |
|
$1,355,551 |
|
$
3,435,232 |
| |
|
50,000 |
|
|
.67 |
|
35.00 |
|
8/12/09 |
|
–0
– |
|
$1,100,566 |
|
$
2,789,049 |
|
| Louis G. Lower,
II |
|
50,000 |
|
|
.67 |
|
35.00 |
|
8/12/09 |
|
–0
– |
|
$1,100,566 |
|
$
2,789,049 |
|
| Casey J.
Sylla |
|
40,000 |
|
|
.54 |
|
39.19 |
|
1/4/09 |
|
–0
– |
|
$
985,855 |
|
$
2,498,351 |
| |
|
6,642 |
(2) |
|
.09 |
|
37.91 |
|
7/26/05 |
|
–0
– |
|
$
92,516 |
|
$
212,218 |
| |
|
91,020 |
|
|
1.23 |
|
35.00 |
|
8/12/09 |
|
–0
– |
|
$2,003,470 |
|
$
5,077,185 |
|
| Thomas J. Wilson,
II |
|
50,000 |
|
|
.67 |
|
39.19 |
|
1/4/09 |
|
–0
– |
|
$1,232,319 |
|
$
3,122,938 |
| |
|
115,340 |
|
|
1.55 |
|
35.00 |
|
8/12/09 |
|
–0
– |
|
$2,538,785 |
|
$
6,433,779 |
|
|
(1)
|
These options are
exercisable in three or four equal annual installments, were granted with
an exercise price equal to or higher than the fair market value of Allstate
’s common shares on the date of grant, expire ten years from the date
of grant, and include tax withholding rights and a “reload”
feature. Tax withholding rights permit the option holder to elect to have
shares withheld to satisfy federal, state and local tax withholding
requirements. The reload feature permits payment of the exercise price by
tendering Allstate common stock, which in turn gives the option holder the
right to purchase the same number of shares tendered, at a price equal to
the fair market value on the exercise date. The options permit the option
holder to exchange shares owned or to have option shares withheld to
satisfy all or part of the exercise price. The vested portions of all the
options may be transferred to any immediate family member, to a trust for
the benefit of the executive or immediate family members or to a family
limited partnership.
|
(2)
|
Options granted to
replace shares tendered in exercise of options under the reload
feature.
|
Option Exercises in 1999 and Option Values on December 31,
1999
The following table shows Allstate stock
options that were exercised during 1999 and the number of shares and the
value of grants outstanding as of December 31, 1999 for each named
executive:
| |
|
Shares
Acquired
on Exercise (#)
|
|
Value
Realized ($)
|
|
Number of
Securities
Underlying Unexercised
Options/SARs at
12/31/99(#)
|
|
Value of
Unexercised
In-The-Money
Options/SARs at
12/31/99($)(1)
|
| |
|
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
| Edward M.
Liddy |
|
-0- |
|
-0- |
|
961,412 |
|
628,066 |
|
8,638,811 |
|
-0- |
| Robert W.
Gary |
|
-0- |
|
-0- |
|
451,622 |
|
-0- |
|
1,946,201 |
|
-0- |
| Louis G. Lower,
II |
|
-0- |
|
-0- |
|
264,284 |
|
108,195 |
|
1,784,094 |
|
-0- |
| Casey J.
Sylla |
|
16,575 |
|
376,523 |
|
171,315 |
|
176,423 |
|
1,033,190 |
|
-0- |
| Thomas J. Wilson,
II |
|
-0- |
|
-0- |
|
343,727 |
|
218,705 |
|
3,097,636 |
|
-0- |
|
|
(1)
|
Value is based on
the closing price of Company common stock ($24.00) on December 31, 1999,
minus the exercise price.
|
Long-Term Executive Incentive Compensation Plans
|
LONG-TERM
INCENTIVE PLANS — AWARDS IN LAST FISCAL YEAR
|
Name
|
|
Number of
Shares, Units or
Other Rights($)(a)
|
|
Performance
or
Other Period
Until Payout
|
|
Estimated Future
Payouts Under
Non-Stock Price-Based Plans($)(b)
|
|
|
|
Threshold
|
|
Target
|
|
Maximum(c)
|
| Edward M.
Liddy |
|
2,759,000 |
|
1/1/99-12/31/01 |
|
689,750 |
|
2,759,000 |
|
7,242,375 |
| Robert W.
Gary |
|
518,100 |
|
1/1/99-12/31/01 |
|
129,525 |
|
518,100 |
|
1,360,013 |
| Louis G. Lower,
II |
|
458,700 |
|
1/1/99-12/31/01 |
|
114,675 |
|
458,700 |
|
1,204,088 |
| Casey J.
Sylla |
|
327,360 |
|
1/1/99-12/31/01 |
|
81,840 |
|
327,360 |
|
859,320 |
| Thomas J. Wilson,
II |
|
458,700 |
|
1/1/99-12/31/01 |
|
114,675 |
|
458,700 |
|
1,204,088 |
| |
|
|
(a)
|
Awards represent
potential cash incentive to be paid upon achievement of threshold, target
or maximum performance objectives.
|
|
(b)
|
Target awards are
set for participants at the beginning of each cycle based on a percentage
of aggregate salary during the cycle. Actual awards are based on each
participant’s actual salary earned during the cycle. In years in
which performance cycles overlap, 50% of the participants’ salaries
are applied to each cycle. If threshold level performance (80% of goal)
were achieved, the awards would be 25% of the participant’s target
award. If maximum level of performance (125% of goal) or greater were
achieved, the award would be 263% of the participant’s target award.
The performance goal for the 1999-2001 cycle is based solely on return on
average equity which is subject to adjustment, in specific calibrations,
depending on the relative performance of the Company with respect to its
operating earnings per share growth as compared with the performance of an
identified peer group, the S&P Property & Casualty Index, with
respect to such goal.
|
|
(c)
|
Up to $3.5 million
of any individual award opportunity may be paid from The Allstate
Corporation Long-Term Executive Incentive Compensation Plan. The
remainder, if any, will be paid under an arrangement subject to Board
approval.
|
The following table indicates the estimated
total annual benefits payable to the named executives upon retirement under
the specified compensation and years of service classifications, pursuant to
the combined current benefit formulas of the Allstate Retirement Plan and
the unfunded Supplemental Retirement Income Plan. The Supplemental
Retirement Income Plan will pay the portion of the benefits shown below
which exceeds Internal Revenue Code limits or is based on compensation in
excess of Internal Revenue Code limits. Benefits are computed on the basis
of a participant’s years of credited service (generally limited to 28)
and average annual compensation over the participant’s highest five
successive calendar years of earnings out of the ten years immediately
preceding retirement. Only annual salary and annual bonus amounts as
reflected in the Summary Compensation Table are considered annual
compensation in determining retirement benefits.
Annual retirement benefits are generally
payable monthly and benefits accrued from January 1, 1978 through December
31, 1988 are reduced by a portion of a participant’s estimated social
security benefits. Effective January 1, 1989 the retirement benefit
calculation was integrated with the employees’ social security wage
base. Benefits shown below are based on retirement at age 65 and selection
of a straight life annuity.
As of December 31, 1999, Messrs. Liddy and
Wilson had 12 and 7 years, respectively, of combined Allstate/Sears service
and Messrs. Gary, Lower and Sylla had 38, 23 and 4 years of service,
respectively, with Allstate. As a result of their prior Sears service, a
portion of Mr. Liddy’s and Mr. Wilson’s retirement benefits will
be paid from the Sears Plan. Allstate has agreed to provide Mr. Liddy with
enhanced pension benefits when he reaches 60. The enhanced benefit will be
calculated based on the existing pension formula assuming an additional five
years of age and five years of service. This enhancement will be phased out
at a rate of 20% a year.
Years of
Service
|
Remuneration
|
|
15
|
|
20
|
|
25
|
|
30
|
|
35
|
|
| $1,000,000 |
|
$
327,000 |
|
$
436,000 |
|
$
545,000 |
|
$
610,000 |
|
$
610,000 |
|
| $1,500,000 |
|
$
492,000 |
|
$
656,000 |
|
$
820,000 |
|
$
918,000 |
|
$
918,000 |
|
|
| $2,000,000 |
|
$
657,000 |
|
$
876,000 |
|
$1,095,000 |
|
$1,226,000 |
|
$1,226,000 |
|
| $2,500,000 |
|
$
822,000 |
|
$1,096,000 |
|
$1,370,000 |
|
$1,534,000 |
|
$1,534,000 |
|
|
| $3,000,000 |
|
$
987,000 |
|
$1,316,000 |
|
$1,645,000 |
|
$1,842,000 |
|
$1,842,000 |
|
| $3,500,000 |
|
$1,152,000 |
|
$1,536,000 |
|
$1,920,000 |
|
$2,150,000 |
|
$2,150,000 |
|
|
| $4,000,000 |
|
$1,317,000 |
|
$1,756,000 |
|
$2,195,000 |
|
$2,458,000 |
|
$2,458,000 |
|
Termination of Employment and Change-in-Control Arrangements
Mr. Gary
In November 1999, Allstate agreed to accept
Mr. Gary’s request to retire effective as of December 31, 1999. In
recognition of Mr. Gary’s 38 years of dedicated service, Allstate
agreed to accelerate the vesting of Mr. Gary’s outstanding options.
Allstate also agreed to pay Mr. Gary an amount equal to one year’s
salary in consideration for Mr. Gary’s commitment not to enter into an
employment or consulting arrangement with an Allstate competitor for a
one-year period following his departure from Allstate.
Mr. Lower
In January 2000, Mr. Lower announced his
intention to retire. In recognition of his many years of service, Allstate
agreed to accelerate the vesting of Mr. Lower’s outstanding options and
agreed to pay Mr. Lower an enhanced retirement benefit based on 3 years and
5 months of additional age and service credit.
Mr. Sylla
In July 1995, Allstate agreed to provide Mr.
Sylla or his beneficiary a basic retirement or death benefit if his
employment is terminated within 5 years of July 26, 1995 (Mr. Sylla’s
date of hire) for any reason other than termination pursuant to Allstate
’s written policy. The amount of the benefit would be calculated under
the Allstate retirement plan, assuming Mr. Sylla had 5 years of service
under the plan, and would be reduced by Mr. Sylla’s actual years of
service. The agreement terminates no later than July 26, 2000.
Change in Control Arrangements
In 1999, the Board approved agreements with
the named executives that provide for severance and other benefits upon a
“change of control” involving Allstate. In general, a change of
control is one or more of the following events: 1) any person acquires more
than 20% of Allstate common stock; 2) certain changes are made to the
composition of the Board; or 3) certain transactions occur that result in
Allstate stockholders owning 70% or less of the surviving corporation’s
stock.
Under these agreements, severance benefits
would be payable if an executive’s employment is terminated by Allstate
without “cause” or by the executive for “good reason” as
defined in the agreements during the three-year period following such event.
Good reason includes a termination of employment by a named executive for
any reason during the 13th month after a change of control. Allstate
believes these agreements encourage retention of its executives and enable
them to focus on managing the Company’s business thereby more directly
aligning management and shareholder interests in the event of a
transaction.
The principal benefits include: 1) pro-rated
annual incentive award and long-term incentive award (both at target) for
the year of termination of employment; 2) a payment equal to three times the
sum of the executive’s base salary, target annual incentive award and
target annualized long-term incentive award; 3) continuation of certain
welfare benefits for three years; 4) an enhanced retirement benefit; and 5)
reimbursement (on an after-tax basis) of any resulting excise taxes. In
addition, all unvested stock options would become exercisable, all
restricted stock would vest and nonqualified deferred compensation account
balances would become payable.
Compensation and Succession Committee Report
Allstate’s Compensation and Succession
Committee, which is composed entirely of independent, non-employee
directors, administers Allstate’s executive compensation program. The
purposes of the program are to:
|
·
|
Link executives
’ goals with stockholders’ interests
|
|
·
|
Attract and retain
talented management
|
|
·
|
Reward annual and
long-term performance
|
In 1996, the Committee created stock ownership
goals for executives at the vice president level and above. The goals are
for these executives to own, within five years, common stock worth a
multiple of base salary, ranging from one times salary to up to three times
salary for the Chairman, President and Chief Executive Officer. In 1997, the
Committee weighted the compensation opportunities for executive officers,
including each of the named executives, more heavily towards compensation
payable upon the attainment of specified performance objectives and
compensation in the form of Allstate common stock. In 1999, the Committee
increased the target award levels for common stock awards for executive
officers, including each of the named executives.
Allstate executives can receive three types of
compensation, each of which is described in more detail below:
|
·
|
Annual cash
compensation
|
|
·
|
Long-term cash
compensation
|
|
·
|
Long-term equity
compensation
|
Annual Compensation
Annual cash compensation includes base salary
and annual incentive awards.
Base salaries of Allstate executives are set
by the Committee at a level designed to be competitive in the U.S. insurance
industry. At least annually, the Committee reviews a report based on data
prepared by independent compensation consultants comparing Allstate’s
base salary levels for its executives with base salaries paid to executives
in comparable positions at other companies in the peer group of large U.S.
public insurance companies. The Committee attempts to set Allstate base
salaries at the median level of the peer group.
Annual incentive awards are designed to
provide certain employees, including each of the named executives, with a
cash award based on the achievement of annual performance objectives. These
objectives are approved by the Committee prior to the end of the first
quarter of the relevant year. Threshold, target and maximum benchmarks are
set for each objective. Each award opportunity is based on that individual
’s potential contribution to the achievement of a particular objective
and is stated as a specified percentage of base salary for the year. For
1999, no award was payable with respect to an objective if the threshold
level of performance was not attained. In addition, no award would be
payable if Allstate sustained a net loss for the year.
Annual incentive awards are paid in March of
the year following the year of performance, after the Committee has
certified attainment of the objectives. The Committee has the authority to
adjust the amount of awards but, with respect to the chief executive officer
and the other named executives, has no authority to increase any award above
the amount specified for the level of performance achieved with respect to
the relevant objective.
For 1999, 75% of Mr. Liddy’s annual
incentive cash award was based on an operating earnings per share objective.
The other 25% was based on a revenue growth objective for the personal
property and casualty segment and the life and savings segment.
For 1999, 50% of the annual incentive cash
awards for the other named executives was based on one or more performance
objectives related to their particular business units. Another 30% was based
on achievement of the corporate goals for operating earnings per share and
revenue growth. The remaining 20% was based on individual performance
priorities.
Allstate met the threshold level of
performance on the operating earnings per share objective. On average, the
business units achieved slightly less than the target level of performance
for their objectives. Allstate did not meet the threshold level of revenue
growth for the personal property and casualty segment. However, it achieved
the maximum level of revenue growth for the life and savings segment. The
investment department also achieved the maximum level of performance on its
objectives.
Long-Term Cash Compensation
Long-term incentive cash awards are designed
to provide certain employees, including each of the named executives, with a
cash award based on the achievement of a performance objective over a
three-year period. The objective is established by the Committee at the
beginning of the three-year cycle. Threshold, target and maximum levels of
performance are established on which individual award opportunities are
based, stated as a specified percentage of aggregate base salary over the
period. A new cycle commences every two years. In years in which performance
cycles overlap, 50% of participants’ salaries are applied to each
cycle. The awards will be adjusted, in specific calibrations, by up to 50%,
depending on Allstate’s performance as compared to the performance of a
group of peer companies over the same period. The Committee must certify in
writing the attainment of the objective before awards may be paid. Awards
are payable in March of the year following the end of the cycle.
Long-term incentive cash awards for the
1997-1999 cycle were paid in March 2000. In this cycle the objective for all
participants, including the named executives, was the achievement of a
specified return on average equity. The maximum level of performance was
achieved on this objective, as well as the maximum level of performance as
measured against the peer group. Payments to each of the named executives
for the 1997-1999 cycle are set forth under the “LTIP Payouts”
column of the Summary Compensation Table.
The current cycle for long-term incentive cash
awards covers the years 1999-2001. In this cycle the objective for all
participants, including the named executives, is the achievement of a
specified return on average equity. For this cycle, the Committee determined
that the peer calibration should be based on growth in operating earnings
per share and that the peer group of companies would be the Standard &
Poor’s Property & Casualty Index. This change is intended to more
closely link long-term cash compensation to shareholder value.
Long-Term Equity Compensation
The Equity Incentive Plan provides for the
grant of stock options and restricted or unrestricted common stock of
Allstate to plan participants.
In January 1999, the Committee granted stock
options to a select group of executives, including some named executives, to
recognize an increase in the level of their responsibility occasioned by the
transition of the Chief Executive Officer.
In August 1999, the Committee granted stock
options to a number of key Allstate employees, including each of the named
executives. The size of each named executive’s grant was based on a
specified percentage of his base salary and the Committee’s assessment
of his performance. All stock option grants under this plan have been made
in the form of nonqualified stock options at exercise prices equal to 100%
of the fair market value of Allstate common stock on the date of grant.
These options are not fully-exercisable until four years or, in some cases,
three years after the date of grant and expire in ten years. The vested
portions of options may be transferred to immediate family members, to
trusts for the benefit of the executive or immediate family members or to a
family limited partnership.
Chief Executive Officer Compensation
In 1999, approximately 12% of Mr. Liddy’s
total compensation opportunity was base salary. The remaining 88% was
variable compensation that was at risk and tied to Allstate’s business
results.
Mr. Liddy’s previous increase in base
salary was in November 1998 and reflected his being named Allstate’s
Chairman, President and Chief Executive Officer. In February 2000, Mr. Liddy
’s base salary was increased 7.9% to $960,000. This 15-month interval
of increase aligns with normal review cycles for Allstate’s executive
officers.
For 1999, 75% of Mr. Liddy’s annual cash
incentive award was based upon the achievement of an operating earnings per
share objective and 25% was based on the achievement of revenue growth
objectives. Allstate met the threshold level of performance for the
operating earnings per share objective; did not meet the threshold on the
property and casualty revenue growth objective; and achieved the maximum
level on the life and savings revenue growth objective. The payout was
calculated accordingly.
Mr. Liddy’s 1997-1999 long-term cash
award was based on Allstate’s achievement of the maximum return on
average equity objective as well as the maximum level of performance as
measured against the relevant peer group.
On August 12, 1999, the Committee awarded Mr.
Liddy a stock option under the Equity Incentive Plan for 400,000 shares. The
Committee used the Black-Scholes valuation formula to determine the amount
of this award, which was based on a specified percentage of Mr. Liddy’s
1999 base salary.
Mr. Liddy’s 1999 base salary, annual
incentive cash award, long-term incentive cash award and stock option grant
follow the policies and plan provisions described above. Amounts paid and
granted under these policies and plans are disclosed in the Summary
Compensation Table.
Limit on Tax Deductible Compensation
Under Section 162(m) of the Internal Revenue
Code, Allstate cannot deduct compensation paid in any year to certain
executives in excess of $1,000,000, unless it is performance-based. The
Committee continues to emphasize performance-based compensation for
executives and this is expected to minimize the effect of Section 162(m).
However, the Committee believes that its primary responsibility is to
provide a compensation program that attracts, retains and rewards the
executive talent that is necessary to Allstate’s success. Consequently,
in any year the Committee may authorize compensation in excess of $1,000,000
that is not performance-based. The Committee recognizes that the loss of a
tax deduction may be unavoidable in these circumstances.
Compensation and
Succession Committee
| Warren L. Batts
(Chairman)
F. Duane
Ackerman
James G.
Andress
H. John Riley,
Jr.
|
|
Edward A.
Brennan
W. James
Farrell
Ronald T.
LeMay
|
|
The following performance graph compares the
performance of Allstate’s common stock during the five-year period from
December 31, 1994 through December 31, 1999 with the performance of the S
&P 500 index and the S&P Property-Casualty Insurance Index. The
graph plots the changes in value of an initial $100 investment over the
indicated time periods, assuming all dividends are reinvested
quarterly.
COMPARISON OF
TOTAL RETURN
December 31, 1994
to December 31, 1999
Allstate v.
Published Indices
| |
|
12/31/94
|
|
12/31/95
|
|
12/31/96
|
|
12/31/97
|
|
12/31/98
|
|
12/31/99
|
| Allstate |
|
100.00 |
|
$176.44 |
|
$251.95 |
|
$398.16 |
|
$343.52 |
|
$220.05 |
| S&P
500 |
|
100.00 |
|
$137.12 |
|
$168.22 |
|
$223.90 |
|
$287.35 |
|
$347.36 |
| S&P
Prop./Cas. |
|
100.00 |
|
$134.96 |
|
$164.37 |
|
$233.92 |
|
$212.78 |
|
$154.71 |
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act
of 1934, as amended, requires Allstate’s officers, directors and
persons who beneficially own more than ten percent of a registered class of
Allstate’s equity securities to file reports of securities ownership
and changes in such ownership with the SEC.
Based solely upon a review of copies of such
reports, or written representations that all such reports were timely filed,
Allstate believes that each of its officers, directors and greater than
ten-percent beneficial owners complied with all Section 16(a) filing
requirements applicable to them during 1999.
The Northern Trust Company maintains banking
relationships, including credit lines, with Allstate and various of its
subsidiaries, in addition to performing services for the profit sharing
plan. In 1999, revenues received by Northern Trust for cash management
activities, trustee, custodian, credit lines and other services for all such
entities were approximately $947,123.
Stockholder Proposal For Year 2001 Annual Meeting
Proposals which stockholders intend to be
included in Allstate’s proxy material for presentation at the annual
meeting of stockholders in the year 2001 must be received by the Secretary
of Allstate, Robert W. Pike, The Allstate Corporation, 2775 Sanders Road,
Suite F8, Northbrook, Illinois 60062-6127 by November 27, 2000, and must
otherwise comply with rules promulgated by the Securities and Exchange
Commission in order to be eligible for inclusion in the proxy material for
the 2001 annual meeting.
If a stockholder desires to bring business
before the meeting which is not the subject of a proposal meeting the SEC
proxy rule requirements for inclusion in the proxy statement, the
stockholder must follow procedures outlined in Allstate’s By-Laws in
order to personally present the proposal at the meeting. A copy of these
procedures is available upon request from the Secretary of Allstate. One of
the procedural requirements in the By-Laws is timely notice in writing of
the business the stockholder proposes to bring before the meeting. Notice of
business proposed to be brought before the 2001 annual meeting must be
received by the Secretary of Allstate no earlier than January 18, 2001 and
no later than February 17, 2001 to be presented at the meeting. The notice
must describe the business proposed to be brought before the meeting, the
reasons for bringing it, any material interest of the stockholder in the
business, the stockholder’s name and address and the number of shares
of Allstate stock beneficially owned by the stockholder. It should be noted
that these By-law procedures govern proper submission of business to be put
before a stockholder vote at the annual meeting.
Under Allstate’s By-Laws, if a
stockholder wants to nominate a person for election to the Board at Allstate
’s annual meeting, the stockholder must provide advance notice to
Allstate. Notice of stockholder nominations for election at the 2001 annual
meeting must be received by the Secretary, The Allstate Corporation, 2775
Sanders Road, Suite F8, Northbrook, Illinois 60062-6127, no earlier than
January 18, 2001 and no later than February 17, 2001. With respect to the
proposed nominee, the notice must set forth the name, age, principal
occupation, number of shares of Allstate stock beneficially owned and
business and residence address. With respect to the stockholder proposing to
make the nomination, the notice must set forth the name, address and number
of shares of Allstate stock beneficially owned. A copy of these By-law
provisions is available from the Secretary of Allstate upon
request.
Alternatively, a stockholder may propose an
individual to the Nominating and Governance Committee for its consideration
as a nominee for election to the Board by writing to the office of the
Secretary, The Allstate Corporation, 2775 Sanders Road, Suite F-8,
Northbrook, Illinois 60062-6127.
Officers and other employees of Allstate and
its subsidiaries may solicit proxies by mail, personal interview, telephone,
telex, facsimile, or electronic means. None of these individuals will
receive special compensation for these services which will be performed in
addition to their regular duties, and some of them may not necessarily
solicit proxies. Allstate has also made arrangements with brokerage firms,
banks, nominees and other fiduciaries to forward proxy solicitation
materials for shares held of record by them to the beneficial owners of such
shares. Allstate will reimburse them for reasonable out-of-pocket expenses.
Corporate Investors’ Communications, Inc., 111 Commerce Road,
Carlstadt, New Jersey 07072 will assist in the distribution of proxy
solicitation materials, for a fee estimated at $7,500 plus out-of-pocket
expenses. Allstate will pay the cost of all proxy solicitation.
|
By order of the
Board,
|
|
|
|
[Signature of
Robert W. Pike]
|
|
Robert W.
Pike
|
|
Secretary
|
|
Dated: March 27,
2000
|
11-Year Summary of Selected Financial Data
| ($ in millions
except per share data) |
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
| Consolidated
Operating Results |
|
|
|
|
|
|
|
|
| Insurance premiums
and contract charges |
|
$21,735 |
|
$20,826 |
|
$20,106 |
|
$19,702 |
| Net investment
income |
|
4,112 |
|
3,890 |
|
3,861 |
|
3,813 |
| Realized capital
gains and losses |
|
1,112 |
|
1,163 |
|
982 |
|
784 |
| Total
revenues |
|
26,959 |
|
25,879 |
|
24,949 |
|
24,299 |
| Operating income
(loss) |
|
2,082 |
|
2,573 |
|
2,429 |
|
1,600 |
| Realized capital
gains and losses, after-tax |
|
691 |
|
694 |
|
638 |
|
510 |
| Equity in net
income of unconsolidated subsidiary |
|
– |
|
10 |
|
34 |
|
29 |
| Income (loss) from
continuing operations |
|
2,720 |
|
3,294 |
|
3,105 |
|
2,075 |
| Gain (loss) from
discontinued operations, after-tax |
|
– |
|
– |
|
– |
|
– |
| Cumulative effect
of changes in accounting principle |
|
– |
|
– |
|
– |
|
– |
| Net income
(loss) |
|
2,720 |
|
3,294 |
|
3,105 |
|
2,075 |
| Earnings (loss) per
share: |
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of changes in accounting |
|
3.38 |
|
3.94 |
|
3.56 |
|
2.31 |
|
Cumulative effect of changes in
accounting |
|
– |
|
– |
|
– |
|
– |
|
Net income (loss) |
|
3.38 |
|
3.94 |
|
3.56 |
|
2.31 |
|
Basic: |
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of changes in accounting |
|
3.40 |
|
3.96 |
|
3.58 |
|
2.33 |
|
Cumulative effect of changes in
accounting |
|
– |
|
– |
|
– |
|
– |
|
Net income (loss) |
|
3.40 |
|
3.96 |
|
3.58 |
|
2.33 |
| Dividends declared
per share |
|
0.60 |
|
0.54 |
|
0.48 |
|
0.43 |
|
| Consolidated
Financial Position |
|
|
|
|
|
|
|
|
| Investments |
|
$69,645 |
|
$66,525 |
|
$62,548 |
|
$58,329 |
| Total
assets |
|
98,119 |
|
87,691 |
|
80,918 |
|
74,508 |
Reserves for claims
and claims expense and life-contingent contract
benefits and contractholder funds |
|
50,610 |
|
45,615 |
|
44,874 |
|
43,789 |
| Debt |
|
2,851 |
|
1,746 |
|
1,696 |
|
1,386 |
| Mandatorily
redeemable preferred securities of subsidiary trusts |
|
964 |
|
750 |
|
750 |
|
750 |
| Shareholders’
equity |
|
16,601 |
|
17,240 |
|
15,610 |
|
13,452 |
| Shareholders’
equity per diluted share |
|
21.05 |
|
21.00 |
|
18.28 |
|
15.14 |
|
| Property-Liability Operations |
|
|
|
|
|
|
|
|
| Premiums
written |
|
$20,389 |
|
$19,515 |
|
$18,789 |
|
$18,586 |
| Premiums
earned |
|
20,112 |
|
19,307 |
|
18,604 |
|
18,366 |
| Net investment
income |
|
1,761 |
|
1,723 |
|
1,746 |
|
1,758 |
| Operating income
(loss) |
|
1,717 |
|
2,211 |
|
2,079 |
|
1,266 |
| Realized capital
gains and losses, after-tax |
|
609 |
|
514 |
|
511 |
|
490 |
| Equity in net
income of unconsolidated subsidiary |
|
– |
|
10 |
|
34 |
|
29 |
| Income (loss)
before cumulative effect of changes in accounting |
|
2,312 |
|
2,760 |
|
2,670 |
|
1,725 |
| Net income
(loss) |
|
2,312 |
|
2,760 |
|
2,670 |
|
1,725 |
| Operating
ratios |
|
|
|
|
|
|
|
|
|
Claims and claims expense (“loss”) ratio |
|
73.0 |
|
70.4 |
|
71.7 |
|
78.9 |
|
Expense ratio |
|
24.4 |
|
22.8 |
|
22.3 |
|
21.6 |
|
Combined ratio |
|
97.4 |
|
93.2 |
|
94.0 |
|
100.5 |
|
| Life and Savings
Operations |
|
|
|
|
|
|
|
|
| Premiums and
contract charges |
|
$
1,623 |
|
$
1,519 |
|
$
1,502 |
|
$
1,336 |
| Net investment
income |
|
2,260 |
|
2,115 |
|
2,085 |
|
2,045 |
| Operating
income |
|
384 |
|
392 |
|
377 |
|
368 |
| Realized capital
gains and losses, after-tax |
|
101 |
|
158 |
|
123 |
|
20 |
Income from
continuing operations before cumulative effect of changes in
accounting |
|
485 |
|
550 |
|
497 |
|
388 |
| Net
income |
|
485 |
|
550 |
|
497 |
|
388 |
| Statutory premiums
and deposits |
|
8,497 |
|
5,902 |
|
4,946 |
|
5,157 |
| Investments
including Separate Accounts |
|
48,301 |
|
41,863 |
|
37,341 |
|
33,588 |
|
*Operating income
(loss) is “Income before dividends on preferred securities and equity
in net income of unconsolidated subsidiary” excluding realized capital
gains and losses, after-tax, and gain (loss) on disposition of operations,
after-tax. *The supplemental operating income (loss) information presented
above allows for a more complete analysis of results of operations. The net
effect of gains and losses have been excluded due to their volatility
between periods and because such data are often excluded when evaluating the
overall financial performance of insurers. Operating income (loss) should
not be considered as a substitute for any GAAP measure of performance. Our
method of calculating operating income (loss) may be different from the
method used by other companies and therefore comparability may be
limited.
| 1995 |
|
1994 |
|
1993 |
|
1992 |
|
1991 |
|
1990 |
|
1989 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $18,908 |
|
$17,566 |
|
|
$17,118 |
|
|
$16,670 |
|
|
$16,215 |
|
|
$15,342 |
|
$14,251 |
| 3,627 |
|
3,343 |
|
|
3,269 |
|
|
3,153 |
|
|
2,954 |
|
|
2,528 |
|
2,195 |
| 258 |
|
200 |
|
|
215 |
|
|
161 |
|
|
4 |
|
|
182 |
|
224 |
|
22,793 |
|
21,109 |
|
|
20,602 |
|
|
19,984 |
|
|
19,173 |
|
|
18,052 |
|
16,670 |
| 1,587 |
|
268 |
|
|
1,083 |
|
|
(718 |
) |
|
662 |
|
|
518 |
|
626 |
| 168 |
|
130 |
|
|
140 |
|
|
106 |
|
|
3 |
|
|
118 |
|
148 |
| 56 |
|
86 |
|
|
79 |
|
|
112 |
|
|
58 |
|
|
54 |
|
41 |
| 1,904 |
|
484 |
|
|
1,302 |
|
|
(500 |
) |
|
723 |
|
|
690 |
|
815 |
| – |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
11 |
|
– |
| – |
|
– |
|
|
– |
|
|
(325 |
) |
|
– |
|
|
– |
|
– |
| 1,904 |
|
484 |
|
|
1,302 |
|
|
(825 |
) |
|
723 |
|
|
701 |
|
815 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2.12 |
|
0.54 |
|
|
1.49 |
|
|
(0.58 |
) |
|
|
|
|
|
|
|
| – |
|
– |
|
|
– |
|
|
(0.38 |
) |
|
|
|
|
|
|
|
| 2.12 |
|
0.54 |
|
|
1.49 |
|
|
(0.96 |
) |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2.12 |
|
0.54 |
|
|
1.49 |
|
|
(0.58 |
) |
|
|
|
|
|
|
|
| – |
|
– |
|
|
– |
|
|
(0.38 |
) |
|
|
|
|
|
|
|
| 2.12 |
|
0.54 |
|
|
1.49 |
|
|
(0.96 |
) |
|
|
|
|
|
|
|
| 0.39 |
|
0.36 |
|
|
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $56,505 |
|
$47,227 |
|
|
$47,932 |
|
|
$40,971 |
|
|
$38,213 |
|
|
$32,972 |
|
$28,144 |
| 70,029 |
|
60,988 |
|
|
58,994 |
|
|
51,817 |
|
|
47,173 |
|
|
41,246 |
|
35,369 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 42,904 |
|
39,961 |
|
|
37,275 |
|
|
35,776 |
|
|
31,576 |
|
|
27,058 |
|
22,193 |
| 1,228 |
|
869 |
|
|
850 |
|
|
1,800 |
|
|
– |
|
|
– |
|
– |
| – |
|
– |
|
|
– |
|
|
– |
|
|
– |
|
|
– |
|
– |
| 12,680 |
|
8,426 |
|
|
10,300 |
|
|
5,383 |
|
|
8,151 |
|
|
7,127 |
|
6,793 |
| 14.09 |
|
9.37 |
|
|
11.45 |
|
|
8.52 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $17,965 |
|
$16,739 |
|
|
$16,292 |
|
|
$15,774 |
|
|
$15,107 |
|
|
$14,572 |
|
$13,385 |
| 17,540 |
|
16,513 |
|
|
16,039 |
|
|
15,542 |
|
|
15,018 |
|
|
14,176 |
|
13,039 |
| 1,630 |
|
1,515 |
|
|
1,406 |
|
|
1,420 |
|
|
1,350 |
|
|
1,254 |
|
1,212 |
| 1,301 |
|
81 |
|
|
963 |
|
|
(867 |
) |
|
475 |
|
|
355 |
|
481 |
| 158 |
|
145 |
|
|
146 |
|
|
166 |
|
|
24 |
|
|
108 |
|
132 |
| 56 |
|
86 |
|
|
79 |
|
|
112 |
|
|
58 |
|
|
54 |
|
41 |
| 1,608 |
|
312 |
|
|
1,188 |
|
|
(589 |
) |
|
557 |
|
|
517 |
|
654 |
| 1,608 |
|
312 |
|
|
1,188 |
|
|
(900 |
) |
|
557 |
|
|
517 |
|
654 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 78.1 |
|
88.0 |
|
|
79.7 |
|
|
97.4 |
|
|
83.3 |
|
|
85.7 |
|
82.8 |
| 22.3 |
|
23.3 |
|
|
23.5 |
|
|
24.0 |
|
|
24.8 |
|
|
24.5 |
|
24.7 |
| 100.4 |
|
111.3 |
|
|
103.2 |
|
|
121.4 |
|
|
108.1 |
|
|
110.2 |
|
107.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $1,368 |
|
$
1,053 |
|
|
$
1,079 |
|
|
$
1,128 |
|
|
$
1,197 |
|
|
$
1,166 |
|
$
1,212 |
| 1,992 |
|
1,827 |
|
|
1,858 |
|
|
1,733 |
|
|
1,604 |
|
|
1,274 |
|
983 |
| 327 |
|
226 |
|
|
169 |
|
|
149 |
|
|
187 |
|
|
163 |
|
145 |
| 10 |
|
(15 |
) |
|
(6 |
) |
|
(60 |
) |
|
(21 |
) |
|
10 |
|
16 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 337 |
|
211 |
|
|
163 |
|
|
89 |
|
|
166 |
|
|
173 |
|
161 |
| 337 |
|
211 |
|
|
163 |
|
|
75 |
|
|
166 |
|
|
184 |
|
161 |
| 4,874 |
|
4,539 |
|
|
4,086 |
|
|
3,851 |
|
|
4,222 |
|
|
4,252 |
|
3,276 |
|
31,065 |
|
26,197 |
|
|
24,909 |
|
|
21,829 |
|
|
19,050 |
|
|
15,732 |
|
11,787 |
|
*Consolidated
financial position for 1993 and thereafter are not comparable to prior years
due to adoption of new accounting rules for debt and equity securities. *Per
share amounts for years prior to 1998 have been restated for a 2-for-1 stock
split in 1998. *Shareholders’ equity is presented pro forma for 1992
reflecting the formation of The Allstate Corporation. *Net income (loss) and
financial position for 1992 and thereafter are not comparable to prior years
due to adoption of new accounting rules for postretirement and
postemployment benefits. *Earnings (loss) per share is presented pro forma
for 1993 and 1992 and is not applicable prior to 1992.
Management’s Discussion and Analysis
of Financial
Condition and Results of Operations
The following discussion highlights
significant factors influencing the consolidated results of operations and
financial position of The Allstate Corporation (the “Company” or
“Allstate”). It should be read in conjunction with the
consolidated financial statements and related notes appearing on pages
A-33
through A-72 and the 11-year summary of selected financial data on pages
A-2
and
A-3
. Further analysis of the Company’s insurance segments is provided in
Property-Liability Operations (which includes the Personal Property and
Casualty (“PP&C”) and Discontinued Lines and Coverages
segments) and Life and Savings Operations (which represents the Life and
Savings segment) beginning on pages
A-5
and
A-15
, respectively. The segments are defined based upon the components of the
Company for which financial information is used internally to evaluate
segment performance and determine the allocation of
resources.
1999
HIGHLIGHTS
|
·
|
Announced a
strategic initiative to provide customers with access to Allstate sales
and service through the Internet and call centers. The intent of this
initiative is to aggressively expand selling and customer service
capabilities, by combining ease of access with the expertise and local
presence of an Allstate agency.
|
|
·
|
Completed the
acquisition of the personal lines auto and homeowners insurance business
of CNA Financial Corporation (“CNA personal lines”) and the
acquisition of American Heritage Life Investment Corporation (“AHL
”), which provide the Company a strong presence in the independent
agency and workplace marketing distribution channels,
respectively.
|
|
·
|
Established an
alliance with Putnam Investments which generated additional Life and
Savings sales of $832 million during the year.
|
|
·
|
Expanded the
existing $2 billion share repurchase program by an additional $2
billion. The combined $4 billion program is expected to be completed by
December 31, 2000.
|
Consolidated
revenues
| For the years
ended December 31, |
|
1999
|
|
1998
|
|
1997
|
| ($ in
millions) |
| Property-Liability
insurance premiums |
|
$20,112 |
|
$19,307 |
|
$18,604 |
| Life and Savings
premiums and contract charges |
|
1,623 |
|
1,519 |
|
1,502 |
| Net investment
income |
|
4,112 |
|
3,890 |
|
3,861 |
| Realized capital
gains and losses |
|
1,112 |
|
1,163 |
|
982 |
| |
|
|
|
|
|
|
| Total
revenues |
|
$26,959 |
|
$25,879 |
|
$24,949 |
| |
|
|
|
|
|
|
Consolidated revenues increased 4.2% in 1999
due primarily to higher Property-Liability earned premiums and revenues from
acquisitions. Consolidated revenues increased 3.7% in 1998 due to higher
Property-Liability earned premiums and realized capital gains.
Consolidated net
income
| For the years
ended December 31, |
|
1999
|
|
1998
|
|
1997
|
| ($ in millions
except per share data) |
|
| Net
income |
|
$2,720 |
|
$3,294 |
|
$3,105 |
| Net income per
share (Basic) |
|
3.40 |
|
3.96 |
|
3.58 |
| Net income per
share (Diluted) |
|
3.38 |
|
3.94 |
|
3.56 |
| Cash dividends
declared per share |
|
.60 |
|
.54 |
|
.48 |
| Realized capital
gains and losses, net of tax |
|
691 |
|
694 |
|
638 |
| Restructuring and
acquisition related charges, net of tax |
|
116 |
|
– |
|
– |
1999 over
1998
Net income decreased 17.4% due primarily to
decreased operating results including the impact of restructuring charges
and the affect of acquisitions. Net income per diluted share decreased 14.2%
in 1999 as the decline in net income was partially offset by the effects of
share repurchases.
1998 over
1997
Net income for 1998 increased 6.1% as a result
of increased operating results and realized capital gains. Net income per
diluted share increased 10.7% due to increased net income and the positive
impacts of share repurchases.
PROPERTY-LIABILITY 1999 HIGHLIGHTS
|
·
|
Property-Liability
premiums written increased 4.5% in 1999, as a result of the acquisition of
CNA personal lines business and increases in policies in
force.
|
|
·
|
Property-Liability
underwriting income decreased to $527 million compared to $1.30 billion in
1998, as earned premium growth was offset by unfavorable loss costs,
restructuring and acquisition related charges and increased operating
expenses.
|
|
·
|
Completed the
acquisition of CNA personal lines.
|
|
·
|
Announced a series
of strategic initiatives to expand selling and service capabilities to
customers.
|
|
·
|
Commenced a
restructuring plan to reduce expenses and to finance strategic
initiatives.
|
|
·
|
Commenced a
reorganization of the multiple employee agency programs to a single
exclusive agency independent contractor program.
|
PROPERTY-LIABILITY
OPERATIONS
Overview
The Company’s Property-Liability operations
consist of two business segments: PP&C and Discontinued Lines and
Coverages. PP&C is principally engaged in the sale of property and
casualty insurance, primarily private passenger auto and homeowners
insurance to individuals in the United States, and to a lesser extent, other
countries. Discontinued Lines and Coverages represents business no longer
written by Allstate, and includes the results from environmental, asbestos
and other mass tort exposures and other commercial lines of business in
run-off. This segment also included mortgage pool insurance business, which
the Company exited in 1999. Such groupings of financial information are
consistent with that used internally for evaluating segment performance and
determining the allocation of resources.
Underwriting results for each segment are
discussed separately beginning on page
A-6
. Summarized financial data and key operating ratios for Allstate’s
Property-Liability operations for the years ended December 31, are presented
in the following table.
| ($ in millions
except ratios) |
|
1999
|
|
1998
|
|
1997
|
| Premiums
written |
|
$20,389 |
|
|
$19,515 |
|
$18,789 |
| |
|
|
|
|
|
|
|
| Premiums
earned |
|
$20,112 |
|
|
$19,307 |
|
$18,604 |
| Claims and claims
expense |
|
14,679 |
|
|
13,601 |
|
13,336 |
| Operating costs and
expenses |
|
4,833 |
|
|
4,402 |
|
4,145 |
| Restructuring
charges |
|
73 |
|
|
– |
|
– |
| |
|
|
|
|
|
|
|
| Underwriting
income |
|
527 |
|
|
1,304 |
|
1,123 |
| Net investment
income |
|
1,761 |
|
|
1,723 |
|
1,746 |
| Realized capital
gains and losses, after-tax |
|
609 |
|
|
514 |
|
511 |
| Gain (loss) on
disposition of operations, after-tax |
|
(14 |
) |
|
25 |
|
46 |
| Income tax expense
on operations |
|
571 |
|
|
816 |
|
790 |
| |
|
|
|
|
|
|
|
| Income before
equity in net income of unconsolidated subsidiary |
|
2,312 |
|
|
2,750 |
|
2,636 |
| Equity in net
income of unconsolidated subsidiary |
|
– |
|
|
10 |
|
34 |
| |
|
|
|
|
|
|
|
| Net
income |
|
$
2,312 |
|
|
$
2,760 |
|
$
2,670 |
| |
|
|
|
|
|
|
|
| Catastrophe
losses |
|
$
816 |
|
|
$
780 |
|
$
365 |
| |
|
|
|
|
|
|
|
| Operating
ratios |
|
|
|
|
|
|
|
|
Claims and claims expense (
“loss”) ratio |
|
73.0 |
|
|
70.4 |
|
71.7 |
|
Expense ratio |
|
24.4 |
|
|
22.8 |
|
22.3 |
| |
|
|
|
|
|
|
|
|
Combined ratio |
|
97.4 |
|
|
93.2 |
|
94.0 |
| |
|
|
|
|
|
|
|
|
Effect of catastrophe losses on
combined ratio |
|
4.1 |
|
|
4.0 |
|
2.0 |
| |
|
|
|
|
|
|
|
Effect of restructuring and
acquisition related charges on combined
ratio |
|
0.7 |
|
|
– |
|
– |
| |
|
|
|
|
|
|
|
PERSONAL PROPERTY
AND CASUALTY (“PP&C”) SEGMENT
In 1999, the Company announced a series of
strategic initiatives to aggressively expand selling and service
capabilities to its customers. These initiatives include creating a platform
that will provide consumers with sales and service capabilities through the
Internet and call centers, as well as through locally established Allstate
agencies. Other initiatives include the introduction of new competitive
pricing and underwriting techniques, new agency and claim technology and
enhanced marketing and advertising. The Company believes successful
implementation of the initiatives will result in selling and customer
service advantages in an increasingly competitive marketplace.
Summarized financial data and key operating
ratios for Allstate’s PP&C segment for the years ended December 31,
are presented in the following table.
| ($ in millions
except ratios) |
|
1999
|
|
1998
|
|
1997
|
| Premiums
written |
|
$20,381 |
|
$19,516 |
|
$18,787 |
| |
|
|
|
|
|
|
| Premiums
earned |
|
$20,103 |
|
$19,307 |
|
$18,600 |
| Claims and claims
expense |
|
14,642 |
|
13,572 |
|
13,333 |
| Other costs and
expenses |
|
4,812 |
|
4,380 |
|
4,126 |
| Restructuring
charges |
|
73 |
|
– |
|
– |
| |
|
|
|
|
|
|
| Underwriting
income |
|
$
576 |
|
$ 1,355 |
|
$ 1,141 |
| |
|
|
|
|
|
|
| Catastrophe
losses |
|
$
816 |
|
$
780 |
|
$
365 |
| |
|
|
|
|
|
|
| Operating
ratios |
|
|
Claims and claims expense (
“loss”) ratio |
|
72.8 |
|
70.3 |
|
71.7 |
|
Expense ratio |
|
24.3 |
|
22.7 |
|
22.2 |
| |
|
|
|
|
|
|
|
Combined ratio |
|
97.1 |
|
93.0 |
|
93.9 |
| |
|
|
|
|
|
|
|
Effect of catastrophe losses on
combined ratio |
|
4.1 |
|
4.0 |
|
2.0 |
| |
|
|
|
|
|
|
PP&C premiums PP&C sells primarily private
passenger auto and homeowners insurance to individuals through the exclusive
Allstate agency channel, and in 1999 with the acquisition of CNA personal
lines, an expanded independent agency channel. The Company has historically
separated the voluntary personal auto insurance business into two categories
for underwriting purposes: the standard market and the non-standard market.
Generally, standard auto customers are expected to have lower risks of loss
than non-standard customers. The Company distinguishes between these risk
categories using factors unique to each customer such as the driving records
of the various drivers on the policy, the existence of prior insurance
coverage, the type of car owned or the customer’s financial stability.
The Company is implementing a refined pricing program that uses its
underwriting experience for these factors to price auto coverage for each
customer using a unique tier-based pricing model. Tier-based pricing allows
a much broader range of premiums to be offered to customers within the two
existing categories of risks. As a result, management believes that
tier-based pricing will allow the Company to compete more effectively and
operate more profitably. The Company’s ability to implement these
strategies is generally subject to regulatory approval. Currently,
management expects to implement these strategies in approximately 15 states
during 2000 and the remaining states in 2001, or as the strategy receives
regulatory approval in each state. The Company’s underwriting strategy
for homeowners is to target customers whose risk of loss provides the best
opportunity for profitable growth. This includes managing exposure on
policies in areas where the potential loss from catastrophes exceeds
acceptable levels.
The Company’s marketing strategy is to
provide sales and service to new and existing customers in the distribution
channel of their choice. With the implementation of its strategic
initiatives, the Company will provide products in four major channels of
distribution. Customers will be able to access Allstate products through
exclusive agencies, call centers and the Internet, which will provide
consistent pricing and enhanced customer service. CNA personal lines and
Deerbrook Insurance Company products will be accessible through independent
agencies. Management expects the execution of this strategy, in conjunction
with the execution of new underwriting and pricing strategies, to improve
the opportunity for profitable growth.
Standard auto premiums written
increased 2.8% in 1999, to $11.44 billion, from $11.13 billion in 1998, due
primarily to the acquisition of CNA personal lines during the fourth quarter
of 1999 and a 1.9% increase in the
number of policies in force, offset by a 1.1% decrease in average premiums per
policy. Standard auto premiums written increased 2.6% in 1998, from $10.85
billion in 1997, due primarily to an increase in the number of renewal
policies in force and higher average premiums.
Average premium decreases in 1999 were caused
by competitive rate pressures due, in part, to increased consolidation in
the industry and competitors expanding and redefining their underwriting
risk selection and tolerance, favorable loss trends in recent years and
regulatory activities in some states. (See the discussion of regulatory
actions in New Jersey below.) Increases in average premiums in 1998 were
primarily attributable to a shift to newer and more expensive autos, and to
a lesser extent, rate increases. The Company expects premium growth to
continue to be limited by the competitive environment and the implementation
of new underwriting and pricing guidelines.
Excluding standard auto premiums written in
New Jersey, standard auto premiums written increased approximately 4.8% in
1999 as compared to 1998. Since the implementation of regulated rate and
coverage reductions in the state of New Jersey in March 1999, the Company
has experienced decreased premiums in the state, but also expects to see
corresponding improvement in future loss experience. While the impacts of
the rate reductions on premiums written will generally be fully realized in
the first quarter of 2000, impacts of coverage reductions on losses will not
be fully determinable until 2001.
Non-standard auto premiums written
increased 3.3% in 1999, to $3.46 billion, from $3.35 billion in 1998.
The increase was due to a 4.4% increase in the number of new policies in
force, primarily due to the expansion of non-standard auto into the states
of California and South Carolina, and additional independent agency
appointments during the year. This increase was partially offset by a 2.8%
decline in average premiums due to decreases in rates and a shift to
policyholders selecting less coverage. In 1998, non-standard auto premiums
written increased 6.0%, from $3.16 billion in 1997, due to an increase in
the number of renewal policies in force and, to a lesser extent, higher
average premiums. Management believes non-standard auto premiums written for
1999 and 1998 were adversely impacted by competitive pressures. In addition,
the introduction of new administrative requirements which were intended to
improve retention and decrease expenses related to the collection of
premiums, also negatively impacted the 1998 results.
Management is implementing programs to address
the emergence of adverse profitability trends in non-standard auto. These
programs include additional down payment requirements, new underwriting
guidelines and new rating plans, and are expected to adversely impact
written premium growth in the near term while improving profitability in the
future. The Company has filed, or plans to file additional rate increases
during 2000.
Homeowners premiums written increased 9.2%
in 1999, to $3.51 billion, from $3.21 billion in 1998. Homeowners premiums
written increased 7.8% in 1998, from $2.98 billion in 1997. Increases in
1999 were due to impacts from the acquisition of CNA personal lines during
the fourth quarter of 1999, and increases of 3.1% in policies in force and
2.0% in average premium. The increase in premiums written in 1998 was due to
an increase in the number of policies in force combined with higher average
premiums. Higher average premiums were due to increases in rates and insured
values in both years. The Company has filed, or plans to file additional
rate increases during 2000.
PP&C
underwriting results Underwriting income
decreased to $576 million in 1999 from $1.36 billion in 1998. The decrease
was due primarily to increases in premiums earned being more than offset by
the impacts of increased loss costs and the restructuring and acquisition
related charges incurred. Loss costs increased during 1999 due to increased
auto claim frequency (rate of claim occurrence) and auto and homeowners
claim severity (average cost per claim). Underwriting income increased in
1998 from $1.14 billion in 1997, due to increased premiums earned, favorable
claim frequency and favorable auto injury claim severity, partially offset
by increased catastrophe losses and increased homeowners claim severity.
Catastrophe losses for 1999 were $816 million compared with $780 million and
$365 million in 1998 and 1997, respectively.
Changes in claim severity are generally
influenced by inflation in the medical and auto repair sectors of the
economy. The Company mitigates these effects through various loss control
programs. Injury claims are affected largely by medical cost inflation while
physical damage claims are affected largely by auto repair cost inflation
and used car prices. Increases in injury claim severity experienced during
1999 were due in part to medical cost
inflationary pressures and were consistent with relevant medical cost indices.
Management believes the Company’s claim settlement initiatives, such as
special investigative units used to detect fraud and handle suspect claims,
are contributing to the positive 1999 and 1998 injury severity trends.
Management believes severity may continue to be adversely affected as
inflationary pressures on medical costs outweigh the benefit of claim
settlement initiatives aimed at reducing claim severity.
For physical damage coverage, the Company
monitors its rate of increase in average cost per claim against the Body
Work price index and the Used Car price index. In 1999 and 1998, the Company
’s physical damage coverage severity was consistent with prior years,
whereas related indices increased slightly during the year. Management
believes that the 1999 and 1998 results were largely impacted by the
application of enhanced claim settlement practices for auto physical damage
claims.
The restructuring charge incurred during 1999
was the result of implementing the cost reduction program announced on
November 10, 1999. The impact of the charge on the PP&C segment was $73
million, or $48 million after-tax, and related specifically to the
elimination of certain employee positions, the consolidation of operations
and facilities and the reorganization of its multiple employee agency
programs to a single exclusive agency independent contractor program. See
Note 11 to the consolidated financial statements for a more detailed
discussion of these charges.
Based on information developed from the
post-closing review of the acquired CNA personal lines business, the Company
recorded an acquisition charge of $58 million, or $37 million after-tax,
relating to different estimates of loss and loss expense reserves and asset
valuation allowances. The pretax charge is reflected in Claims and claims
expense and Other costs and expenses.
The 1999 and 1998 expense ratios increased
compared to prior years due primarily to the Company’s investment in
various initiatives, such as increased advertising and technology, which are
intended to expand the business.
PP&C
catastrophe losses and catastrophe management Catastrophes are an
inherent risk of the property-liability insurance industry which have
contributed, and will continue to contribute, to potentially material
year-to-year fluctuations in Allstate’s results of operations and
financial position. A “catastrophe” is defined by Allstate as an
event that produces pre-tax losses before reinsurance in excess of $1
million, and involves multiple first party policyholders. Catastrophes are
caused by various events including, but not limited to, earthquakes,
wildfires, tornadoes, hailstorms, hurricanes, tropical storms, high winds
and winter storms.
The level of catastrophic losses experienced
in any year cannot be predicted and could potentially be material to results
of operations and financial position. While management believes the Company
’s catastrophe management initiatives, described below, have reduced
the magnitude of possible future losses, the Company continues to be exposed
to catastrophes that may materially impact the Company’s results of
operations and financial position.
The establishment of appropriate reserves for
losses incurred from catastrophes, as for all outstanding Property-Liability
claims, is an inherently uncertain process. Catastrophe reserve estimates
are regularly reviewed and updated, using the most current information and
estimation techniques. Any resulting adjustments, which may be material, are
reflected in current operations.
Allstate has limited, over time, its aggregate
insurance exposures in certain regions prone to catastrophes. These limits
include restrictions on the amount and location of new business production,
limitations on the availability of certain policy coverages, policy
brokering and increased participation in catastrophe pools. Allstate has
also requested and received rate increases and has expanded its use of
increased hurricane and earthquake deductibles in certain regions prone to
catastrophes. During 1999, the Company continued to make progress in
reducing its exposure to catastrophes in the northeastern United States (
“Northeast”). However, the initiatives are somewhat mitigated by
requirements of state insurance laws and regulations, as well as by
competitive considerations.
Allstate continues to support the enactment of
federal legislation that would reduce the impact to Allstate of catastrophic
natural disasters, such as earthquakes and hurricanes. Allstate is a
founding member of a coalition, the
Home Insurance Federation of America, whose members include property insurers
and insurance agents. The group is promoting measures in Congress that would
enable insurers and other eligible parties, including state disaster plans,
to purchase catastrophic-level reinsurance from the federal government. In
1999, the House Committee on Banking and Financial Services voted to refer a
bill, H.R. 21, the Homeowners’ Insurance Availability Act, to the full
House of Representatives for further consideration. H.R. 21 was not acted
upon by the House during its 1999 session. A comparable bill, S. 1361,
Natural Disaster Protection and Insurance Act of 1999, is pending in the
Senate Commerce, Science and Transportation Committee. Allstate cannot
predict whether this natural disaster legislation will be enacted or the
effect on Allstate if it were enacted.
For Allstate, areas of potential catastrophe
losses due to hurricanes include major metropolitan centers near the eastern
and gulf coasts of the United States. Exposure to potential earthquake
losses in California is limited by the Company’s participation in the
California Earthquake Authority (“CEA”). Other areas in the United
States with exposure to potential earthquake losses include areas
surrounding the New Madrid fault system in the Midwest and faults in and
surrounding Seattle, Washington and Charleston, South Carolina. Allstate
continues to evaluate alternative business strategies to more effectively
manage its exposure to catastrophe losses in these and other
areas.
Florida Hurricanes
Allstate Floridian Insurance Company (“Floridian”) and
Allstate Floridian Indemnity Company (“AFI”) sell and service
Florida residential property policies. Floridian has access to reimbursement
from the Florida Hurricane Catastrophe Fund (“FHCF”) for 90% of
hurricane losses in excess of approximately the first $255 million for each
storm, up to an aggregate of $900 million (90% of approximately $1.00
billion) in a single hurricane season, and $1.23 billion total reimbursement
over all hurricane seasons.
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% in the first year of
assessment, and up to a total of 6% for assessments in the second and
subsequent years. Assessments 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 with
the State of 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 Residential
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 Florida property premiums
industry-wide for that 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 emergency assessments in subsequent years.
Companies are required to collect the emergency assessments directly from
the policyholder and remit these monies to the organizations as they are
collected. Participating companies are obligated 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 any 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 statutes are designed so that the
ultimate cost is borne by the policyholders, the exposure to assessments and
availability of recoveries may not offset each other in the financial
statements due to timing and the possibility of policies not being renewed
in subsequent years.
Northeast Hurricanes
The Company has a three-year excess of loss reinsurance contract
covering property policies in the 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 a limit of $500 million in any one year and an
aggregate limit of $1.00 billion over the three-year contract period. To
limit insurance exposure to catastrophe losses, deductibles on residential
property policies in the New York metropolitan area now include a hurricane
deductible that is triggered by hurricane winds greater than 100 miles per
hour.
California Earthquakes
Allstate participates in the CEA which is a privately-financed,
publicly-managed state agency created to provide insurance coverage for
earthquake damage. Insurers selling homeowners insurance in California are
required to offer earthquake insurance to their customers either through
their company or by participation in the CEA. The Company’s homeowners
policy continues to include coverages for losses caused by explosions,
theft, glass breakage and fires following an earthquake, which are not
underwritten by the CEA.
Should losses arising from an earthquake cause
a deficit in the CEA, additional capital needed to operate the CEA would be
obtained through assessments of participating insurance companies, payments
received under reinsurance agreements and bond issuances funded by future
policyholder assessments. Participating insurers are required to fund an
assessment, not to exceed $2.15 billion, if the capital of the CEA falls
below $350 million. Participating insurers are required to fund a second
assessment, not to exceed $1.43 billion, if aggregate CEA earthquake losses
exceed $5.86 billion or the capital of the CEA falls below $350 million. At
December 31, 1999, the CEA’s capital balance was approximately $485
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
startup assessment issued to participating insurers in 1996. The authority
of the CEA to assess participating insurers expires when it has completed
twelve 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. As of December 31, 1999, the Company had 25.7% of the
CEA market share. 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 $553 million, as the likelihood of an event
exceeding the CEA claims paying capacity of $5.86 billion is remote.
Management believes Allstate’s exposure to earthquake losses in
California has been significantly reduced as a result of its participation
in the CEA.
PP&C
Outlook
|
·
|
The competitive
environment has caused Allstate and other participants in the industry to
implement auto insurance rate decreases during 1999 and in prior years.
Management expects to see a stabilization of rates beginning in 2000, as
many competitors have publicly indicated their intentions to file rate
increases during the year. Planned rate changes and the Company’s new
pricing and underwriting strategies may also adversely impact premium
revenues while intending to improve profitability.
|
|
·
|
The Company expects
to incur additional restructuring and related expenses of approximately
$100 million throughout 2000. The costs will be incurred as employee
positions are eliminated, as the transition to a single exclusive agency
independent contractor program proceeds, and to a lesser extent, as
operations and facilities are consolidated. These costs will be incurred
as part of a larger initiative to reduce expenses by $600 million to
finance the new strategic initiatives. The Company estimates it will
invest approximately $300 million in capital expenditures over the next
two years, and will spend approximately $700 million in systems
development and implementation costs, rollout costs and advertising for
the new strategy over the next two years.
|
|
·
|
The Company
implemented a program to transition from multiple employee agency programs
to a single exclusive agency independent contractor program, as part of
its restructuring initiative. This program is intended to service agencies
and customers more efficiently and cost-effectively. With this program,
the Company expects transitioning agents to select one of three
alternatives: i) conversion to an exclusive agency independent contractor;
ii) conversion to an exclusive agency independent contractor and sale of
an economic interest in their existing business; or iii) separation from
the Company either through a voluntary separation or retirement. If a
substantial number of transitioning agents do not convert to the new
contract or if converting agents have a decline in productivity, adverse
impacts to premiums could be experienced. Currently, the Company believes
these impacts will not be material.
|
|
·
|
The Company has
experienced favorable trends in injury severity that are expected to be
adversely impacted by inflationary increases in medical costs in the
future.
|
|
·
|
Federal legislation
has been passed that eliminates many federal and state law barriers to
affiliations among banks, securities firms, insurers and other financial
service providers. The impact this may have on the PP&C segment is
unknown at this time.
|
DISCONTINUED
LINES AND COVERAGES SEGMENT
Summarized underwriting results for the years
ended December 31, for the Discontinued Lines and Coverages segment are
presented in the following table.
| ($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
| Total underwriting
loss |
|
$49 |
|
$51 |
|
$18 |
| |
|
|
|
|
|
|
Discontinued Lines and Coverages consists of
business no longer written by Allstate, including results from
environmental, asbestos and other mass tort exposures and other commercial
business in run-off. This segment also included mortgage pool insurance
business, which the Company exited in 1999.
During 1999, the Company strengthened its net
asbestos reserves by $346 million, which was partially offset by the
reduction of net reserves for environmental and other losses of $155 million
and the release of a reserve held as a provision for future losses on the
run-off of the mortgage pool business of $114 million. The strengthening of
net asbestos reserves and the release of net environmental and other
reserves was primarily the result of the Company’s annual assessment of
these liabilities completed during the third quarter of the year. The
release of the provision for future losses on the mortgage pool business was
the result of a recapture, by The PMI Group, Inc., of the reinsured business
and all related assets and future liabilities of the mortgage pool
business.
PROPERTY-LIABILITY
NET INVESTMENT INCOME AND REALIZED CAPITAL GAINS
Pretax net
investment income Net investment income increased
in 1999 after decreasing in 1998 as compared to 1997. In 1999, positive cash
flows from operations, assets acquired with the CNA personal lines business
and increases in income from partnership interests, were partially offset by
dividends paid to The Allstate Corporation and lower investment yields.
Despite recent increases in interest rates, current investment yields are
still lower than average portfolio yields, therefore funds from called or
maturing investments were generally reinvested at lower yields resulting in
reduced investment income. If interest rates continue to rise, this trend
may reverse over time. The decrease in 1998 was primarily due to higher
investment balances being offset by the impact of lower investment
yields.
Realized capital
gains and losses after-tax Realized capital gains
and losses, after-tax were $609 million in 1999 compared to $514 million in
1998 and $511 million in 1997. Increased realized gains in 1999 were largely
the result of the timing of sales decisions reflecting management’s
decision on positioning the portfolio, as well as assessments of individual
securities and overall market conditions. Realized gains in 1998 were
impacted by gains on the sale of a majority of the Company’s real
estate property portfolio, partially offset by a decrease in gains on the
sales of securities due to less favorable market conditions.
Investment
Outlook
|
·
|
Investment income
growth for the Property-Liability operations will continue to be adversely
impacted by dividends paid to The Allstate Corporation and lower yields as
funds from called or maturing investments are reinvested at lower
yields.
|
PROPERTY-LIABILITY
CLAIMS AND CLAIMS EXPENSE RESERVES
Underwriting results of the Company’s two
Property-Liability segments are significantly influenced by estimates of
property-liability claims and claims expense reserves (see Note 7 to the
consolidated financial statements). These reserves are an accumulation of
the estimated amounts necessary to settle all outstanding claims, including
claims which are incurred but not reported (“IBNR”), as of the
reporting date. These reserve estimates are based on known facts and
circumstances, internal factors including Allstate’s experience with
similar cases, historical trends involving claim payment patterns, loss
payments, pending levels of unpaid claims and product mix. In addition, the
reserve estimates are also influenced by external factors including court
decisions, economic conditions and public attitudes. The Company, in the
normal course of business, may also supplement its claims processes by
utilizing third party adjusters, appraisers, engineers, inspectors, other
professionals and information sources to assess and settle catastrophe and
non-catastrophe related claims. The effects of inflation are implicitly
considered in the reserving process.
The establishment of appropriate reserves,
including reserves for catastrophes, is an inherently uncertain process.
Allstate regularly updates its reserve estimates as new facts become known
and further events occur which may impact the resolution of unsettled
claims. Changes in prior year reserve estimates, which may be material, are
reflected in the results of operations in the period such changes are
determined to be necessary.
Changes in Allstate’s estimate of prior
year net loss reserves at December 31 are summarized in the following
table.
| ($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
| Reserve
re-estimates due to: |
|
|
Environmental and asbestos
claims |
|
$254 |
|
|
$100 |
|
|
$
– |
|
|
All other property-liability
claims |
|
(841 |
) |
|
(800 |
) |
|
(677 |
) |
| |
|
|
|
|
|
|
|
|
|
| Pretax reserve
decrease |
|
$(587 |
) |
|
$(700 |
) |
|
$(677 |
) |
| |
|
|
|
|
|
|
|
|
|
Favorable calendar year reserve development in
1999, 1998 and 1997 was the result of favorable injury severity trends, as
compared to the Company’s anticipated trends, in each of the three
years. In 1999 and 1998, this favorable development more than offset adverse
developments in environmental, asbestos and other mass tort reserves. The
favorable injury severity trend during this three-year period was largely
due to moderate medical cost inflation mitigated by the Company’s loss
control programs. The impacts of the moderate medical cost inflation trend
have developed over time as actual claim settlements validate the effect of
the rate of inflation. 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, 1999. Future reserve
development releases, if any, are expected to be adversely impacted by
anticipated increases in medical cost inflation rates.
Allstate’s exposure to environmental,
asbestos and other mass tort claims stem principally from excess and surplus
business written from 1972 through 1985, including substantial excess and
surplus general liability coverages on Fortune 500 companies and reinsurance
coverage written during the 1960s through the 1980s, including reinsurance
on primary insurance written on large United States companies. Other mass
tort exposures primarily relate to product liability claims, such as those
for medical devices and other products, and general liabilities.
In 1986, the general liability policy form
used by Allstate and others in the property-liability industry was amended
to introduce an “absolute pollution exclusion”, which excluded
coverage for environmental damage claims and added an asbestos exclusion.
Most general liability policies issued prior to 1987 contain annual
aggregate limits for product liability coverage, and policies issued after
1986 also have an annual aggregate limit on all coverages. Allstate’s
experience to date is that these policy form changes have effectively
limited its exposure to environmental and asbestos claim risks.
Establishing net loss reserves for
environmental, asbestos and other 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 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 those 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.
The table below summarizes reserves and claim
activity for environmental and asbestos claims before (Gross) and after
(Net) the effects of reinsurance for the past three years.
| |
|
1999
|
|
1998
|
|
1997
|
| ($ in
millions) |
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
| ENVIRONMENTAL
CLAIMS |
| Beginning
reserves |
|
$
840 |
|
|
$641 |
|
|
$885 |
|
|
$685 |
|
|
$
947 |
|
|
$722 |
|
| Incurred claims and
claims expense |
|
(109 |
) |
|
(96 |
) |
|
21 |
|
|
– |
|
|
– |
|
|
– |
|
| Claims and claims
expense paid |
|
(66 |
) |
|
(39 |
) |
|
(66 |
) |
|
(44 |
) |
|
(62 |
) |
|
(37 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ending
reserves |
|
$
665 |
|
|
$506 |
|
|
$840 |
|
|
$641 |
|
|
$
885 |
|
|
$685 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Survival ratio
– environmental claims |
|
10.1 |
|
|
13.0 |
|
|
12.7 |
|
|
14.6 |
|
|
14.3 |
|
|
18.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ASBESTOS
CLAIMS |
| Beginning
reserves |
|
$
686 |
|
|
$459 |
|
|
$605 |
|
|
$417 |
|
|
$
774 |
|
|
$510 |
|
| Incurred claims and
claims expense |
|
447 |
|
|
350 |
|
|
225 |
|
|
100 |
|
|
– |
|
|
– |
|
| Claims and claims
expense paid |
|
(86 |
) |
|
(51 |
) |
|
(144 |
) |
|
(58 |
) |
|
(169 |
) |
|
(93 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ending
reserves |
|
$1,047 |
|
|
$758 |
|
|
$686 |
|
|
$459 |
|
|
$ 605 |
|
|
$417 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Survival ratio
– asbestos claims |
|
12.2 |
|
|
14.9 |
|
|
4.8 |
|
|
7.9 |
|
|
3.6 |
|
|
4.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Survival ratio
– environmental and asbestos combined |
|
11.3 |
|
|
14.0 |
|
|
7.3 |
|
|
10.8 |
|
|
6.5 |
|
|
8.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The survival ratio is calculated by taking the
Company’s ending reserves divided by payments made during the year. The
survival ratio, however, is an extremely simplistic approach to measuring
the adequacy of environmental and asbestos reserve levels. Many factors,
such as mix of business, level of coverage provided and settlement
procedures have significant impacts on the amount of environmental and
asbestos claims and claims expense reserves, ultimate payments thereof and
the resultant ratio. As payments result in corresponding reserve reductions,
survival ratios can be expected to vary over time. In 1999, the
environmental survival ratio decreased due to reduced reserve levels. In
1999 and 1998, the asbestos survival ratio increased due to increased
reserve levels and a decline in payments.
Pending, new, total closed and closed without
payment claims for environmental and asbestos exposures for the years ended
December 31, are summarized in the following table.
| Number of
Claims |
|
1999
|
|
1998
|
|
1997
|
| Pending, beginning
of year |
|
16,027 |
|
|
15,965 |
|
|
16,075 |
|
| New |
|
2,991 |
|
|
2,032 |
|
|
1,728 |
|
| Total
closed |
|
(3,154 |
) |
|
(1,970 |
) |
|
(1,838 |
) |
| |
|
|
|
|
|
|
|
|
|
| Pending, end of
year |
|
15,864 |
|
|
16,027 |
|
|
15,965 |
|
| |
|
|
|
|
|
|
|
|
|
| Closed without
payment |
|
2,357 |
|
|
1,460 |
|
|
1,311 |
|
| |
|
|
|
|
|
|
|
|
|
Approximately 59%, 58% and 57% of the total
net environmental and asbestos reserves at December 31, 1999, 1998 and 1997,
respectively, represents IBNR.
Allstate’s reserves for environmental
exposures could be affected by the existing federal Superfund law and
similar state statutes. 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. Management is unable to determine the effect, if any, that
such legislation will have on results of operations or financial
position.
Management believes its net loss reserves for
environmental, asbestos and other mass tort exposures are appropriately
established based on available facts, technology, laws and regulations.
However, due to the inconsistencies of court coverage decisions, plaintiffs
’ expanded theories of liability, the risks inherent in major
litigation and other uncertainties, the ultimate cost of these claims may
vary materially from the amounts currently
recorded, resulting in an increase in loss reserves. In addition, while the
Company believes the improved actuarial techniques and databases have
assisted in its ability to estimate environmental, asbestos and other mass
tort net loss reserves, these refinements may subsequently prove to be
inadequate indicators of the extent of probable losses. Due to the
uncertainties and factors described above, management believes it is not
practicable to develop a meaningful range for any such additional net loss
reserves that may be required.
Property-Liability
reinsurance ceded The Company purchases
reinsurance to limit aggregate and single exposures on large risks. Allstate
has purchased reinsurance primarily to mitigate losses arising from
catastrophes and long-tail liability lines, including environmental,
asbestos and other mass tort exposures. The Company retains primary
liability as a direct insurer for all risks reinsured. In connection with
the Company’s acquisition of CNA personal lines, Allstate and CNA
entered into a four-year aggregate stop loss reinsurance agreement. The
Company currently has a reinsurance recoverable from CNA on unpaid losses of
$147 million that is subject to the reinsurance agreement. Allstate also has
access to reimbursement provided by the FHCF for 90% of hurricane losses in
excess of approximately the first $255 million for each storm, up to an
aggregate of $900 million (90% of approximately $1.00 billion) in a single
hurricane season, and $1.23 billion total reimbursement over all hurricane
seasons. Allstate also entered into a three-year excess of loss reinsurance
contract covering property policies in the 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 a limit of $500 million in any one year and an
aggregate limit of $1.00 billion over the three-year contract period.
Additionally, in connection with the sale of the Company’s reinsurance
business to SCOR U.S. Corporation in 1996, Allstate entered into a
reinsurance agreement for the post-1984 reinsurance liabilities. These
reinsurance arrangements have not had a material effect on Allstate’s
liquidity or capital resources.
The impact of reinsurance activity on Allstate
’s reserve for claims and claims expense at December 31, 1999 is
summarized in the following table.
| ($ in
millions) |
|
Gross claims
and claims
expense reserves
|
|
Reinsurance
recoverable on
unpaid claims, net
|
| Mandatory pools
& facilities |
|
$
969 |
|
$
662 |
| Environmental &
asbestos |
|
1,712 |
|
448 |
| Other |
|
15,133 |
|
543 |
| |
|
|
|
|
|
Total
property-liability |
|
$17,814 |
|
$1,653 |
| |
|
|
|
|
Reinsurance has been placed with insurance
companies after an evaluation of the financial security of the reinsurer, as
well as the terms and price of coverage. Developments in the insurance
industry have often led to the segregation of environmental, asbestos and
other mass tort exposures into separate legal entities with dedicated
capital. These actions have been supported by regulatory bodies in certain
cases. The Company is unable to determine the impact, if any, that these
developments will have on the collectibility of reinsurance recoverables in
the future. The Company had amounts recoverable from Lloyd’s of London
of $89 million and $99 million at December 31, 1999 and 1998, respectively.
Lloyd’s of London implemented a restructuring plan in 1996 to solidify
its capital base and to segregate claims for years prior to 1993. The
impact, if any, of the restructuring on the collectibility of the
recoverable from Lloyd’s of London is uncertain at this time. The
recoverable from Lloyd’s of London syndicates is spread among thousands
of investors who have unlimited liability. Excluding mandatory pools and
facilities and the CNA recoverable on unpaid losses, no other amount due or
estimated to be due from any one property-liability reinsurer was in excess
of $85 million and $84 million at December 31, 1999 and 1998,
respectively.
Estimating amounts of reinsurance recoverables
is also impacted by the uncertainties involved in the establishment of loss
reserves. Management believes the recoverables are appropriately
established; however, as the Company’s underlying reserves continue to
develop, the amount ultimately recoverable may vary from amounts currently
recorded. The reinsurers and amounts recoverable therefrom are regularly
evaluated by the Company and a provision for uncollectible reinsurance is
recorded, if needed. The allowance for uncollectible reinsurance was $111
million and $141 million at December 31, 1999 and 1998,
respectively.
Allstate enters into certain intercompany
insurance and reinsurance transactions for the Property-Liability and Life
and Savings operations. Allstate enters into these transactions as a sound
and prudent business practice 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
significant intercompany transactions have been eliminated in
consolidation.
LIFE AND SAVINGS
1999 HIGHLIGHTS
|
·
|
Statutory premiums
and deposits increased 44.0% to $8.50 billion in 1999.
|
|
·
|
An alliance with
Putnam Investments, commenced in May 1999, generated sales of $832
million.
|
|
·
|
Separate Accounts
assets increased 37.2% driven by 60.4% growth in variable annuity product
sales, as well as strong performance in the underlying funds.
|
|
·
|
Completed the
acquisition of AHL, giving the Company a strong presence in the workplace
marketing distribution channel.
|
|
·
|
Income from
operations decreased 2.0% as higher profitability on life products and
variable annuities was offset by the impacts of restructuring and
acquisition related charges.
|
|
·
|
Net income
decreased 11.8% due primarily to decreased realized capital gains and
lower operating income.
|
LIFE AND SAVINGS OPERATIONS
| ($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
| Statutory premiums
and deposits |
|
$ 8,497 |
|
$ 5,902 |
|
$ 4,946 |
|
| |
|
|
|
|
|
|
|
| Investments |
|
$34,444 |
|
$31,765 |
|
$29,759 |
|
| Separate Accounts
assets |
|
13,857 |
|
10,098 |
|
7,582 |
|
| |
|
|
|
|
|
|
|
| Investments,
including Separate Accounts assets |
|
$48,301 |
|
$41,863 |
|
$37,341 |
|
| |
|
|
|
|
|
|
|
| GAAP
Premiums |
|
$
891 |
|
$
889 |
|
$
955 |
|
| Contract
charges |
|
732 |
|
630 |
|
547 |
|
| Net investment
income |
|
2,260 |
|
2,115 |
|
2,085 |
|
| Contract
benefits |
|
1,318 |
|
1,225 |
|
1,248 |
|
| Credited
interest |
|
1,260 |
|
1,190 |
|
1,167 |
|
| Operating costs and
expenses |
|
706 |
|
623 |
|
602 |
|
| Restructuring
charges |
|
8 |
|
– |
|
– |
|
| |
|
|
|
|
|
|
|
| Operating income
before tax |
|
591 |
|
596 |
|
570 |
|
| Income tax
expense |
|
207 |
|
204 |
|
193 |
|
| |
|
|
|
|
|
|
|
| Operating
income
(1)
|
|
384 |
|
392 |
|
377 |
|
| Realized capital
gains and losses, after-tax
(2)
|
|
101 |
|
158 |
|
123 |
|
| Loss on disposition
of operations, after-tax |
|
– |
|
– |
|
(3 |
) |
| |
|
|
|
|
|
|
|
| Net
income |
|
$
485 |
|
$
550 |
|
$
497 |
|
| |
|
|
|
|
|
|
|
(1)
|
The supplemental
operating information presented above allows for a more complete analysis
of results of operations. The net effects of gains and losses have been
excluded due to the volatility between periods and because such data is
often excluded when evaluating the overall financial performance of
insurers. Operating income should not be considered as a substitute for
any GAAP measure of performance. Our method of calculating operating
income may be different from the method used by other companies and
therefore comparability may be limited.
|
(2)
|
Net of the effect
of related amortization of deferred policy acquisition costs in 1999 and
1998.
|
Life and Savings
statutory premiums, deposits and contract charges
Life and Savings markets primarily life insurance, savings and group
pension products. Life insurance products consist of traditional products,
including term and whole life, interest-sensitive life, immediate annuities
with life contingencies, variable life and indexed life insurance. Savings
products include deferred annuities and immediate annuities without life
contingencies. Group pension products include contracts with fixed or
indexed rates and fixed terms, such as guaranteed investment contracts,
funding agreements and deferred and immediate annuities, or retirement
annuities. The segment also uses several brand identities. Generally,
Allstate brand products are sold through exclusive agencies, specialized
brokers and direct response marketing. Other brands such as Glenbrook Life
and Annuity, Northbrook Life, Lincoln Benefit Life and American Heritage
Life sell products through both exclusive and independent agencies,
securities firms, banks and direct response marketing. The products offered
in each brand are of similar types, with the exception of American Heritage
Life, which includes health and disability insurance in addition to life and
annuity products.
Statutory premiums and deposits, which include
premiums and deposits for all products, are used to analyze sales trends.
The following table summarizes statutory premiums and deposits by product
line.
| ($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
| Life
products |
|
|
|
Interest-sensitive |
|
$
777 |
|
$
821 |
|
$
804 |
|
Traditional |
|
367 |
|
325 |
|
317 |
|
Other |
|
534 |
|
241 |
|
188 |
| |
|
|
|
|
|
|
|
Total life products |
|
1,678 |
|
1,387 |
|
1,309 |
| Annuity
products |
|
|
|
Variable |
|
2,647 |
|
1,650 |
|
1,427 |
|
Fixed |
|
2,497 |
|
1,629 |
|
1,638 |
| Group pension
products |
|
1,675 |
|
1,236 |
|
572 |
| |
|
|
|
|
|
|
| Total |
|
$8,497 |
|
$5,902 |
|
$4,946 |
| |
|
|
|
|
|
|
Total statutory premiums and deposits
increased 44.0% in 1999, as compared to 1998. Statutory premiums on life
products increased 21.0% due to an increase in term life products with
higher face amounts, and correspondingly higher premiums, sales of a new
bank-owned life product, and the acquisition of AHL. In 1999, sales of
variable annuities increased 60.4% over 1998, primarily driven by $832
million of sales from the alliance with Putnam Investments which began in
May of 1999. Fixed annuities grew 53.3% in 1999 through the introduction of
new products and new marketing partnerships in the independent agency and
banking distribution channels, and the acquisition of AHL. Additional
statutory premiums on group pension products were generated during the year
primarily through the sale of funding agreements. Period to period
fluctuations in sales of group pension products, including funding
agreements, are largely due to management’s actions based on the
assessment of market opportunities.
In 1998, statutory premiums and deposits
increased 19.3% from 1997 due to an increase of 15.6% in variable annuity
deposits impacted by strong sales in the securities firms, bank and
independent agency channels. Sales of interest-sensitive life and
traditional life products through Allstate agencies and independent agencies
also contributed to the growth.
Life and Savings sales during 1999 continued
to move toward products with greater sales volumes and lower profit margins.
In addition, the current interest rate environment and strong stock market
conditions continue to fuel strong growth in the fixed and variable annuity
product lines. Through the use of multiple distribution channels and a wide
range of product offerings, Life and Savings is well positioned to meet
changing customer needs.
Life and Savings
GAAP premiums and contract charges Under
generally accepted accounting principles (“GAAP”), premiums
represent revenue generated from traditional life products with significant
mortality risk. Revenues for interest-sensitive life insurance and fixed and
variable annuity contracts, for which deposits are treated as liabilities,
are reflected as contract charges. Immediate annuities may be purchased with
a life contingency whereby the mortality risk is a significant factor. For
this reason the GAAP revenues generated on these contracts are recognized as
premiums. The following table summarizes GAAP premiums and contract
charges.
| ($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
| Premiums |
|
|
| Traditional
life |
|
$
342 |
|
$
316 |
|
$
319 |
| Immediate annuities
with life contingencies |
|
240 |
|
305 |
|
347 |
| Other |
|
309 |
|
268 |
|
289 |
| |
|
|
|
|
|
|
|
Total premiums |
|
891 |
|
889 |
|
955 |
| Contract
Charges |
|
|
| Interest-sensitive
life |
|
527 |
|
474 |
|
430 |
| Variable
annuities |
|
177 |
|
130 |
|
96 |
| Other |
|
28 |
|
26 |
|
21 |
| |
|
|
|
|
|
|
|
Total contract
charges |
|
732 |
|
630 |
|
547 |
| |
|
|
|
|
|
|
|
Total Premiums and Contract
Charges |
|
$1,623 |
|
$1,519 |
|
$1,502 |
| |
|
|
|
|
|
|
In 1999, total premiums were consistent with
1998 as higher traditional life premiums were offset by lower sales of
immediate annuities with life contingencies. Traditional life premiums
increased due to an increase in term life products with higher face amounts,
and correspondingly higher premiums, and an increase in renewal policies in
force. The types of immediate annuities sold may fluctuate significantly
from year to year, which impacts premiums reported. Other premiums increased
during 1999 due to the acquisition of AHL. Premiums decreased 6.9% in 1998
primarily due to lower sales of immediate annuities with life
contingencies.
Total contract charges increased 16.2% during
1999 as compared to 1998 due to higher variable annuity and
interest-sensitive life contract charges. Interest-sensitive life contract
charges increased primarily due to higher mortality charges as policyholders
age. Variable annuity contract charges increased primarily due to increases
in account value inforce, which was approximately $12.94 billion during 1999
compared to $9.15 billion in 1998, or an increase of 41.3%. Variable annuity
account values are increased by sales and market performance, which is
offset by surrenders, withdrawals and benefit payments, during each year.
During 1999, sales added $1.90 billion and market performance added $2.07
billion to the account value. This was offset by $1.13 billion in
surrenders, withdrawals and benefit payments. In 1998 the account values
increased $1.80 billion due to sales and $1.25 billion in market
performance, offset by $966 million in surrenders, withdrawals and benefit
payments. As variable annuity account values are impacted directly by market
performance, total variable annuity contract charges, which are calculated
as a percentage of each annuity account value, will fluctuate during the
year.
Life and Savings
net investment income Net investment income
increased 6.9% and 1.4% in 1999 and 1998, respectively. Increases in both
years were due to higher investment balances, partially offset by lower
portfolio yields. Investments, excluding Separate Accounts assets and
unrealized gains on fixed income securities, grew 16.0% and 6.1% in 1999 and
1998, respectively. In 1999, the increase was due to increased premiums and
contract charges, and also the impacts of the acquisition of AHL. Despite
recent increases in interest rates, current investment yields are still
lower than average portfolio yields, therefore funds from maturing
investments were generally reinvested at lower yields resulting in reduced
investment income. If interest rates continue to rise, this trend may
reverse over time.
Life and Savings
realized capital gains and losses Realized
capital gains and losses decreased in 1999 as compared to 1998, as 1998
capital gains reflected the sale of real estate and certain fixed income
securities during the year. In 1998, realized capital gains increased over
1997, due primarily to the sales of equity-linked securities, real estate
and pre-payments of fixed income securities.
Life and Savings
operating income Operating income decreased 2.0%
in 1999, as increased investment margins and contract charges were offset by
less favorable mortality margins, higher expenses and the impacts of the
restructuring and acquisition related charges. The 1998 operating income
increased 4.0% as compared to 1997 due to higher investment and mortality
margins, offset by increased expenses.
Investment margin, which represents the excess
of investment income earned over interest credited to policyholders and
contractholders, increased 8.8% due to increases in asset balances from new
sales. The difference between average investment yields and interest
credited during the year remained relatively constant with the prior year.
In 1998, the investment margins increased due to new sales, partly offset by
a slight decrease in the average investment yield. The weighted average
investment yield and the weighted average interest crediting rates during
1999, 1998 and 1997 are in the following table.
| |
|
Weighted
average
investment yield
|
|
Weighted
average
interest crediting rate
|
| |
|
1999
|
|
1998
|
|
1997
|
|
1999
|
|
1998
|
|
1997
|
| Interest-sensitive
life products |
|
7.5 |
% |
|
7.8 |
% |
|
7.8 |
% |
|
5.5 |
% |
|
5.8 |
% |
|
5.8 |
% |
| Fixed rate
contracts |
|
8.0 |
|
|
8.3 |
|
|
8.4 |
|
|
7.3 |
|
|
7.5 |
|
|
7.5 |
|
| Flexible rate
contracts |
|
7.3 |
|
|
7.6 |
|
|
7.7 |
|
|
5.2 |
|
|
5.6 |
|
|
5.7 |
|
Fixed rate contracts include funding
agreements, immediate annuities and group pension products, while flexible
rate contracts include all other fixed annuities.
Mortality margin, which represents premiums
and cost of insurance charges in excess of related policy benefits,
decreased 9.0% during 1999. The decrease, which negatively impacts operating
income, was the result of a return to
an expected level of claims and average claim size as compared to favorable
mortality results in 1998. The 1998 favorable margin was due to an increase
in life insurance inforce and fewer claims.
Increased expenses during 1999 and 1998 are
due to additional investments in technology.
The restructuring charge incurred during 1999
was the result of the cost reduction program announced on November 10, 1999.
The impact of the charge on the Life and Savings segment totaled $8 million,
or $5 million after-tax, and related primarily to the elimination of
employee positions. See Note 11 to the consolidated financial statements for
a more detailed discussion of these charges.
Based on information developed from the
post-closing review of the acquired AHL business, the Company recorded an
acquisition charge of $32 million, or $26 million after-tax, primarily
relating to different estimates of loss reserves and asset valuation
allowances. The pretax charge is reflected in Contract charges, Contract
benefits and Operating costs and expenses.
Life and Savings
Outlook
|
·
|
Life and Savings
product growth will continue to be driven by a focus on multiple channels
of distribution and multiple products. With this focus management plans
to:
|
|
*
|
Emphasize alliance
partners, Putnam Investments, Morgan Stanley Dean Witter and PNC
Bank;
|
|
*
|
Perform ongoing
market assessments to capture opportunities for group pension and
immediate annuity products;
|
|
*
|
Develop the
Allstate Financial Advisor initiative, which includes implementing
financial planning services for customers;
|
|
*
|
Utilize a funding
agreement program;
|
|
*
|
Continue
wholesaling activities; and
|
|
*
|
Expand its Internet
presence.
|
|
·
|
Consistent with the
marketplace, Life and Savings sales continued to move towards lower profit
margin products, such as term life and variable annuities. These lower
profit margin products require a higher volume of business to increase the
Life and Savings operating results. Life and Savings achieved this
increased volume in 1999 and expects product growth to
continue.
|
|
·
|
Benefits derived
from investments in technology, distribution systems and restructuring are
expected to contribute to profitability.
|
|
·
|
The Company is
currently experiencing increased competition in the Life and Savings
segment. This competition is expected to continue and therefore increase
the need to reduce costs of distribution and increase economies of scale
in order to compete with larger traditional insurance companies, as well
as non-traditional competitors, such as banks and securities firms.
Federal legislation has also been passed that eliminates many federal and
state law barriers to affiliations among banks, securities firms, insurers
and other financial service providers. The impact this may have on the
Life and Savings segment is unknown at this time.
|
Market risk is the risk that the Company will
incur losses due to adverse changes in equity, interest, commodity, or
currency exchange 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 results of operations. The Company may use
the following approaches 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 derivative financial instruments section in “Investments
” and Note 6 to the consolidated financial statements provides a more
detailed discussion of these instruments.
Corporate Oversight
The Company generates substantial investable
funds from its primary business operations, Property-Liability and Life and
Savings. In formulating and implementing policies for investing new and
existing funds, 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.
The Company administers and oversees the
investment risk management processes primarily through the Boards of
Directors and Investment Committees of its operating subsidiaries, and the
Credit and Risk Management Committee (“CRMC”). The Boards of
Directors and Investment Committees provide executive oversight of
investment activities. The CRMC is a senior management committee consisting
of the Chief Investment Officer, the Investment Risk Manager, and other
investment officers who are responsible for the day-to-day management of
market risk. The CRMC meets at least monthly to provide detailed oversight
of investment risk, including market risk.
The Company has investment guidelines that
define the overall framework for managing market and other investment risks,
including the accountabilities and controls over these activities. In
addition, the Company has specific investment policies for each of its
affiliates that delineate the investment limits and strategies that are
appropriate given each entity’s liquidity, surplus, product, and
regulatory requirements.
The Company manages its exposure to market
risk through asset allocation limits, duration limits, value-at-risk limits,
through the use of simulation and, as appropriate, stress tests. Asset
allocation limits place restrictions on the aggregate fair value which may
be invested within an asset class. The Company has duration limits on the
Property-Liability and Life and Savings investment portfolios, and, as
appropriate, on individual components of these portfolios. These duration
limits place restrictions on the amount of interest rate risk which may be
taken. Value-at-risk limits the potential loss in fair value that could
arise from adverse movements in the fixed income, equity, and currency
markets over a time interval based on historical volatilities and
correlations between market risk factors. Simulation and stress tests
measure downside risk to fair value and earnings over longer time intervals
and/or for adverse market scenarios.
The day-to-day management of market risk
within defined tolerance ranges occurs as portfolio managers buy and sell
within their respective markets based upon the acceptable boundaries
established by the asset allocation, duration and other limits, including
but not limited to credit and liquidity.
Although the Company applies a common overall
governance approach to market risk where appropriate, the underlying
asset-liability frameworks and accounting and regulatory environments differ
markedly between Property-Liability and Life and Savings operations. These
differing frameworks affect each operation’s investment decisions and
risk parameters.
Interest Rate Risk
Interest rate risk is the risk that the Company
will incur economic losses due to adverse changes in interest rates. This
risk arises from many of the Company’s primary activities, as the
Company invests substantial funds in interest-sensitive assets and also has
certain interest-sensitive liabilities, primarily in its Life and Savings
operations.
The Company manages the interest rate risk
inherent in its assets relative to the interest rate risk inherent in its
liabilities. One of the measures the Company uses to quantify this exposure
is duration. Duration measures the sensitivity of the fair value of assets
and liabilities to changes in interest rates. For example, if interest rates
increase 1%, the fair value of an asset with a duration of 5 years is
expected to decrease in value by approximately 5%. At December 31, 1999, the
difference between the Company’s asset and liability duration was
approximately 0.62 years, versus a 0.11 year gap at December 31, 1998. This
positive duration gap indicates that the fair value of the Company’s
assets is somewhat more sensitive to interest rate movements than the fair
value of its liabilities.
The major portion of the Company’s
duration gap is determined by its Property-Liability operations, with the
primary liabilities of these operations being auto and homeowners claims. In
the management of investments supporting this business, Property-Liability
adheres to an objective of maximizing total after-tax return on capital and
earnings while ensuring the safety of funds under management and adequate
liquidity. This objective generally results in a duration mismatch between
Property-Liability’s assets and liabilities within a defined tolerance
range.
Life and Savings seeks to invest premiums and
deposits to generate future cash flows that will fund future claims,
benefits and expenses, and earn stable margins across a wide variety of
interest rate and economic scenarios. In order to achieve this objective and
limit its exposure to interest rate risk, Life and Savings adheres to a
philosophy of managing the duration of assets and related liabilities. Life
and Savings uses interest rate swaps, futures, forwards, caps and floors to
reduce the interest rate risk resulting from duration mismatches between
assets and liabilities. In addition, Life and Savings uses financial futures
to hedge the interest rate risk related to anticipatory purchases and sales
of investments and product sales to customers.
To calculate duration, the Company projects
asset and liability cash flows, and discounts them to a net present value
basis using a risk-free market rate adjusted for credit quality, sector
attributes, liquidity and other specific risks. Duration is calculated by
revaluing these cash flows at an alternative level of interest rates, and
determining the percentage change in fair value from the base case. The cash
flows used in the model reflect the expected maturity and repricing
characteristics of the Company’s derivative financial instruments, all
other financial instruments (as depicted in Note 6 to the consolidated
financial statements), and certain non-financial instruments including
unearned premiums, Property-Liability claims and claims expense reserves and
interest-sensitive annuity liabilities. The projections include assumptions
(based upon historical market and Company specific experience) reflecting
the impact of changing interest rates on the prepayment, lapse, leverage
and/or option features of instruments, where applicable. Such assumptions
relate primarily to mortgage-backed securities, collateralized mortgage
obligations, municipal housing bonds, callable municipal and corporate
obligations, and fixed rate single and flexible premium deferred annuities.
Additionally, the projections incorporate certain assumptions regarding the
renewal of Property-Liability policies.
Based upon the information and assumptions the
Company uses in its duration calculation and interest rates in effect at
December 31, 1999, management estimates that a 100 basis point immediate,
parallel increase in interest rates (“rate shock”) would decrease
the net fair value of its assets and liabilities identified above by
approximately $779 million, versus $660 million at December 31, 1998. In
addition, there are $3.10 billion of assets supporting life insurance
products which are not financial instruments and have not been included in
the above analysis. This amount has decreased from the $3.32 billion in
assets reported for December 31, 1998. According to the duration
calculation, in the event of a 100 basis point immediate increase in
interest rates, these assets would decrease in value by $131 million,
comparable to a decrease of $123 million reported for December 31, 1998. The
selection of a 100 basis point immediate parallel increase in interest rates
should not be construed as a prediction by the Company’s management of
future market events, but rather, is intended to illustrate the potential
impact of such an event.
To the extent that actual results differ from
the assumptions utilized, the Company’s duration and rate shock
measures could be significantly impacted. Additionally, the Company’s
calculation assumes that the current relationship between short-term and
long-term interest rates (the term structure of interest rates) will remain
constant over time. As a result, these calculations may not fully capture
the impact of non-parallel changes in the term structure of interest rates
and/or large changes in interest rates.
Equity Price
Risk Equity price risk is the risk that the
Company will incur economic losses due to adverse changes in a particular
stock or stock index. At December 31, 1999, the Company had approximately
$5.38 billion in common stocks and $1.89 billion in other equity investments
(including primarily convertible securities and private equity securities).
Approximately 94% and 56% of these totals, respectively, represented
invested assets of the Property-Liability operations. At December 31, 1998,
the Company had $4.90 billion in common stocks and $1.90 billion in other
equity investments, and approximately 95% and 58%, respectively, represented
invested assets of the Property-Liability operations.
In addition to the above, at December 31, 1999
and December 31, 1998, Life and Savings had $1.25 billion and $823 million,
respectively, in equity-indexed annuity liabilities which provide customers
with contractually guaranteed participation in price appreciation of the
Standard & Poor’s 500 Composite Price Index (“S&P 500
”). Life and Savings hedges the risk associated with the price
appreciation component of the equity-indexed annuity liabilities through the
purchase of equity-indexed options, futures, and futures options and
eurodollar futures (the “hedging portfolio”). Any tracking error
is maintained within specified value-at-risk limits. In addition to the
options
purchased to hedge these annuity liabilities, Life and Savings has purchased
equity-indexed options as a means to diversify overall portfolio
risk.
The Company’s largest equity exposure is
to declines in the S&P 500. As of December 31, 1999, the Company’s
portfolio of equity instruments has a beta of approximately 0.87. Beta
represents a widely accepted methodology to describe, in mathematical terms,
an investment’s market risk characteristic. For example, if the S&P
500 decreases by 10%, management estimates that the fair value of its equity
portfolio will decrease by approximately 8.7%. Likewise, if the S&P 500
increases by 10%, management estimates that the fair value of its equity
portfolio will increase by approximately 8.7%. At December 31, 1998, the
Company’s equity portfolio had a beta of 0.89.
Based upon the information and assumptions the
Company uses in its beta calculation and in effect at December 31, 1999,
management estimates that an immediate decrease in the S&P 500 of 10%
would decrease the net fair value of the Company’s assets and
liabilities identified above by approximately $630 million, versus $603
million at December 31, 1998. The selection of a 10% immediate decrease in
the S&P 500 should not be construed as a prediction by the Company
’s management of future market events, but rather, is intended to
illustrate the potential impact of such an event.
Beta was measured by regressing the monthly
stock price movements of the equity portfolio against movements in the S
&P 500 over a three year historical period. Portfolio beta was also
measured for the domestic equity portfolio by weighting individual stock
betas by the market value of the holding in the portfolio. The two
approaches to calculating portfolio beta yielded virtually identical
results. Since beta is historically based, projecting future price
volatility using this method involves an inherent assumption that historical
volatility and correlation relationships will remain stable. Therefore, the
results noted above may not reflect the Company’s actual experience if
future volatility and correlation relationships differ from such historical
relationships.
Foreign Currency
Exchange Rate Risk Foreign currency risk is the
risk that the Company will incur economic losses due to adverse changes in
foreign currency exchange rates. This risk arises from the Company’s
foreign equity investments and its international operations. The Company
also has certain fixed income securities that are denominated in foreign
currencies; however, the Company uses derivatives to hedge the foreign
currency risk of these securities (both interest payments and the final
maturity payment). At December 31, 1999, the Company had approximately $1.18
billion in foreign currency denominated equity securities and an additional
$520 million net investment in foreign subsidiaries. These amounts have
increased from $886 million and $472 million, respectively, as of December
31, 1998. The increase in equity securities is due to
increases in public equity holdings. Approximately 94% of the total of these
two sources of currency exposure represents invested assets of the
Property-Liability operations. This percentage has increased from 89% as of
December 31, 1998.
Based upon the information and assumptions in
effect at December 31, 1999, management estimates that, holding everything
else constant, a 10% immediate unfavorable change in each of the foreign
currency exchange rates to which the Company is exposed would decrease the
net fair value of its foreign currency denominated instruments (identified
above) by approximately $170 million, versus $136 million at December 31,
1998. The selection of a 10% immediate decrease in all currency exchange
rates should not be construed as a prediction by the Company’s
management of future market events, but rather, is intended to illustrate
the potential impact of such an event. The Company’s currency exposure
is well diversified across 32 countries, modestly decreased from 44
countries at December 31, 1998. The largest individual exposures at December
31, 1999 are to Canada (26%) and Japan (22%). The largest individual
exposures at December 31, 1998 were to Canada (30%) and Japan (12%). The
Company’s primary regional exposure is to Western Europe with
approximately 47%, versus 50% at December 31, 1998.
The modeling technique the Company uses to
calculate its currency exposure does not take into account correlation among
foreign currency exchange rates, or correlation among various markets (i.e.,
the foreign exchange, equity and fixed-income markets). Even though the
Company believes it to be unlikely that all of the foreign currency exchange
rates to which it is exposed would simultaneously decrease by 10%, the
Company finds it meaningful to “stress test” its portfolio under
this and other hypothetical extreme adverse market scenarios. The Company
’s actual experience may differ from the results noted above due to the
correlation assumptions utilized, or if events occur that were not included
in the methodology, such as significant liquidity or market
events.
CAPITAL RESOURCES
AND LIQUIDITY
Capital
resources Allstate’s capital resources
consist of shareholders’ equity, mandatorily redeemable preferred
securities and debt, representing funds deployed or available to be deployed
to support business operations. The following table summarizes our capital
resources at the end of the last three years:
| ($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
| Common stock and
retained earnings |
|
$15,256 |
|
|
$14,284 |
|
|
$12,825 |
|
| Accumulated other
comprehensive income |
|
1,345 |
|
|
2,956 |
|
|
2,785 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total shareholders’
equity |
|
16,601 |
|
|
17,240 |
|
|
15,610 |
|
| Mandatorily
redeemable preferred securities |
|
964 |
|
|
750 |
|
|
750 |
|
| Debt |
|
2,851 |
|
|
1,746 |
|
|
1,696 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total capital
resources |
|
$20,416 |
|
|
$19,736 |
|
|
$18,056 |
|
| |
|
|
|
|
|
|
|
|
|
| Ratio of debt to
total capital resources
(1)
|
|
16.3 |
% |
|
10.7 |
% |
|
11.5 |
% |
(1)
|
When analyzing the
Company’s ratio of debt to total capital resources, various formulas
are used. In this presentation, debt includes 50% of mandatorily
redeemable preferred securities.
|
Shareholders’
equity Shareholders’ equity decreased in
1999, as net income was offset by share repurchases and a decline in
unrealized capital gains. Shareholders’ equity increased in 1998
primarily as a result of net income.
Since 1995, the Company has repurchased 156
million shares of its common stock at a cost of $5.43 billion as part of
stock repurchase programs totaling $7.83 billion. The remaining programs are
expected to be completed by December 31, 2000. The Company has reissued 43.6
million shares, including 34.1 million shares used to fund the AHL
acquisition during 1999.
Mandatorily
redeemable preferred securities The balance of
mandatorily redeemable preferred securities increased in 1999, as the
outstanding mandatorily redeemable preferred securities “FELINE PRIDES
” originally issued by AHL, were consolidated into the Company’s
results upon acquisition. FELINE PRIDES, consist of a unit with a stated
amount of $50 comprising i) a stock purchase contract under which the holder
will purchase from the Company on August 16, 2000, a number of Allstate
common shares equal to a specified rate, and ii) a beneficial ownership of a
6.75% trust preferred security representing a preferred undivided beneficial
interest in the assets of AHL Financing (the “Trust”), a Delaware
statutory business trust. The assets of the Trust are 6.75% debentures due
August 16, 2002. Under a shelf registration statement filed with the
Securities and Exchange Commission (“SEC”) in February 2000, the
Company may issue up to 7,398,387 shares of Allstate common stock upon
settlement of the purchase contracts of the FELINE PRIDES.
Debt
Consolidated debt increased in 1999, due to an increase in
short-term debt, the issuance of $750 million of 7.20% Senior Notes due 2009
and the issuance of a $75 million, 10-year note to CNA Financial Corporation
(“CNA”). The proceeds from the 7.20% Senior Note issuance were
used for general corporate purposes, including stock
repurchases.
Consolidated debt increased in 1998, the
result of increased short-term debt and the issuance of $250 million of
6.75% senior debentures due 2018 and $250 million of 6.90% senior debentures
due 2038. The net proceeds were used to fund the maturity of $300 million of
5.875% notes due June 15, 1998, and for general corporate purposes. These
increases were offset by the conversion of $357 million of 6.76%
Automatically Convertible Equity Securities into approximately 8.6 million
common shares of The PMI Group, Inc. held by Allstate.
The Company has access to additional borrowing
as follows:
|
·
|
Allstate has a
commercial paper program with an authorized borrowing limit of up to $1.00
billion to cover its short-term cash needs. At December 31, 1999, the
Company had outstanding commercial paper borrowings of $594 million with a
weighted average interest rate of 5.86%.
|
|
·
|
Allstate maintains
two credit facilities totaling $1.55 billion as a potential source of
funds to meet short-term liquidity requirements, including a $1.50
billion, five-year revolving line of credit expiring in 2001 and a $50
million, one-year revolving line of credit expiring in 2000. In order to
borrow on the five-year line of credit, Allstate Insurance Company (
“AIC”), a wholly owned subsidiary of the Company, is required to
maintain a specified statutory surplus level, and the Company’s debt to
equity ratio (as defined in the agreement) must not exceed a designated
level. These requirements are currently being met and management expects
to continue to meet them in the future. There were no borrowings under
these lines of credit during 1999. Total borrowings under the combined
commercial paper program and the Allstate lines of credit are limited to
$1.55 billion.
|
|
·
|
AHL maintains three
lines of credit totaling $92 million as a potential source of funds to
meet short-term liquidity requirements. At December 31, 1999, $71 million
was outstanding on these lines with a weighted average interest rate of
6.47%.
|
|
·
|
At December 31,
1999, under a shelf registration statement filed with the SEC in August
1998, the Company may issue up to an additional $1.25 billion of debt
securities, preferred stock or debt warrants.
|
Capital
Transactions
|
·
|
On October 1, 1999,
the Company completed the acquisition of the personal lines auto and
homeowners insurance business of CNA. At closing, AIC made a cash payment
of $140 million to CNA for: i) certain assets of CNA used in connection
with that business; ii) access to the CNA agency distribution channel;
iii) infrastructure and employees of the business; iv) renewal rights to
the in-force business; and v) an option to acquire certain licensed
companies of CNA in the future. AIC will pay a license fee to CNA for the
use of certain of CNA’s trademarks and access to the CNA personal
lines distribution channel for a period of up to six years. The license
fee will be based on a percentage of the aggregate premiums produced by
independent agents appointed by CNA personal lines prior to the
acquisition date. At closing, Allstate also issued a $75 million, 10-year
note to CNA, the principal repayment of which at maturity is contingent
upon certain profitability measures of the acquired business. The maximum
amount of principal which would have to be paid is $85 million and the
minimum amount is $65 million. In addition, as consideration for entering
into a 100% indemnity reinsurance agreement with CNA to reinsure the
in-force policy obligations of the business, AIC received cash of
approximately $1.2 billion and other assets.
|
|
·
|
On October 31,
1999, Allstate acquired all of the outstanding shares of AHL pursuant to a
merger agreement for $32.25 per share in cash and Allstate common stock,
in a transaction valued at $1.1 billion. AHL specializes in selling life,
health and disability insurance to individuals through their workplaces.
In order to fund the equity component of the consideration, the Company
reissued 34.1 million shares of Allstate common stock held in treasury to
AHL shareholders. The remaining $87 million portion of the consideration
was funded with cash.
|
|
·
|
In connection with
the acquisition of AHL, Allstate assumed AHL’s obligations under the
outstanding mandatorily redeemable preferred securities originally issued
by AHL and the Trust.
|
|
·
|
On April 14, 1998,
the Company completed the purchase of Pembridge Inc. (“Pembridge
”) for approximately $275 million. Pembridge primarily sells
non-standard auto insurance in Canada through its wholly-owned subsidiary,
Pafco Insurance Company.
|
Financial ratings
and strength The following table summarizes the
Company’s and its major subsidiaries’ debt and commercial paper
ratings and the insurance claims-paying ratings from various agencies at
December 31, 1999.
| |
|
Moody
’s
|
|
Standard
& Poor’s
|
|
A.M.
Best
|
| The Allstate
Corporation (debt) |
|
A 1 |
|
A+ |
|
|
– |
|
| The Allstate
Corporation (commercial paper) |
|
P-1 |
|
A-1 |
|
|
– |
|
| Allstate Insurance
Company (claims-paying ability) |
|
Aa2 |
|
AA |
|
|
A |
+ |
| Allstate Life
Insurance Company (claims-paying ability) |
|
Aa2 |
|
AA |
+ |
|
A |
+ |
| American Heritage
Life Insurance Company (claims-paying ability) |
|
Aa3 |
|
AA |
|
|
A |
+ |
The Company’s and its major subsidiaries
’ ratings are influenced by many factors including the amount of
financial leverage (i.e. debt), exposure to risks such as catastrophes, as
well as the current level of operating leverage.
Operating leverage for property-liability companies is measured by the ratio
of net premiums written to statutory surplus and serves as an indicator of
the Company’s premium growth capacity. 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 1.5x and 1.4x at December
31, 1999 and 1998, respectively.
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 formula for
property-liability companies includes asset and credit risks but places more
emphasis on underwriting factors for reserving and pricing. The RBC formula
for life insurance companies establishes capital requirements relating to
insurance, business, asset and interest rate risks. At December 31, 1999,
RBC for each of the Company’s domestic insurance companies was
significantly above levels that would require regulatory
actions.
Liquidity
The Allstate Corporation is a holding company whose
principal operating subsidiaries include AIC and AHL. The Company’s
principal sources of funds are dividend payments from AIC, intercompany
borrowings, funds from the settlement of Company benefit plans and funds
that may be raised periodically from the issuance of additional debt,
including commercial paper, or stock. The payment of dividends by AIC is
limited by Illinois insurance law, to formula amounts based on statutory net
income and statutory surplus, as well as the timing and amount of dividends
paid in the preceding twelve months. In the twelve month period beginning
January 1, 1999, AIC paid dividends of $2.96 billion, the maximum amount
allowed based on the 1998 formula amounts. Based on 1999 statutory net
income, the maximum amount of dividends AIC will be able to pay without
prior Illinois Department of Insurance approval at a given point in time
beginning in May 2000 is $1.96 billion, less dividends paid during the
preceding twelve months measured at that point in time. The Company’s
principal uses of funds are the payment of dividends to shareholders, share
repurchases, intercompany lending to its insurance affiliates, debt service,
additional investments in its subsidiary affiliates and
acquisitions.
The principal sources of funds for the
Property-Liability operations are premiums, reinsurance, collections of
principal, interest and dividends from the investment portfolio, and
intercompany loans or equity investments from The Allstate Corporation. The
principal uses of funds by the Property-Liability operations are the payment
of claims and related expenses, operating expenses, dividends to The
Allstate Corporation, the purchase of investments, the repayment of
intercompany loans and the settlement of Company benefit plans.
The Company’s Property-Liability
operations typically generate substantial positive cash flows from
operations as a result of most premiums being received in advance of the
time when claim payments are required. These positive operating cash flows,
along with that portion of the investment portfolio that is held in cash and
highly liquid securities, commercial paper borrowings and the Company’s
lines of credit have met, and are expected to continue to meet, the
liquidity requirements of the Property-Liability operations. Catastrophe
claims, the timing and amount of which are inherently unpredictable, may
create increased liquidity requirements for the Property-Liability
operations of the Company.
The principal sources of funds for Life and
Savings are premiums, deposits, collection of principal, interest and
dividends from the investment portfolio, and capital contributions from AIC,
its parent. The primary uses of these funds are to purchase investments and
pay policyholder claims, benefits, contract maturities, contract surrenders
and withdrawals, operating costs, and dividends to AIC.
The maturity structure of Life and Savings
’ fixed income securities, which represent 81.6% of Life and Savings
’ total investments, is managed to meet the anticipated cash flow
requirements of the underlying liabilities. A portion of Life and Savings
’ diversified product portfolio, primarily fixed deferred annuity and
interest-sensitive life insurance products, is subject to discretionary
surrender and withdrawal by contractholders. Total surrender and withdrawal
amounts for Life and Savings were $2.78 billion, $2.11 billion and $1.90
billion in 1999, 1998 and 1997, respectively. As Life and Savings’
interest-sensitive life policies and annuity contracts in force grow and
age, the dollar amount of surrenders and withdrawals could increase, as
experienced in 1999 and 1998. While the overall amount of surrenders may
increase in the future, a significant increase in the level of surrenders
relative to total
contractholder account balances is not anticipated. Management believes the
assets are sufficiently liquid to meet future obligations to the Life and
Savings contractholders under various interest rate scenarios.
The following table summarizes liabilities for
interest-sensitive Life and Savings products by their contractual withdrawal
provisions at December 31, 1999. Approximately 11.2% of these liabilities
are subject to discretionary withdrawal without adjustment.
| ($ in
millions) |
|
1999
|
| Not subject to
discretionary withdrawal |
|
$10,624 |
| Subject to
discretionary withdrawal with adjustments: |
|
|
Specified surrender
charges
(1)
|
|
14,223 |
|
Market value |
|
2,473 |
| Subject to
discretionary withdrawal without adjustments |
|
3,463 |
|
|
|
| Total |
|
$30,783 |
| |
|
|
(1)
|
Includes $5.79
billion of liabilities with a contractual surrender charge of less than 5%
of the account balance.
|
INVESTMENTS
The composition of the investment portfolio at
December 31, 1999 is presented in the table below (see Notes 2 and 5 to the
consolidated financial statements for investment accounting policies and
additional information).
| |
|
Property-Liability
|
|
Life and
Savings
|
|
Corporate
and Other
|
|
Total
|
| ($ in
millions) |
|
|
|
Percent
to total
|
|
|
|
Percent
to total
|
|
|
|
Percent
to total
|
|
|
|
Percent
to total
|
| Fixed income
securities
(1)
|
|
$25,405 |
|
77.1 |
% |
|
$28,106 |
|
81.6 |
% |
|
$1,775 |
|
78.6 |
% |
|
$55,286 |
|
79.4 |
% |
| Equity
securities |
|
6,113 |
|
18.6 |
|
|
624 |
|
1.8 |
|
|
1 |
|
– |
|
|
6,738 |
|
9.7 |
|
| Mortgage
loans |
|
187 |
|
0.6 |
|
|
3,881 |
|
11.3 |
|
|
– |
|
– |
|
|
4,068 |
|
5.8 |
|
| Short-term |
|
1,227 |
|
3.7 |
|
|
713 |
|
2.1 |
|
|
482 |
|
21.4 |
|
|
2,422 |
|
3.5 |
|
| Other |
|
11 |
|
– |
|
|
1,120 |
|
3.2 |
|
|
– |
|
– |
|
|
1,131 |
|
1.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$32,943 |
|
100.0 |
% |
|
$34,444 |
|
100.0 |
% |
|
$2,258 |
|
100.0 |
% |
|
$69,645 |
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Fixed income
securities are carried at fair value. Amortized cost for these securities
was $25.47 billion, $27.94 billion and $1.88 billion for
Property-Liability, Life and Savings and Corporate and Other,
respectively.
|
Total investments increased to $69.65 billion
at December 31, 1999 from $66.53 billion at December 31, 1998.
Property-Liability investments were $32.94 billion at December 31, 1999 as
compared to $33.73 billion at December 31, 1998, as amounts invested from
positive cash flows generated from operations and additional assets acquired
with the CNA personal lines, were offset by dividends paid to The Allstate
Corporation during the year and declines in unrealized positions on fixed
income securities.
Life and Savings investments increased to
$34.44 billion at December 31, 1999, from $31.77 billion at December 31,
1998. The increase in Life and Savings investments was primarily due to
amounts invested from positive cash flows generated from operations and
additional investments acquired with AHL, partially offset by decreased
unrealized capital gains on fixed income and equity securities.
Fixed income
securities Allstate’s fixed income
securities portfolio consists of tax-exempt municipal bonds, publicly traded
corporate bonds, privately-placed securities, mortgage-backed securities,
asset-backed securities, foreign government bonds, redeemable preferred
stock and U.S. government bonds. Allstate generally holds its fixed income
securities to maturity, but has classified all of these securities as
available for sale to allow maximum flexibility in portfolio management. At
December 31, 1999, unrealized net capital losses on the fixed income
securities portfolio totaled $7 million compared to an unrealized gain of
$3.61 billion as of December 31, 1998. The decrease in the unrealized gain
position is primarily attributable to an increase in interest rates at the
end of the year. As of December 31, 1999, 68.9% of the consolidated fixed
income securities portfolio was invested in taxable securities.
At December 31, 1999, 93.7% of the Company
’s fixed income securities portfolio was rated investment grade, which
is defined by the Company as a security having an NAIC rating of 1 or 2, a
Moody’s rating of Aaa, Aa, A or Baa, or a comparable Company internal
rating. The quality mix of Allstate’s fixed income securities portfolio
at December 31, 1999 is presented in the following table.
| ($ in
millions) |
|
|
|
|
|
|
NAIC
ratings
|
|
Moody’s
equivalent description
|
|
Fair
value
|
|
Percent to
total
|
| 1 |
|
Aaa/Aa/A |
|
$
42,697 |
|
77.2 |
% |
| 2 |
|
Baa |
|
9,135 |
|
16.5 |
|
| 3 |
|
Ba |
|
1,867 |
|
3.4 |
|
| 4 |
|
B |
|
1,241 |
|
2.2 |
|
| 5 |
|
Caa or
lower |
|
261 |
|
.5 |
|
| 6 |
|
In or near
default |
|
85 |
|
.2 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
$ 55,286 |
|
100.0 |
% |
| |
|
|
|
|
|
|
|
Included among the securities that are rated
below investment grade are both public and privately-placed high-yield bonds
and securities that were purchased at investment grade but have since been
downgraded. The Company mitigates the credit risk of investing in below
investment grade fixed income securities by limiting the percentage of these
investments that can be carried in its portfolio, and through
diversification of the portfolio. Based on these limits, a minimum of 93% of
the Company’s fixed income securities portfolio will be investment
grade.
Over 34% of the Company’s fixed income
securities portfolio at December 31, 1999 was invested in municipal bonds of
which 92.2% are rated as investment grade. The municipal bond portfolio
consisted of approximately 6,000 issues from nearly 2,000 issuers. The
largest exposure to a single issuer was less than 1.0% of the
portfolio.
As of December 31, 1999, the fixed income
securities portfolio contained $8.62 billion of privately-placed corporate
obligations, compared with $9.69 billion at December 31, 1998. The benefits
of privately-placed securities as compared to public securities are
generally higher yields, improved cash flow predictability through pro-rata
sinking funds on many bonds, and a combination of covenant and call
protection features designed to better protect the holder against losses
resulting from credit deterioration, reinvestment risk and fluctuations in
interest rates. A relative disadvantage of privately-placed securities as
compared to public securities is reduced liquidity. At December 31, 1999,
91.3% of the privately-placed securities were rated as investment grade by
either the NAIC or the Company’s internal ratings. The Company
determines the fair value of privately-placed fixed income securities based
on discounted cash flows using current interest rates for similar
securities.
At December 31, 1999 and 1998, $7.88 billion
of the fixed income securities portfolio was invested in mortgage-backed
securities (“MBS”). The MBS portfolio consists primarily of
securities which were issued by or have underlying collateral that is
guaranteed by U.S. government agencies or sponsored entities, thus
minimizing credit risk.
The MBS portfolio is subject to interest rate
risk since the price volatility and ultimate realized yield are affected by
the rate of repayment of the underlying mortgages. Allstate attempts to
limit interest rate risk on these securities by investing a portion of the
portfolio in securities that provide prepayment protection. At December 31,
1999, over 33% of the MBS portfolio was invested in planned amortization
class bonds.
The fixed income securities portfolio
contained $3.90 billion and $4.25 billion of asset-backed securities (
“ABS”) at December 31, 1999 and 1998, respectively. The ABS
portfolio is subject to credit and interest rate risk. Credit risk is
mitigated by monitoring the performance of the collateral. Approximately 51%
of all securities are rated in the highest rating category by one or more
credit rating agencies. Interest rate risk is similar to the risks posed by
MBS, however to a lesser degree because of the nature of the underlying
assets. Over 45% of the Company’s ABS are invested in securitized
credit card receivables. The remainder of the portfolio is backed by
securitized home equity, manufactured housing and auto loans.
Allstate closely monitors its fixed income
securities portfolio for declines in value that are other than temporary.
Securities are placed on non-accrual status when they are in default or when
the receipt of interest payments is in doubt.
Mortgage loans
and real estate Allstate’s $4.07 billion
investment in mortgage loans at December 31, 1999 is comprised primarily of
loans secured by first mortgages on developed commercial real estate, and is
primarily held in the Life and Savings operations. Geographical and property
type diversification are key considerations used to manage Allstate’s
mortgage loan risk.
Allstate closely monitors its commercial
mortgage loan portfolio on a loan-by-loan basis. Loans with an estimated
collateral value less than the loan balance, as well as loans with other
characteristics indicative of higher than normal credit risk, are reviewed
by financial and investment management at least quarterly for purposes of
establishing valuation allowances and placing loans on non-accrual status.
The underlying collateral values are based upon discounted property cash
flow projections, which are updated as conditions change or at least
annually.
During 1998, the Company sold the majority of
its real estate properties but continues to hold equity interests in several
publicly traded real estate investment trusts and private securities which
are classified as equity securities.
Equity securities
and short-term investments The Company’s
equity securities portfolio was $6.74 billion at December 31, 1999 compared
to $6.42 billion in 1998. The increase can be attributed to general market
appreciation.
The Company’s short-term investment
portfolio was $2.42 billion and $2.48 billion at December 31, 1999 and 1998,
respectively. Allstate invests available cash balances primarily in taxable
short-term securities having a final maturity date or redemption date of one
year or less.
YEAR
2000
In 1995, the Company commenced a four phase
plan which included reprogramming, remediating or replacing computer systems
and equipment which may have failed to operate properly in or after the year
1999, due to the inability of the systems and equipment to recognize the
last two digits of the year in any date (“Year 2000”). Because of
the comprehensiveness of this plan, and its timely completion, the Company
has experienced no material impacts on its results of operations, liquidity
or financial position due to the Year 2000 issue. The Company expects to
incur total costs related to this plan of $109 million between the years of
1995 and 2000. These costs are expensed as incurred.
The Company is also potentially exposed to
Year 2000 risks associated with certain personal lines policies that have
been issued. While coverage may exist for some Year 2000 related losses
under Allstate’s personal auto or homeowners insurance policies, many
Year 2000 related losses will not be covered by these policies. Losses
incurred due to mere failures of personal electronic devices to function as
intended by their manufacturer or distributor, or as expected by the
policyholder, are not the type of losses which would be covered by the
Company’s personal auto or homeowners insurance policies. Such product
failures are considered to be product warranty issues best addressed between
the policyholder and the manufacturer or distributor of the products.
However, certain other types of Year 2000-related losses may be covered
under the Company’s policies, depending upon the particular
circumstances of the loss and the type of policy in force at the time of
loss. Some of the Company’s homeowners policies, for instance, provide
significantly broader protection than others, and therefore may provide
coverage for certain types of losses. The Company also is exposed to Year
2000 risks associated with certain commercial policies that have been
issued. Since the commercial business written by the Company is not material
to the overall results of operations of the Company, management believes
that Year 2000-related losses associated with these lines do not pose a
material risk to the Company. However, with respect to both personal lines
and commercial policies, in determining whether coverage exists in any
particular circumstance, all facts of the loss as well as the applicable
policy terms, conditions and exclusions will be reviewed. The Company
currently does not expect the impacts of such losses, if any, on its results
of operations, liquidity or financial position to be material.
REGULATION AND
LEGAL PROCEEDINGS
Regulation
The Company’s insurance businesses are subject to
the effects of changing social, economic and regulatory environments. Public
and regulatory initiatives have varied and have included efforts to adversely
influence and restrict premium rates, restrict the Company’s ability to
cancel policies, impose underwriting standards and expand overall
regulation. The ultimate changes and eventual effects, if any, of these
initiatives are uncertain.
Legal proceedings
Allstate and plaintiffs’ representatives
have agreed to settle certain civil suits filed in California, including a
class action, related to the 1994 Northridge, California earthquake. The
class action settlement received final approval from the Superior Court of
the State of California for the County of Los Angeles on June 11, 1999. The
plaintiffs in these civil suits challenged licensing and engineering
practices of certain firms Allstate retained and alleged that Allstate
systematically pressured engineering firms to improperly alter their reports
to reduce the loss amounts paid to some insureds with earthquake claims.
Under the terms of the settlement, Allstate sent notice to approximately
11,500 homeowner customers inviting them to participate in a
court-administered program which may allow for review of their claims by an
independent engineer and an independent adjusting firm to ensure that they
have been adequately compensated for all structural damage from the 1994
Northridge earthquake covered under the terms of their Allstate policies. It
is anticipated that approximately 2,500 of these customers will ultimately
participate in this independent review process. Allstate has agreed to
retain an independent consultant to review, among other things, Allstate
’s practices and procedures for handling catastrophe claims, and has
helped fund a charitable foundation devoted to consumer education on loss
prevention and consumer protection and other insurance issues. The Company
does not expect that the effect of the proposed settlement will exceed the
amounts currently reserved. During August 1999, a group of objectors filed
an appeal from the order approving the settlement. That appeal is
pending.
In April 1998, Federal Bureau of Investigation
agents executed search warrants at three Allstate offices for documents
relating to the handling of certain claims for losses resulting from the
Northridge earthquake. Allstate is cooperating with the investigation, which
is being directed by the United States Attorney’s Office for the
Central District of California. At present, the Company cannot determine the
impact of resolving the investigation.
For the past five years, the Company has been
distributing to certain PP&C claimants, documents regarding the claims
process and the role that attorneys may play in that process. Suits
challenging the use of these documents have been filed against the Company,
including purported class action suits. In addition to these suits, the
Company has received inquires from states’ attorneys general, bar
associations and departments of insurance. In certain states, the Company
continues to use these documents after agreeing to make certain
modifications. The Company is vigorously defending its rights to use these
documents. The outcome of these disputes is currently uncertain.
There are currently several state and
nationwide putative class action lawsuits pending in various state courts
seeking actual and punitive damages from Allstate alleging breach of
contract and fraud because of its specification of aftermarket (non-original
equipment manufacturer) replacement parts in the repair of insured vehicles.
Plaintiffs in these suits allege that aftermarket parts are not “of
like kind and quality” as required by the insurance policies. The
lawsuits are in various stages of development with no class action having
been certified. The outcome of these disputes is currently
uncertain.
Allstate is defending lawsuits, including two
putative class actions, regarding worker classification. Two suits relate to
the classification of California exclusive agents as independent
contractors. These suits were filed after Allstate’s reorganization of
its California agency programs in 1996. The plaintiffs, among other things,
seek a determination that they have been treated as employees
notwithstanding agent contracts that specify that they are independent
contractors for all purposes. Another suit relates to the classification of
staff working in agency offices. In this putative class action, plaintiffs
seek damages under the Employee Retirement Income Security Act and the
Racketeer Influenced and Corrupt Organizations Act alleging that 10,000
agency secretaries were terminated as employees by Allstate and rehired by
agencies through outside staffing vendors for the purpose of avoiding the
payment of employee benefits. Allstate is vigorously defending these
lawsuits. The outcome of these disputes is currently uncertain.
Various other legal and regulatory actions are
currently pending that involve Allstate and specific aspects of its conduct
of business, including some related to the Northridge earthquake, and like
other members of the insurance industry, the Company is the target of an
increasing number of class action lawsuits. These class actions are based on
a variety of issues including insurance and claim settlement practices. At
this time, based on their present status, it is the opinion of management
that the ultimate liability, if any, in one or more of these other actions
in excess of amounts currently reserved is not expected to have a material
effect on the results of operations, liquidity or financial position of the
Company.
Shared Markets
As a condition of its license to do business in
various states, the Company 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. The Company’s expenses related to these funds have been
immaterial.
OTHER
DEVELOPMENTS
|
·
|
The NAIC has
approved a January 1, 2001 implementation date for newly developed
statutory accounting principles (“codification”). Each company,
however, must adhere to the implementation date adopted by their state of
domicile. Forty-nine states have indicated their intention to adopt the
codification as of January 1, 2001. States continue to review codification
requirements to determine if revisions to existing state laws and
regulations are necessary. The implementation of codification is not
expected to have a material impact on the statutory surplus of the Company
’s insurance subsidiaries.
|
PENDING ACCOUNTING
STANDARDS
In June 1999, the Financial Accounting
Standards Board (“FASB”) delayed the effective date of Statement
of Financial Accounting Standard (“SFAS”) No. 133,
“Accounting for Derivative Instruments and Hedging Activities.”
SAFS No. 133 replaces existing pronouncements and practices with a single,
integrated accounting framework for derivatives and hedging activities. This
statement requires that all derivatives be recognized on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. Additionally, the change in
fair value of a derivative which is not effective as a hedge will be
immediately recognized in earnings. The delay was effected through the
issuance of SFAS No. 137, which extends the effective date of SFAS No. 133
requirements to fiscal years beginning after June 15, 2000. As such, the
Company expects to adopt the provisions of SFAS No. 133 as of January 1,
2001. The impact of this statement is dependent upon the Company’s
derivative positions and market conditions existing at the date of adoption.
Based on existing interpretations of the requirements of SFAS No. 133, the
impact of adoption is not expected to be material to the results of
operations or financial position of the Company.
FORWARD-LOOKING
STATEMENTS AND RISK FACTORS AFFECTING ALLSTATE
This document contains “forward-looking
statements” that anticipate results based on management’s plans
that are subject to uncertainty. These statements are made subject to the
safe-harbor provisions of the Private Securities Litigation Reform Act of
1995.
Forward-looking statements do not relate
strictly to historical or current facts and may be identified by their use
of words like “plans,” “expects,” “will,”
“anticipates,” “estimates,” “intends,”
“believes” and other words with similar meanings. These statements
may address, among other things, our strategy for growth, product
development, regulatory approvals, market position, expenses, financial
results and reserves. Forward-looking statements are based on management
’s current expectations of future events. We cannot guarantee that any
forward-looking statement will be accurate. However, we believe that our
forward-looking statements are based on reasonable, current expectations and
assumptions. We assume no obligation to update any forward-looking
statements as a result of new information or future events or
developments.
If the expectations or assumptions underlying
our forward-looking statements prove inaccurate or if risks or uncertainties
arise, actual results could differ materially from those communicated in our
forward-looking statements. In addition to the normal risks of business,
Allstate is subject to significant risk factors, including those listed
below which apply to it as an insurance business.
|
·
|
The implementation
of Allstate’s multi-access distribution model involves risks and
uncertainties that could have a material adverse effect on Allstate’s
results of operations, liquidity or financial position. More specifically,
the following factors could affect Allstate’s ability to successfully
implement various aspects of its new multi-access distribution
model:
|
|
—The success
of Allstate’s proposed direct response call centers may be adversely
affected by the limited pool of individuals suited and trained to do such
work in any geographic area, particularly in light of the current low
unemployment rate. The absence of seasoned staff could be a factor
impeding the training of staff and the roll-out of the call centers
because they represent a new initiative by Allstate involving virtually
all new hires.
|
|
—Allstate
’s reorganization of its multiple employee agency programs into a
single exclusive agency independent contractor program may have a
temporary negative impact on written premium. As the reorganization
proceeds, many agents will be deciding whether to convert to independent
contractor status and remain with Allstate; to convert to independent
contractor status and sell their economic interest in their book of
businesses to an Allstate-approved buyer; or to retire or otherwise
voluntarily separate from Allstate. The distractions of this decision
making process and the possible departure of some agents may lead to
decreased sales. In addition, possible litigation regarding the
reorganization could diminish the gains in efficiency and
cost-effectiveness that Allstate expects to realize from the transition to
one program.
|
|
—Allstate
’s reorganization of its multiple employee agency programs into a
single exclusive agency independent contractor program, as well as its
plans to sell and service its products through direct response call
centers and the Internet, are dependent upon its ability to adapt current
computer systems and to develop and implement new systems.
|
|
·
|
There is inherent
uncertainty in the process of establishing property-liability loss
reserves, particularly reserves for the cost of environmental, asbestos
and other mass tort claims. This uncertainty arises from a number of
factors, including ongoing interpretation of insurance policy provisions
by courts, inconsistent decisions in lawsuits regarding coverage and
expanded theories of liability. In addition, on-going changes in claims
settlement practices can lead to changes in loss payment patterns.
Moreover, while management believes that improved actuarial techniques and
databases have assisted in estimating environmental, asbestos and other
mass tort net loss reserves, these refinements may subsequently prove to
be inadequate indicators of the extent of probable loss. Consequently,
ultimate losses could materially exceed established loss reserves and have
a material adverse effect on our results of operations, liquidity or
financial position.
|
|
·
|
Allstate has
experienced, and continues to expect to experience, catastrophe losses.
While we believe that our catastrophe management initiatives have reduced
the magnitude of possible future losses, Allstate continues to be exposed
to catastrophes that could have a material adverse impact on results of
operations, liquidity or financial position. Catastrophic events in the
future may indicate that the techniques and data that are used to predict
the probability of catastrophes and the extent of the resulting losses are
inaccurate.
|
|
·
|
Changes in market
interest rates can have adverse effects on Allstate’s investment
portfolio, investment income and product sales. Increases in market
interest rates have an adverse impact on the value of the investment
portfolio by decreasing capital gains. In addition, increases in market
interest rates as compared to rates offered on some of the Life and
Savings segment’s products make those products less attractive and
therefore decrease sales. Declining market interest rates have an adverse
impact on Allstate’s investment income as Allstate invests positive
cash flows from operations and reinvests proceeds from maturing and called
investments in new investments yielding less than the portfolio’s
average rate. Despite recent increases, current market interest rates are
lower than the Allstate portfolio average rate.
|
|
·
|
In order to meet
the anticipated cash flow requirements of its obligations to
policyholders, from time to time Allstate adjusts the effective duration
of the assets and liabilities of the Life and Savings segment’s
investment portfolio. Those adjustments may have an impact on the value of
the investment portfolio and on investment income.
|
|
·
|
The insurance
business is subject to extensive regulation—particularly at the state
level. Many of these restrictions affect Allstate’s ability to
operate and grow its businesses in a profitable manner. In particular, the
PP&C segment’s implementation of a tiered-based pricing model for
its private passenger auto business is subject to state regulation of auto
insurance rates.
|
|
·
|
Recently, the
competitive pricing environment for private passenger auto insurance has
put pressure on the PP&C segment’s premium growth and profit
margins. Allstate’s management believes that this pressure is abating
and that industry participants may begin to raise auto insurance rates in
2000. However, because Allstate’s PP&C segment’s loss ratio
compares favorably to the industry, state regulatory authorities may
resist our efforts to raise rates or to maintain them at current
levels.
|
|
·
|
Allstate is a
holding company with no significant business operations of its own.
Consequently, to a large extent, its ability to pay dividends and meet its
debt payment obligations is dependent on dividends from its subsidiaries,
primarily AIC.
|
|
·
|
State insurance
regulatory authorities require insurance companies to maintain specified
levels of statutory capital and surplus. In addition, competitive
pressures require Allstate’s subsidiaries to maintain financial
strength or claims-paying ability ratings. These restrictions affect
Allstate’s ability to pay shareholder dividends and use its capital
in other ways.
|
|
·
|
There is
uncertainty involved in estimating the availability of reinsurance and the
collectibility of reinsurance recoverables. This uncertainty arises from a
number of factors, including segregation by the industry generally of
reinsurance exposure into separate legal entities.
|
|
·
|
The Life and
Savings segment distributes some of its products under agreements with
other financial services entities. Termination of such agreements due to
changes in control of these non-affiliated entities could have a
detrimental effect on the segment’s sales. This risk may be increased
due to the recent enactment of the Gramm-Leach-Bliley Act of 1999, which
eliminates many federal and state law barriers to affiliations among
banks, securities firms, insurers and other financial service
providers.
|
|
·
|
In November 1999,
Allstate announced a program to reduce expenses by approximately $600
million, to be fully realized beginning in 2001. These expense reductions
are dependent on the elimination of certain employee positions, the
consolidation of Allstate’s operations and facilities, and the
reorganization of its multiple employee agency programs to a single
exclusive agency independent contractor program. The savings are to be
invested in technology, competitive pricing and advertising.
|
|
·
|
Allstate maintains
a $1.50 billion, five-year revolving line of credit and a $50 million
one-year revolving line of credit as potential sources of funds to meet
short-term liquidity requirements. In order to borrow on the five-year
line of credit, AIC is required to maintain a specified statutory surplus
level and the Allstate debt to equity ratio (as defined in the credit
agreement) must not exceed a designated level. The ability of Allstate and
AIC to meet the requirements is dependent upon their financial condition.
If AIC were to sustain significant losses from catastrophes, Allstate and
AIC’s ability to borrow on the lines of credit could be diminished or
eliminated during a period when they might be most in need of capital
resources and liquidity.
|
|
·
|
Changes in the
severity of claims have an impact on the profitability of Allstate’s
business. Changes in injury claim severity are driven primarily by
inflation in the medical sector of the economy. Changes in auto physical
damage claim severity are driven primarily by inflation in auto repair
costs and used car prices.
|
|
·
|
For its
non-standard auto insurance business, Allstate is implementing programs to
address the emergence of adverse profitability trends. These programs
include additional down-payment requirements, new underwriting guidelines
and new rating plans. Allstate expects these programs to have a temporary
adverse impact on written premium growth; however, they should improve
profitability over time.
|
|
·
|
A number of enacted
and pending legislative measures may lead to increased consolidation and
increased competition in the financial services industry. At the federal
level, these measures include the recently enacted Gramm-Leach-Bliley Act
of 1999, which eliminates many federal and state law barriers to
affiliations among banks, securities firms, insurers and other financial
service providers. At the state level, these measures include legislation
to permit mutual insurance companies to convert to a hybrid structure
known as a mutual holding company, thereby allowing insurance companies
owned by their policyholders to become stock insurance companies owned
(through one or more intermediate holding companies) at least 51% by their
policyholders and potentially up to 49% by stockholders. Also several
large mutual life insurers have used or are expected to use existing state
laws and regulations governing the conversion of mutual insurance
companies into stock insurance companies (demutualization). These measures
may also increase competition for capital among financial service
providers.
|
|
·
|
Deferred annuities
and interest-sensitive life insurance products receive favorable
policyholder taxation under current tax laws and regulations. Any
legislative or regulatory changes that adversely alter this treatment are
likely to negatively affect the demand for these products.
|
|
·
|
Due to legislative
and regulatory reform of the auto insurance system in New Jersey that
included regulated rate reductions and coverage changes effective for new
policies written and renewals processed on and after March 22, 1999,
Allstate New Jersey Insurance Company, a wholly owned Allstate subsidiary,
experienced decreased average premiums in 1999. Management expects that
these reforms will also lead to improved loss experience in the future.
However, it is possible that losses may increase or that any decrease in
losses will not be commensurate with the reductions in
premiums.
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